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Dead people on title, trust issues can derail mortgages

By Jeff Lazerson

2/22/18

What I think: Borrowers get bogged down in title trouble more often than you think.

That is, asking a lender or title insurer to publicly record ownership in an improper or even impossible way. It’s always at its scariest when these challenges are discovered in the middle of a purchase or refinance transaction.

The worst is when a borrower wants financing for an irrevocable trust. It may start out as a revocable trust between a husband and wife, for example. Dad dies. His half of the home, goes into an irrevocable trust. Mom eventually dies. Now the entire trust is irrevocable.

It’s almost impossible to find a lender to make a loan in the name of deceased individuals because a dead person can’t be foreclosed on for non-payment.

If the executor changes the title to get out of an irrevocable trust, there could be tax implications.

I recently had this very situation. We asked a lender to review the irrevocable trust documents ahead of time, knowing it was potentially a big problem.

The trustee was the credit borrower. The new loan involved proceeds from a 1031 exchange — a previous sale with a tight deadline to close the new sale — that had a deceased parent remaining on title in an irrevocable trust. The lender mistakenly signed off during the pre-approval process.

The escrow officer put a screeching halt to this at closing, pointing out that the county recorder’s office won’t accept a signature page that has a blank page where the dead parent’s signature was supposed to go.

The problem was solved when the lender agreed to remove the decedent’s blank signature page.

What happens when a property intended for a trust was not formally transferred to the trust?

This is commonplace, said Glenn Awerkamp, title manager at Lawyers Title. It takes a court process called a Heggstad Petition to get this resolved. The filing seeks a court order declaring that the property is a trust asset even though the title never formally got transferred to the trust.

“Parents sometimes attempt to put minor children on title in case something happens to (them),” said Awerkamp. “This requires probate court permission because it can’t be assumed the parent is also the guardian.”

Probate court also has to approve the power of transaction custodianship when parents with wealthy children (successful child stars, for example) buy, sell and refinance properties.

I am often asked if it’s best to put residential rental properties in a limited liability company or LLC for liability protection — against mold, for example.

A better solution could be to get insurance for liability protection, said Wendy Holt of Rancho Cucamonga-based Holt Insurance Agency.

“Some insurance policies do cover mold property damage and liability,” Holt said. And, you can get an umbrella policy for additional protection.

Irvine-based tax attorney Rod Stern gave another reason to avoid LLC’s for residential rentals: The burdensome $1,500 annual LLC fees and maintenance costs.

Stern advises property owners to do an estate plan ahead to prevent potential title and tax trouble down the road.

If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.