Version II- Family Trusts vs Deeds of Trust
What are a Trustor, a Trustee, and a Beneficiary? It Depends on the Purpose.
Family Trust:
A family trust is a legal arrangement between principal parties designed to manage and distribute family assets according to the wishes of the trust’s creator, the grantor. This legal arrangement protects and transfers wealth to family Members, avoiding the need for probate.
Trust documents are tailored to the wishes of the grantor (Trustor), offering significant flexibility in management and control. This adaptability empowers the Trustor to shape the trust according to their unique needs and circumstances. Trusts are also a valuable tool in estate planning, providing a comprehensive approach to wealth management.
A will usually accompany the trust document.
Probate is a cumbersome legal process handled through the court system. The court system oversees the process, which typically requires the assistance of a specialist lawyer. The entire process is time-consuming, consumes a significant portion of the assets’ value, and delays distribution to the beneficiaries.
https://www.investopedia.com/terms/p/probate.asp
Investors or lenders in trust deed Investments who create a family trust are called trustors. The Trustee is the person responsible for managing the trust’s affairs and distributing its assets. A trust format usually requires three principal parties:
Trustor(s): the one who creates the family living trust, either revocable or irrevocable. There are many forms of trusts, such as a children’s remainder trust or a trust representing some group. The primary purpose of a trust is typically to protect and accumulate assets, including cash, real estate, stocks, bonds, businesses, and other valuables. A trust generally aims to minimize taxation and protect assets from liens or creditors during the Trustor's lifetime or upon their death.
Trustee: the person who represents, acts on behalf of, and signs paperwork for the trust. This person is akin to a trustee, managing with rights outlined in the trust document. The trust document outlines delegated rights and responsibilities, establishing the authority to act. When the trust purchases or invests in an asset, the Trustee will sign on behalf of the trust.
The Trustee holds title to the trust’s assets on behalf of the trust by operation of law. The trust, Trustor, and beneficiaries do not have title to the assets.
The Trustor(s) may also be designated as the Trustee (s). The Trustors intend to create a new trust, a separate and distinct agreement between the principal parties, including the Trustor, the Trustee, and the beneficiaries. Although the Trustor(s) conveys title to the trust, the Trustor(s) usually reserve some or all the benefits of the trust during their lifetime while acting as both the Trustor and the Trustee. The added purpose is to preserve some of the benefits for future beneficiaries.
Beneficiaries are those the Trustor designates to receive future benefits of the trust assets, as defined in the trust document. The benefits are typically based on the investment performance of the trust assets and the distributions resulting from the trust, now and sometimes in the future. Beneficiaries may be children, relatives, or some designated organization, such as a church, foundation, education entity, or benevolent group, such as the American Cancer Society or the Make-A-Wish Foundation.
Deeds of Trust:
The deed of trust is a legal, recordable security agreement in real estate transactions.
A deed of trust involves three parties: the Borrower (Trustor), the lender (beneficiary), and the Trustee (a third-party independent entity, such as a title company, escrow company, or bank).
Who has title to the property is a unique legal framework in deed of trust states. In a deed of trust, the Borrower transfers legal title of the property to the Trustee, who holds it as collateral for the loan. If the Borrower fails to make payments, the Trustee can foreclose on the property to recover the loan’s value, which is a faster and less costly option for the lender compared to a traditional mortgage.
The deed of trust is just one of the required loan documents, which is not just paperwork but the backbone of a loan transaction. The loan documents are comprehensive written agreements that memorialize the Borrower's commitment to repay the borrowed funds and the consequences if the Borrower defaults on their obligations. The principal documents integral to this process are a promissory note, a loan agreement, and a deed of trust or mortgage instrument. In less sophisticated transactions, the loan agreement will be merged into a deed of trust and eliminated. In addition to these foundational documents, submitting personal and business financial statements is often part of lenders’ criteria for loan approval. Understanding these documents is crucial for all parties, empowering them to make informed decisions.
Loan documents may be off-the-shelf standardized forms written by an industry lawyer or software support vendor. Often, these documents are a collection of clauses obtained by attorneys from an online legal research platform.
Some deed of trust forms are written and approved by the Federal National Mortgage Association (FNMA), commonly known as Fannie Mae. Fannie Mae is a United States government-sponsored enterprise (GSE) that has been publicly traded since 1968. It plays a significant role in the mortgage industry by setting standards for mortgage lending and approving standardized deed of trust forms, known as uniform instruments, with various form numbers.
Lawyer specialists play a crucial role in the private money lending business.. They construct more sophisticated, customized loan documents for specific purposes, ensuring that all legal aspects are covered and both parties are protected. This expertise provides reassurance in the complex world of private money lending.
The Trustee plays a different role in a deed of trust. Imagine someone decides to make a trust deed investment in a loan secured by real property. The language in the actual deed of trust defines the three parties involved differently.
Trustor -The person or entity who owns the property. They might also be referred to as the grantor. The Borrower/Trustor/or grantor decides to borrow money and use the property as collateral for a loan. A deed of trust, a security instrument, will be drawn, signed, and recorded against the property at the county recorder’s office. This creates a public record notice of the lien.
A trustee of a deed of trust requires a third-party entity, generally a title company, which holds what is referred to as a bare equitable title on behalf of the beneficiaries or investors in the loan transaction. The Trustee is given three powers: 1) to foreclose, 2) to reconvey, and 3) to modify the trust deed per the agreement. The Trustee cannot benefit from the ownership, but is hired only as a placeholder in trust deed states. The Trustee is an intermediary with a fiduciary responsibility to the stated beneficiaries. Their job is to protect the beneficiary’s rights and act in their best interest in the event of default. Additionally, when a Borrower/Trustor pays off the loan, the Trustee will reconvey, meaning they remove the property from the public record, thereby restoring full ownership to the Borrower/Trustor.
Some states use a mortgage security document rather than a deed of trust. A mortgage document typically requires only the Borrower and the lender/beneficiary as necessary.
Deeds of trust are commonly used in states like Alaska, Arizona, California, Colorado, Idaho, Illinois, Mississippi, Missouri, Montana, North Carolina, Tennessee, Texas, Utah, Virginia, Washington, and West Virginia. In contrast, mortgages are more common in other states.
Beneficiaries are investors/lenders like you who invest capital and receive a recorded deed of trust or mortgage document and a promissory note signed by the Borrower/Trustor.
Merging the two separate sets of language or industry terminology:
A trustee of a family trust who purchases all or 100% of a deed of trust investment, acting on behalf of the trust, signs all the paperwork.
The Trustee of the family trust will become the beneficiary of the deed of trust. If the beneficiary of the trust deed also demanded to become the Trustee under the deed of trust, would the person sign as an individual, or would the person sign as Trustee on behalf of the family trust?
I would discourage this because it may alter the servicing relationship between the parties. The Trustee of the deed of trust and the Trustee of the family trust would have to sign the servicing agreement or an addendum stating that the Trustee under the deed of trust will take no actions that will alter the terms of the servicing agreement. The complexity here is not worth addressing, as it could lead to potential conflicts of interest and legal complications.
In a court of law, either of the above parties will claim they did not understand the ramifications. To ensure a secure and informed decision-making process, such actions should only be undertaken with the advice of their counsel and paid for by them.
The only practical solution is for the title company that issued the title insurance policy for the closed loan transaction to become the Trustee under the deed of trust. This reliable and straightforward option can bring relief and reassurance to those involved.