Estate planning is a necessary step to take to ensure your estate does not get lost in the legal limbo that is probate after you die. Estate planning lets you set up trusts and designate beneficiaries to make everything easier on your heirs. Trusts are popular tools, but the differences between the main two types available, revocable and irrevocable, have drastic effects on what you can do with the items you've placed in those trusts. If you're placing property in a trust, watch out. An irrevocable trust could affect your ability to refinance that property.
Irrevocable Trusts Can't Be Changed Without Permission
Anything that goes into an irrevocable trust is there until it's disbursed to beneficiaries after your death. It is also left in there unchanged. Property that's placed in an irrevocable trust may still be in the process of being paid off, but once the property is in that trust, you are following the terms of payment without changes. Technically you can get permission to make changes, of course, but you have to assume you won't get permission when you create the trust. If you're set on eventually making changes, such as refinancing, an irrevocable trust is not the right estate planning strategy.
Refinancing Your Home Affects the Owner, Not You Personally
Refinancing a home you own doesn't sound like something that would change the property so drastically as to require permission from a trustee. But remember, in an irrevocable trust, you're no longer the real owner of your home; the trust is, even though you might be the one making payments on the house. If you want to refinance to get a better deal, you face two obstacles. One is that banks often aren't fans of refinancing when there's an irrevocable trust involved. The other is that the trustee might disagree with the terms of the refinancing, such as extending the mortgage by several years for only a small drop in interest rates.
When a Revocable Trust Might Be Better
Irrevocable trusts offer legal protection for assets in situations where the asset could be at risk of seizure over an unrelated matter. For example, if you lose a lawsuit, the property in an irrevocable trust won't be seized to pay any damages you've been ordered to pay. If you are not at real risk of being pulled into situations like this, then a revocable trust would be a better estate-planning tool. That trust allows you to make changes, such as refinancing or changing who becomes the beneficiary of the property, a lot more easily.
Your estate planning attorney can help you figure out which type of trust is better. Think very hard about what you want to do with the house and what changes you might want to make (or be able to make) in the future. Your estate planning attorney will show you the options.
Contact an estate planning attorney near you for more information.
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