What happens to a house that is in a trust when it still has a mortgage on it?

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What happens to a house that is in a trust when it still has a mortgage on it?

My dad owes a huge mortgage on his home and put it into a trust for me and my siblings. He is terminally ill and we are trying to figure out what will happen to the house once he dies because none of us can afford the mortgage. What is the benefit and downside of having the house in a trust with a mortgage on it?

Asked on August 26, 2012 under Estate Planning, California

Answers:

Catherine Blackburn / Blackburn Law Firm

Answered 8 years ago | Contributor

Your question raises legal and practical issues.  If your dad put the home into a trust, then the trust owns the home.  What happens to the home after your father passes away depends on how the trust is written.  It could be written that the home is to be sold and the proceeds distributed to his children.  It could be written that the home will be transferred to the children subject to the mortgage.  It could be written that other assets will be used to pay off the mortgage and the home transferred to the children.  You have to read the trust to find out what will happen. 

If the trust is revocable and your dad still has capacity to make a trust, he can change the trust.  Just because your dad has a terminal illness does not mean he lacks capacity.  I would strongly suggest that you consult a trust attorney now, while your dad is still living, so that your dad can make sure his trust says exactly what he wants it to say.  Trusts are very powerful and flexible.  This is why it pays to consult a lawyer rather than use a form.

Cameron Norris, Esq. / Law Office of Gary W. Norris

Answered 8 years ago | Contributor

You would receive the property from the trust, subject to the mortgage.  If you can't afford to make the mortgage, then you and your siblings would be forced to sell the property and would divide up any proceeds from the sale. 

Best of luck.


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