Small Estate Affidavit - Transfer of a Deed of Trust

When a person passes away and they have a modest probate estate, for example $150,000 or less in gross assets, beneficiaries may collect the estate using a small estate affidavit. The figure of $150,000 is used because that is the threshold for determining whether or not an estate must be probated or not. For instance, if the decedent passed away with a probate estate worth $170,000, then probate would be required. Conversely, if the decedent passed away with a probate estate worth $120,000, then no probate would be required. Consequently, the small estate affidavit procedure can be used to collect the decedent's estate in such case.

Of note, California until recently had a probate threshold of only $100,000. This was only recently increased to $150,000 effective January 1, 2012.

Many people have inquired over the years if the affidavit has to be filed with the probate court. The short answer is no, the affidavit does not have to be filed with the court. Frankly, absent extreme circumstances, the affidavit will not be filed with the probate court. Although for the transfer of a beneficial interest in a deed of trust, the affidavit needs to be recorded. 

Probate Code §13106.5(a) requires that "if the particular item of property transferred under this chapter is a debt or other obligation secured by a lien on real property and the instrument creating the lien has been recorded in the office of the county recorder of the county where the real property is located, the affidavit or declaration described in Section 13101 shall be recorded in the office of the county recorder of that county and, in addition to the contents required by Section 13101, shall include both of the following: (1) The recording reference of the instrument creating the lien and (2) A notary public’s certificate of acknowledgment identifying each person executing the affidavit or declaration.

The easiest way to obtain the information to complete the affidavit is to acquire a copy of the recorded deed of trust. Since a deed of trust is a recorded document, acquisition of such should not an obstacle. Websites such as datatree.com can be used to obtain these documents for a fee. I used datetree.com, formerly docedge.com, in the past to locate real property records and was please with their service  

A bizarre aspect of this law is that it asks for a notary's acknowledgement when notarizing the affidavit. Yet in California, the correct notarization for an affidavit is a jurat. Hence, when I had to draft an affidavit that transferred a beneficial interest in a deed of trust I was confused about the notarization aspect (I am also a notary). I opted to follow Probate Code §13106.5 because apparently the California legislature decided to alter the notarization requirement for this type of affidavit.

Refinancing a Home - Revocable Trust

When a home is titled in the name of a revocable trust (or living trust) and the trustee wishes to refinance the home, a bank will often require the trustee to transfer the home out of the trust and into the trustee's individual name. For instance, if title is held by "John Doe, Trustee of the Doe 2014 Rev. Trust dated 1/15/14," a bank will typically ask that Mr. Doe transfer title to "John Doe."

One reason why the bank is leery of refinancing when title is held by the trustee of a revocable trust is because it is unclear who is the equitable owner of the property. When a married couple or single person applies for a refinance, the bank will first check to see how title is held. Naturally, a bank will not extend a home loan if the borrower does not own the home. Ah, those crazy banks. Upon inspection of the deed, ownership of the home should be apparent. I say apparent because in the case of a home owned by a revocable trust, it is unclear who is the beneficial owner of title. Legal title is readily clear because the legal title holder will be the name of the trustee. In particular, if correctly titled, the trustee's name, the name of the trust and the date the trust was formed should be listed on the deed. However, no deed will state the name of the equitable title owners, i.e. the beneficiaries of the trust.

Ascertaining the beneficial title owner(s) is particularly important because they have equitable powers that can be enforced against the trustee. For example, the beneficiaries can have the trustee removed, surcharged or suspended for breach of fiduciary duty. Therein lies the problem with refinancing when title is held by the trustee, these unknown beneficiaries can cause legal headaches for the trustee and the bank is unaware of who they may be.

In light of this, some banks insist that title be transferred from the trustee(s) back to the individual(s) in order for the refinancing process to be completed. Still, some banks are okay with the home remaining titled in the name of trustee provided the trustee completes a detailed questionnaire which identifies the appropriate parties, i.e. the trustee and beneficiaries, and the trustee's powers.

For people who must transfer the home out of the trust, it is especially crucial that they transfer the home back into the trust once refinancing has completed. Otherwise, probate may be needed if an owner passes away and title is held in their individual name instead of the trustee's name. This is a rather ironic consequence because almost invariably a person writes a revocable trust to avoid probate.   

Reverse Mortgage

A mortgage is a loan obtained from a lender by a borrower to purchase real estate when the borrower is unable to fully pay the purchase price in cash. Over time, the borrower makes periodic payments with the hope that the home's equity will increase because of principal and interest reduction and appreciation.

Of note, in California we do not have "mortgages" instead we utilize a "deed of trust" to finance the purchase of a home. Still, from my land finance professor in law school, "there is basically no legal difference between a mortgage and a deed of trust in California." Since mortgage is more familiar than deed of trust I use that term.

In contrast, a reverse mortgage is where the the homeowner taps into the equity they have built up in their home over the years by borrowing against it. Equity is defined as the fair market value less encumbrances. Consequently, if a home is worth $500,000 with a $100,000 mortgage the house would have $400,000 in equity. 

The following is a hypothetical situation involving a reverse mortgage. Assume Senior Doe owns a home free and clear worth $500,000. That is, there is no mortgage or other lien on the property. Senior Doe may borrow against his $500,000 in equity by taking out a reverse mortgage. The lender may issue Senior Doe a lump sum of money, a revolving line of credit, periodic payments or a combination of the three. Senior Doe decides to receive a monthly payment of $2,000 for the rest of his life. The amount of money paid out to Senior Doe would be recouped by the lender when the property is sold or Senior Doe passes away.

The exact terms of a reverse mortgage are dictated by the (1) the age of the borrower (2) the value of home and (3) the method of payment, amongst other factors. 

The example mentioned above is a gross simplification of the process. In the real-world, Senior Doe would need to have his house appraised, besides pay origination, servicing and insurance fees. Despite these costs, a reverse mortgage can be an attractive method for senior citizens to enhance their income. Typically a senior citizen lives on fixed income, i.e. social security and/or a pension, and their home is often their most valuable asset. Naturally then, tapping into the value of the home to produce an infusion of income seems like a prudent maneuver. The alternatives for enhancing income are usually not as attractive, e.g. selling or renting the home, because both avenues involve moving which many seniors are uncomfortable with doing due to long tenure at their home.

Reverse mortgages also place a restriction on the type of realty eligible for such. For instance, the home must be the borrower's residence. 12 USC §1715z-20(d)(3); 24 CFR §206.39.

Furthermore, the amount of the loan is subject to a cap. There are various websites which will tell you how much you can borrow. You can Google to find one that suits your needs.   

Deed of Trust or Mortgage

Many clients own real property which are encumbered with a deed of trust. In other words, a person owns a home that was purchased with the assistance of a bank-issued loan. The following are some basic questions that address the rudimentary features of a deed of trust.

1. What is a deed of trust?

A deed of trust is a financing instrument where the borrower pledges real property, the security, in exchange for a loan from the lender in order for the borrower to satisfy the unpaid purchase price of the real property. Yes it sounds confusing at first blush, but conceptually it is not that difficult to grasp.

For example, Bobby wants to purchase 1348 Shawn Drive # 4 San Jose, CA 95118 from Samuel. The listing price for the condo is $175,000. Bobby is unable to make an all-cash offer for the home as he can only come up with $50,000. Therefore Bobby must obtain financing in order to purchase the home. Bobby decides to ask a local credit union for a loan to purchase the home. The local credit union approves Bobby for a loan of $125,000 that will be secured by the condo. This means that if Bobby is unable to repay the loan, the credit union may foreclose on Bobby's condo in what is known as a trustee sale. Bobby then submits his offer and is successful in purchasing the home. Samuel transfers title to Bobby via a grant deed and Bobby executes a deed of trust in favor of the credit union. 

2. What about mortgages? All I ever hear is talk about mortgages rather than a deed of trust?

For reasons that scream "boring" I will spare you the legal history of California's preference for the deed of trust instead of the mortgage.

The key takeaway is that a mortgage and deed a trust create essentially the same legal obligations.  It is just that in California, a loan secured by real property is referred to as a "deed of trust" instead of a "mortgage." 

3. What is the difference between a mortgage and a deed of trust?

Structurally a deed of trust has 3 parties whereas a mortgage has 2 parties. In a deed of trust, there is a trustor, trustee and beneficiary. The trustor is the debtor or borrower. The trustee is the party entrusted to reconvey the property to the trustor if the loan is repaid or to foreclose at the beneficiary's election, if a default occurs. It should be noted that the trustee is not a trustee in the usual legal sense. For instance, a trustee of a trust is held to certain fiduciary standards and a bankruptcy trustee is also held to certain legal standards. A trustee in a deed of trust is not held to such legal standards and serves a passive administrative role. The beneficiary is the lender.

In a mortgage, there is the mortgagor and mortgagee, i.e. the borrower and lender.

Legally speaking though, there is little distinction between the two.

4. How does a deed of trust relate to a revocable trust?

Since many clients own property that is encumbered with a deed of trust, they are concerned about transferring property into a trust. The reason being is that a deed of trust has, or should have, an acceleration clause which says that the lender has the right to accelerate the loan if certain transfers are made. This is known as a due-on-sale clause. This clause is present to prevent the borrower, the homeowner that is, from transferring the property to another person without first paying off the loan.

The good news is that federal law carves out a rather large exception to the general rule that a lender can enforce a due-on-sale clause. The law, the Garn–St. Germain Depository Institutions Act of 1982, says that a due-on-sale clause cannot be enforced on "a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property." 12 USC §1701j-3(d)(8). Hence, even if a person has encumbered real property, they are free to transfer the property into their trust without concern about their entire loan being due immediately.

Due-on-sale Clause - Garn-St. Germain Depository Institutions Act of 1982

Whenever a homeowner purchases a piece of property that is encumbered by a loan, the lender will invariably attach a provision to the loan known as a due-on-sale clause. The following are some questions that address this topic.

1. What is a due-on-sale clause?

Federal law defines a due-on-sale clause as “a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent is a provision in a deed of trust that provides the lender the right to accelerate the secured obligation if the owner transfers the property.” 12 USC §1701j-3(a)(1).

2. What does this mean in everyday language?

A due-on-sale clause gives the lender the right to demand full payment of the loan immediately if the borrower tries to transfer the property without the lender’s approval

3. How does a due-on-sale clause work in real life?

Assume Bud purchases a home from Al. Bud obtains financing from a bank in order to make the purchase. Bud then executes a loan in favor of the bank, which contains a due-on-sale clause. One day Bud decides that he wants to sell the home to his neighbor Jefferson. However, in light of the due-on-sale clause, before a transfer from Bud to Jefferson can take place, the full amount of the loan will need to be paid off because Bud’s attempted transfer would trigger the application of the due-on-sale clause.   

4. Are all transfers of real property subject to due-on-sale clauses?

No, the Garn-St. Germain Depository Institutions Act of 1982 carves out a number of exceptions to the general rule that a transfer of encumbered real property triggers a due-on-sale clause. Pub L 97-320, 96 Stat 1469. Although these exceptions only apply to “a real property loan secured by a lien on residential real property containing less than five dwelling units.” 12 USC §1701j-3(d). Thus, commercial property secured by a deed of trust would not be subject to the protections of Garn-St. Germain. Regardless, if the loan involves residential real property, Garn-St. Germain applies in some situations.  For example, a due-on sale cannot be triggered on "a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property." 12 USC §1701j-3(d)(8), see also California Civil Code § 2924.6(a)(4).