Taking the Fear Out of Trusts & Powers of Attorney

It's quite common, especially in California, to meet with a client whose home and other assets are tied up in a trust. While some lenders may cringe when they hear the word “trust” there's nothing to worry about as long as you understand some basic facts.

NRMLA spoke with several industry experts to increase our knowledge of the topic. We spoke with financial planner Art Widmann, of Bowie, Md.; estate/probate attorney Alexander Djordjevich, who has a private real estate and estate planning practice in Washington, D.C.; lender Robert Ready, of East West Mortgage, Bowie, Md.; and loan underwriters Nichole Crawford, of Wells Fargo Home Mortgage, Minneapolis, Minn., and Deanne Opstad, Generation Mortgage Company, Atlanta.

What Is a Trust?
Trusts are primarily used to transfer a home, and other assets, to avoid probate. "A box is created and anything that goes into the box doesn’t go through probate," explained Widmann.

There are two basic types of trusts, revocable and irrevocable. There are different sub-categories, or “flavors," of revocable and irrevocable trusts, such as charitable trusts, bypass trusts, A/B trusts, and unitrusts. Many of these trusts seek to reduce or minimize estate taxes and some even have current income tax benefits. A revocable trust (which includes the popular "living" trust) is the most flexible. A homeowner can change his mind, remove assets from a revocable trust, so they revert back into his name.

An irrevocable trust is less flexible. If a home is protected by an irrevocable trust, it's very difficult to do a reverse mortgage.

According to Widmann, there are three parties common in all trusts:

• Grantor (sometimes referred to as the trustor). This person is responsible for setting up the trust.
  
  
• Trustee. This person is responsible for keeping track of the assets. The trustee has all the fiduciary responsibilities and all the liabilities associated with the trust.
  
  
• Beneficiary. This person receives the benefits of the trust. [During the Grantor’s lifetime, he is the beneficiary; after his death, there are beneficiaries set forth in the Trust.]

It's quite common to see the same entity, or same person, occupying all three positions, at least during the grantor’s lifetime.

Underwriting Issues
If a client's assets are tied into a trust and the person applies for a reverse mortgage, he or she must be the sole beneficiary. Although that is typically the case, Opstad has seen trusts that give individuals, other than the reverse mortgage client(s), life estate to the property. "In other words, we can’t have somebody that has a right to live in the property beyond our borrowers' deaths," she said.

Divorces can sometimes complicate matters as well, especially when children are involved. After one parent's death, children sometimes split the trust and move some assets, including the home, into a family trust. The property cannot be in a family trust because that gives beneficiaries (other than the remaining spouse) rights to the property.

Again, the reverse mortgage borrower(s) can be the only trust beneficiary.

Another issue that underwriters look for is whether the trust permits the trustee to encumber, or mortgage, the property. In summary, a trust must have the following three things: 1) the borrower(s) must be the sole beneficiary; 2) the trustee must have the ability to encumber the property; 3) the trust must be a revocable trust.

"If those three things are not present, then the trust has to be amended," said Opstad. The only way to change an irrevocable trust to a revocable trust is by court order.

Title companies are frequently asked to review the trust for acceptability as well. Occasionally, Opstad sees trusts that are written in Florida, but the property is in Ohio. In cases like this, a title company ensures the trust meets Ohio laws.

Making Sure Borrower Understands Trust Implications
In most cases, a borrower knows whether his or her home is tied up in a trust. The person may not call it a revocable trust. They may refer to it as a trust or living trust. A little detective work on the part of the lender, or loan underwriter, will uncover whether it's revocable or irrevocable.

Ready will ask his clients for a copy of the trust, so he can review it and submit it to his underwriters and title company. "This way, we can identify potential problems early in the process," he said.

Added Widmann: "I'd like to reiterate that a trust is like a box. You have to make sure the trust has been funded and the property is really in the trust. A cursory look at the deed, just to make sure that it’s titled in the name of the trust, can save you a lot of hassles."

Djordjevich agrees. "You need to be very careful when somebody comes into your office and says, 'oh, I have a trust and everything is in the trust,' because I’ve seen too many times someone with a piece of paper that says it’s a trust and it’s the box, as was discussed, but there’s nothing in the box. The person was charged a pretty penny to do the trust and it’s something, unfortunately, that all too many members of my profession don’t take care of, which is the funding of the trust."

Djordjevich advises lenders to contact the attorney who drafted the trust in case it needs to be amended or anything needs to be clarified.

In most states, the contents of a trust are private and not available for public review. However, Opstad and Crawford said it's important that a lender be able to review the entire trust, not just an excerpt, to make sure it meets FHA's standards.

"We tell the client, 'if you want to do this loan, this is what we need.' Most borrowers are willing to give us what we need, because they want to do the loan and they understand that we have certain criteria that we have to meet," said Crawford.

Power of Attorney
A durable power of attorney enables a designated friend or relative to act on behalf of an incapacitated individual. The POA literally steps into that person’s shoes.

HUD requires a reverse mortgage borrower to be mentally competent when executing the power of attorney. If a person is competent, he or she must go to counseling and sign the initial application. The power of attorney document must allow the person acting as power of attorney to encumber property. It must also be durable, which means that it survives incapacitation or disability. Underwriters typically want a title company to review the power of attorney document just to uncover any other possible issues.

"Where we run into problems," said Opstad, "is if we have a recent power of attorney with a doctor’s letter that states the borrower can’t go to counseling because they have Alzheimer's, or something like that. In other words, it’s very important that we make sure that that borrower knew what they were doing.

"We don’t allow a power of attorney to take an interest away from a property. In other words, if you’ve got a husband and wife, he’s on title, and they’ve got a power of attorney that’s going to take one person off the title, we require a court order to remove somebody from the actual title of the property," added Opstad.

According to Djordjevich, there are two types of POAs. One is a power of attorney that is effective at the time the client signs it. And, so, for example, a father signs a power of attorney giving his son an immediate power of attorney to act on his behalf, such as withdraw money from the bank and pay bills.

The other kind is sometimes referred to as a “springing power of attorney” that only becomes effective if a physician rules an individual mentally incompetent.

Djordjevich suggests that lenders ask for an original copy of the POA document.

"You may want to look at the date to see when it was signed and whether the person assigned as power of attorney has any issues of competency," he said. If the power of attorney is found not to be competent, then a conservatorship may be warranted.

Sometimes, more than one person may be named as a power of attorney, in which case a lender should pay specific attention to whether the POA document says “or,” or whether it says “and,” because in some cases both power of attorneys may need to sign something.