Hello valued Lenders,
Here is a question that does not get asked very often, but should: What happens to your loan if something happens to you?
It’s not something anyone likes to think about, but from an investment standpoint, it’s something that should be addressed properly.
When you invest in a Trust Deed, your position as the Beneficiary is a property interest. That means your interest in the Promissory Note and Deed of Trust must transfer to someone else if you pass away. If that interest is held in your individual name, it does not automatically transfer with the ability for someone else to act on it. Instead, it may need to go through probate, which in California could take months.
During probate there can be a period of time where:
- The loan is still active.
- The borrower is still obligated.
- But no one has legal authority to act on the loan.
This creates a situation where the investment exists, but control over it does not. We’ve seen situations like this more often than you would expect:
- A borrower stops making payments after a lender passes, but no one has authority to initiate foreclosure.
- A payoff is ready to happen but cannot be completed because the lender’s interest is tied up in probate.
- In fractionalized loans, if a majority holder passes, the remaining investors may not be able to act without court involvement.
In each of these cases the issue is not the loan itself. The issue is who has the legal authority to enforce it. There is a straightforward way to avoid this and one solution is to hold your Trust Deed investments in a revocable trust.
When structured properly:
- A successor trustee can step in immediately.
- The loan can continue to be managed without interruption.
- Enforcement actions, if needed, can proceed without delay.
- Probate can often be avoided entirely for that asset.
Most Trust Deed investments perform as expected. But a strong investment is not just about performance, it’s about how the structure holds up when something unexpected happens. This is one of those areas where a simple decision upfront can prevent significant complications later.
We are not attorneys, and each investor should consult with their own legal and tax advisors regarding how to hold title to their investments.
That said however, from a practical standpoint, we have seen firsthand how much smoother things go when investments are held in a properly structured trust. It is something worth considering if you are actively investing in Trust Deeds. Holding a Trust Deed in your individual name can create delays and complications if something happens to you. It’s a simple structural decision that can make a meaningful difference, so I felt it was important to share this information for your consideration.
Warm regards,
Ken Walker
Broker/Owner
Pacific Direct Mortgage & Real Estate, Inc
DRE #01858042 / NMLS #1221130
Phone: 707-708-0797
Office: 1400 N Dutton Ave #22 Santa Rosa, CA 9540
This communication is for informational purposes only and is not legal or tax advice. Investors should consult with their own legal and tax professionals regarding their specific situation. All investments carry risk, including potential loss of principal.
