Can I Mortgage Land in an Irrevocable Trust?

An irrevocable trust is a powerful tool for helping individuals safeguard particular assets that will eventually be distributed to beneficiaries. In fact, both revocable and irrevocable trusts provide numerous benefits and protections that, ultimately, help the grantor of the trust transfer assets to beneficiaries and avoid the lengthy process of probate. The type of asset that can be placed inside of a trust ranges from valuable items, such as artwork, to parcels of land. It is possible to place a mortgage on property held in a trust, although this may require the consent of the trustee if the property is being held in an irrevocable trust.

TL;DR (Too Long; Didn't Read)

If land is being held inside of an irrevocable trust, the trust's trustee has the legal right to seek mortgage funding for it. That being said, the protections offered to irrevocable trusts may cause lenders to decline the mortgage application brought by the trustee.

The Basics of an Irrevocable Trust

Both revocable and irrevocable trusts allow the individual creating the trust, referred to as the grantor, to place specific assets under a set of special provisions and guidelines to be executed upon their death. Whereas a revocable trust allows the grantor to move items in and out of the trust freely, this is not the case with an irrevocable trust. In fact, the grantor is required to give up any form of ownership of an asset in order to place it inside of the irrevocable trust.

Once an item is placed inside of a trust, it is overseen by an appointed trustee. The trustee acts as the "manager" of the trust until such time when the assets are to be distributed to the named beneficiaries.

Irrevocable Trust Tax Advantage

While this may seem excessive, there are certain advantages offered by irrevocable trusts. For example, the grantor is no longer held liable for tax incurred on items placed inside of an irrevocable trust. The trust is required to register as a taxable entity, with the appointed trustee managing all necessary filing guidelines as mandated by the IRS.

The point should also be made that even a revocable trust is eventually converted to an irrevocable trust following the death of the grantor. With that in mind, grantors considering which type of trust they should establish during their lifetime should also realize that there is only one final "destination" for this trust.

The Irrevocable Trust Mortgage Process

Although the rules and regulations associated with an irrevocable trust may require some time to fully understand, it is important to realize that the trustee has a broad degree of freedoms with respect to managing items in the trust as long as their actions are in the best interest of the trust.

For example, a trustee will typically have the legal authority to apply for a mortgage on land placed inside of an irrevocable trust. However, being able to apply for a mortgage is certainly different than qualifying for one. Because irrevocable trusts carry a significant number of protections against creditor claims, many lenders may decline to offer financing for fear that they could not recoup their losses in the event of nonpayment. It's fair to say that a mortgage on land inside of an irrevocable trust carries with it an elevated risk profile compared to more conventional mortgages taking place outside of a trust.

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