How to Assign an Interest in a Deed of Trust Without a Formal Assignment
A deed of trust is a relatively rare instrument that can be used to secure a loan between a lender and the buyer of property. Part or all of the property, called the interest, is titled in the name of a neutral third party trustee. The trustee can sell the property on behalf of the lender without a formal judicial foreclosure if the borrower defaults on their debt payments. Many deeds of trust carry "due on transfer" clauses that entitle the lender to the entire remaining principle of the loan in a lump sum if the property is sold or transferred. Thus, it can be advantageous to transfer property subject to a deed of trust without a formal assignment.
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Instructions
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Create a revocable living grantor trust. A trust is a fictitious entity, like a corporation, that owns assets provided by a grantor (or settlor), which are managed by a trustee on behalf of a beneficiary. A grantor trust is treated by the IRS as the property of the grantor, and all income earned by the trust flows through to their individual income tax returns. The grantor of a revocable living trust can also be the trustee and the beneficiary of the trust. Its sole asset, in this case, should be the property in question.
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Deed the property to the trust. A grant deed need not be recorded to be enforceable in the future, but it must be worded properly and witnessed and/or notarized. See the Resources section for a grant deed form. Draft and execute a grant deed that transfers the property to the newly created revocable living trust.
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"Sell" the property by amending the trust. A property subject to a deed of trust can be assigned without triggering the "due on transfer" clause by adding the new owner as a trustee and beneficiary of the revocable living trust. The terms of the trust can be further amended so only the new owner has equitable and beneficial ownership of the actual property, while the original owner/grantor/beneficiary remains entitled to the cash assets of the trust. This cash is transferred to the trust by the new owner, and can be used by the original owner to remain current on the original loan secured by the deed of trust.
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Tips & Warnings
Clearly, the assignment of interest in property subject to a deed of trust via a revocable living trust is an unconventional way to transfer ownership of real estate. It should only be attempted by individuals who can reasonably expect to maintain the trust relationship until the loan backed by the deed of trust is satisfied, or the principle is reduced to the point where it can be paid in a lump sum.
While the arrangement can become somewhat convoluted, a lender is likely to notice if it starts to consistently receive payment on a loan from a new party, and they will likely suspect a sale of transfer. This is why it is essential for the original owner to continue sending in payments on the original loan secured by the deed of trust.
