Should you Always Record a Deed to a Trust?

Real-World Example

Ashley and Brooke (A&B) have created a revocable trust plan. They are 45 years old and have two children. Among other assets, they have a primary residence and a 2-family investment property, both in joint names with right of survivorship. They live in a jurisdiction that recognizes deeds recorded at the Registry of Deeds anytime after the deed is signed. They are considering selling their primary home in the next few years, but may first refinance while interest rates are still low.

I conclude that the real world solution is to deed their properties to their trust, but they should hold off on recording those deeds. Here’s why:

Timing – The timing would be poor right now for recording a deed to A&B’s trust since they may refinance. Mortgage lenders will ask for a copy of the recorded deed and prefer to see personal over trust ownership. The lender may insist that A&B put the title back in their own names. 

Since they may sell their property in the near future, this is another reason to hold off on recording their deed. While selling the property as a trust is no harder than selling as individuals, the transfer to trust may be just a waste of recording fees right now.

Recording and deed preparation fees – In many counties, recording fees can be hundreds of dollars per transaction. By the time A&B record the deed into the trust, remove the property during the refi, then record a deed back into the trust, they will have signed and recorded 3 deeds and other forms, and could easily spend $1,000 for document prep and recording.

Local Tax and Permit Implications – Watch out! Recording A&B’s deed may result in the local taxing authority changing A&B’s real estate tax status. The City of Boston, for example, will change the classification of a residence from owner-occupied to non-owner-occupied, which will require filing an abatement application to show that they still occupy and thus avoid much higher taxes – if A&B even notice the tax change before the filing deadline. Their investment property should already be taxed as non-owner occupied property and the transfer shouldn’t matter there.

Mortgage Consequences –  Having a mortgage on a 1-4 family property should not prevent A&B’s transfer of title to their trust. The Garn-St. Jurmain Act of 1983 forbids mortgage holders from accelerating a mortgage when the property is put into a trust essentially for estate planning purposes. But, it’s best to look at the mortgage document to be sure. A home equity line of credit (HELOC), for example, might be frozen, preventing further borrowing on the HELOC, even though the lender will not be able to accelerate the full payment of the mortgage. 

A useful feature of 1-4 family Fannie Mae (FNMA) mortgages is the right to “cure” – to cure the default – which means to get caught up on your payments. If the lender says A&B have violated the mortgage, then they can put the property back into the name of the mortgagor during the 30 days following notice of the default. 

Pocket the Deed? On balance, it is better for A&B to sign, notarize and “pocket” their deeds. They’re not concerned with the taxing authority or a mortgage violation, but they want to hold off recording since they may sell or refinance when their kids enter high school. 

Holding or pocketing a deed means that the transfer is still valid as between A&B and their trust – it’s just not binding on anyone else – because the act of recording has been delayed. Pocket deeds are best accompanied by an additional notarized document that acknowledges the intent to create a final transaction by putting off the administrative act of recording. My opinion is that unrecorded deeds are private and should stay that way. They need not be mentioned in a mortgage application because they are not binding on the lender. 

Ashley and Brooke should stay on top of the factors that led them to delay recording and they should keep current on their estate plan. They should occasionally sign a new deed to keep their intentions current, or record the deed, eventually. For now, even if tragedy strikes, their state allows recording deeds anytime after signing, even after death.

Commercial or Residences over 1-4 Family Dwellings –
If the property is commercial or is greater than a 1-4 family residence, get permission from the lender before the transfer, or be prepared to ask for forgiveness. Or pocket the deed. 

Irrevocable Trusts

Irrevocable trusts present their own problems when it comes to refinancing. Deeds to irrevocable trusts almost always should be recorded – public records are important to prove the transfer. But good luck refinancing! Most mortgage lenders will not consider lending on a property that is held by an irrevocable trust – out of an overabundance of caution that they may not be able to foreclose or collect or have trouble identifying who the borrower is.

Trust funding can take an estate plan from merely good, to great! But consider all implications before you record ​​a deed to a trust.