Successor Trustees, Heirs and the House in the Trust

What changes at death

Most revocable trusts say that at the death of the settlor — or of the second settlor, for a married couple's joint trust — the trust becomes irrevocable and the successor trustee takes over. The successor trustee's job is to pay the trust's debts and expenses and carry out the distributions, not to keep borrowing on the house. The home equity programs that accept trusts are built around a living settlor who occupies the home and signs the loan, so an irrevocable, post-death trust usually falls outside them.

What happens to a line that already exists

The line agreement and the federal rules for home equity plans govern it, not the trust. Many agreements allow the lender to stop further draws after the borrower's death, and the outstanding balance becomes a debt the trustee pays from trust assets or from the sale of the house. If the family intends to keep the home, the trustee should call the servicer early, provide the death certificate and the trustee's authority, and ask in writing what the agreement allows.

Keeping the first mortgage

An heir who keeps the house can usually keep the existing first mortgage, too. Federal law bars a lender from enforcing a due-on-sale clause on a home of fewer than five units for a transfer to a relative resulting from the borrower's death, or a transfer in which the borrower's spouse or children become owners. That is often the reason a family keeps a low-rate first mortgage in place and uses a separate line for the cash it needs.

When an heir needs cash from the house

The usual reasons: buying out a sibling's share, paying the estate's expenses, or repairing the house before moving in. The order that tends to work:

1. The successor trustee deeds the home to the beneficiary who will keep it, as the trust directs, once the trust attorney says the trust's debts and taxes are provided for.
2. The beneficiary qualifies for a line in their own name, on their own credit and income, as the owner of the home.
3. If siblings are being bought out, the line or another loan funds the buyout, and the trust attorney documents it so the distribution is clean.

Whether a line, a cash-out refinance or a sale is the right tool depends on the amount, the first mortgage and what the heir can carry. A line keeps the first mortgage; a refinance replaces it.

Incapacity: the hardest file

When a settlor is alive but can no longer manage their affairs, the successor trustee steps in under the trust's incapacity provisions. The trust is still revocable in principle, but the settlor cannot sign as borrower, and the federal-based guidelines most programs follow expect a settlor-borrower who occupies the home. A durable power of attorney, the trust's borrowing language and the program's own rules all matter, and many standard programs cannot do this file at all. Start with the family's attorney; bring the lender in once the attorney knows who can sign for whom.

A rental the family keeps

If an heir keeps the inherited home as a rental instead of moving in, the borrowing question becomes a rental question. Lines on non-owner-occupied homes come from a smaller set of programs, covered on HELOCforRentals.com.

Questions trust owners ask about this