Retirement Related

I Make Payments to My Father for a House in an Irrevocable Trust But I’m Having Money Troubles

Written by Steve Rhode

Question:

Dear Steve,

I’m about 45,000 in debt.

Were at negative cash flow and starting to pile up debt outside of just the credit cards.

I pay the mortgage to my father who I have the house in an irrevocable trust for me in his passing. At the time of the purchase, I was working my way out of bankruptcy.

I don’t have anything to borrow against.

I just saw the podcast with Damon and he laid out the 4 possibilities of possible options; Lending club, Credit Counseling, Settlement, and Bankruptcy.

From what I can see I’m probably at the point of credit counseling or closer to Settlement. Is that something that you could help with or recommend a company you trust.

It’s a crazy jungle looking at all the places that are willing to help right away but hard to get a real sense of who is not a scam, even after looking at BBB, Yelp and other reviews on the web.

Jim

Answer:

Dear Jim,

It is a crazy and confusing world when it comes to getting out of debt. There are very few independent debt coaches like Damon Day out there. Most people you will talk to, including credit counseling, debt settlement, and bankruptcy attorneys all have a builtin prejudice.

Each niche thinks their solution is the best and when it comes to debt settlement and credit counseling, most of the people you will talk to are . not financial professionals, but folks interested in getting you into their program.

The best thing I can do is to encourage you to review all of your options. One place is my online get out of debt calculator.

Given the situation with the trust, it might just be there is not a neat one-size-fits-all solution and your situation will require a more customized approach. Something like a little from column A and B with a touch from column C. Every person in debt is unique and so the best approach is one that is tailored to meet the uniqueness of the person in trouble.

But your unusual question got me motivated to reach out to an attorney I know that deals with trust issues. Here is what Lisa had to say, “OK, lots going on here. First, if the trust document specifically lists a power to mortgage property, the Trustee of the Irrevocable Trust could, theoretically mortgage property within it. Only the Trustee, whoever that may be—not the Grantor (maybe the same person though, but there is a distinction there).

However, I would think you would be hard-pressed to find a lender willing to mortgage property held in the irrevocable trust. They have super strong creditor protections, so that makes it difficult for the lender to recoup on the lien if the trustee defaults.

In this case, it is possible your writer’s father is the Grantor and current Trustee and has mortgaged the property. Sounds like son is the ultimate beneficiary of the property upon Grantor’s passing, but has no current legal claim to the house. Sounds like perhaps they have some kind of arrangement where the son is living in the house and is paying the mortgage to his dad as essentially rent. Certainly, unless the son is the Trustee, I can’t think of a scenario in which son took out the mortgage himself.

One thing to note is that frankly, I find half the time I go down the rabbit hole with people it turns out they were incorrect in what they thought the trust ownership really was—its really a revocable trust, that becomes a irrevocable at dad’s passing, or not in trust at all but rather is set to go to beneficiary via testamentary trust set up through the will at time of death, thus would be currently owned outright by dad in this scenario and only moves into a trust at the time of death, for which the son is beneficiary. Just as a word of caution there, I guess.

To answer your question, it’s not typical, and we’ve never dealt with an irrevocable trust with a mortgage on property within it. But I’m not entirely sure it’s a trainwreck either—I’m not 100% but I seem to recall there are exceptions to due-on-sale if the recipient is a relative of the original debtor. Now, how that works with an irrevocable trust/trustee, I’m not really sure, since that’s not a “person” per se.”

So as you can see, this is a highly technical issue and the absolute best way to get a definitive answer is for you to hire a trust attorney who is licensed to practice law in your state. Anything less is a guess at best.

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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