Can You Put a Home That Has a Mortgage in a Family Trust?

A mortgage generally doesn't prohibit transferring a home to a family trust.
A mortgage generally doesn't prohibit transferring a home to a family trust. (Image: house image by Byron Moore from

When you transfer real estate to a family trust you have to transfer legal title to the real estate to the trustee of the living trust. This requires preparing and recording a deed to transfer title. Although this process technically violates the terms of most mortgage loans, this transfer process is generally acceptable because of a specific federal law allowing such transfers.

Due on Sale

Most mortgage loan documents include a due on sale clause which basically provides that the mortgage lender can call, or accelerate, the entire balance due on the mortgage if the mortgage property is conveyed. A deed transferring title to a trustee is a conveyance, which means the lender can technically demand immediate payment in full on the mortgage loan.

Federal Law

Fortunately, however, a federal law exists that prohibits lenders from exercising the due on sale clause when the sole purpose of the conveyance is to create a family trust or other types of living trusts. Because of the federal law, you can transfer a mortgaged property to your family trust even if your mortgage documents include a due on sale clause.

Mortgage Interest

Another important benefit provided by federal law and related to family trusts is found in the U.S. tax code. Under the tax code, homeowners can claim an itemized deduction for all mortgage interest paid during the year. Technically, a mortgaged property owned by a family trust could not be claimed as an itemized deduction because the trust, not the individual, is paying the mortgage. The tax code, however, conveniently treats trust property as personal property, which allows you to continue claiming the mortgage interest deduction even after you transfer the property and mortgage to the family trust.

The Catch

There is an important catch related to family trusts and the mortgage interest deduction, however. The catch is that the mortgage borrower must be both the trust grantor and a primary beneficiary of the trust, and that person must continue to reside in the mortgaged property. Additionally, the trust documents should clearly state that the mortgaged property is a qualified residence of that person. In a family trust that contains numerous beneficiaries, this could pose a problem, so it may be worth consulting an estate planning attorney to help plan around this tricky issue.

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  • "Make Your Own Living Trust"; Denis Clifford; 2009
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