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It may seem as though transferring a mortgage — allowing a new borrower to take over the payments for the remainder of the loan term and relieving the original borrower of that obligation — would be a pretty straightforward process.

It isn’t.

For one thing, most lenders don’t allow mortgage transfers as a general rule. (Note: This includes SoFi.) And even when transfer of a mortgage is allowed — a government-backed loan may be assumable, for example, if the lender approves it — the process can be complicated and time-consuming.
If you’re considering pursuing a mortgage transfer, read on to learn some of the basics.

What Is a Mortgage Transfer?

A mortgage transfer involves reassigning an existing home loan from the original borrower to a different borrower, and letting the person (or entity) who assumes the loan keep the same interest rate, loan amount, loan length, and monthly payment.

The new borrower takes over all responsibility for paying off the remaining loan balance without getting a new loan, and the original borrower is legally released from any obligation.

A mortgage transfer can help both original and potential new owners: It may make it easier for the homeowner to attract potential buyers, for example, with the prospect of getting a lower interest rate than is currently available. And the homebuyer can look forward to saving money over the life of the loan and possibly paying off the home sooner.

Recommended: Mortgage Basics

How a Mortgage Transfer Works

The only way to make the transfer of a mortgage official is to work through your lender, and the process typically requires several steps, including:

Getting Your Lender’s Approval

If your lender won’t approve the transfer, you won’t be able to move forward — and it’s quite possible your lender will say no. Most conventional mortgages tend to have something called a “due-on-sale” clause,” which says the balance of the loan must be fully repaid in order for the original owner to be rid of the loan obligation. And even if you have an assumable mortgage (an FHA or VA loan, for example), the lender will have to approve the new borrower and the transfer.

That said, no matter what type of loan you have, you can always ask. There are some special situations in which a lender must agree to a transfer, despite the “due-on-sale” clause.

Filing the Proper Paperwork

If you are allowed to do a transfer, both the original and new borrower should prepare for some paperwork. The lender will likely want to verify the homeowner’s reasons for transferring the loan and check on the loan’s current status. And the new borrower can expect the lender to do a credit check and ask for documentation of employment and income to ensure he or she can manage the payments.

To avoid delays, borrowers should be ready to answer the lender’s questions and provide documentation as quickly as possible. You may find it makes sense to hire an attorney to help with this process.

Keeping the Loan in Good Standing

It may take several weeks for the transfer to go through, and any payments that are due during that waiting period should be made on time. If your loan becomes delinquent, it could affect the transfer. Homeowners also should be diligent about keeping up to date with required insurance policies, property taxes, and any homeowners association fees.

Paying the Appropriate Taxes

Most states charge a real estate transfer tax when real estate is sold or transferred. The amount and who’s responsible for this payment (the original borrower, the new borrower, or both) varies depending on where you live. Your attorney and/or lender should be able to help you understand your tax responsibility.

When Can You Transfer a Mortgage?

If you have a government-backed mortgage, your loan transfer request can likely be approved as long as the person assuming the mortgage meets the lender’s qualifications. But if you have a mortgage with a “due-on-sale” clause, which generally prohibits a borrower from transferring a loan to another borrower, you may only be able to get a transfer approved under special circumstances.

Transferring a Mortgage to Another Person

•   The federal law that allows lenders to include the due-on-sale clause in their contracts lists several situations in which the clause isn’t enforceable, including:

•   The transfer is made due to the death of a spouse, joint tenant, or relative.

•   The transfer is part of a living trust arrangement in which the new borrower is a beneficiary.

•   The transfer is part of a divorce or separation agreement in which the ex-spouse continues to live in the home.

•   The transfer is passing the property to an immediate family member.

Mortgage Transfer vs. Refinancing

If you’re a homeowner whose mortgage (or situation) isn’t eligible for a transfer, but you’re struggling to make your monthly payments or you want to make some changes to your current loan terms, you might consider a mortgage refinance. This could allow you to:

•   Extend the length of the loan with the goal of reducing your monthly payments.

•   Shorten the loan term and pay less interest over the life of the loan.

•   Add a second borrower to the refinanced loan to help with making payments.

•   Switch from a variable rate to a fixed interest rate. (If your loan’s current adjustable rate already has or is about to increase, you may benefit from a more reliable and possibly lower fixed rate.)

•   Get a lower interest rate. If your credit profile has improved, or interest rates have dropped since you got your loan, you may qualify for a lower rate.

•   Do a cash-out mortgage refinance and use some of your equity to pay other expenses.

None of these options will remove the original borrower’s responsibility for paying the loan the way a mortgage transfer can. But it could relieve some of the financial stress.

Benefits and Drawbacks of Transferring a Mortgage

As mentioned above, a mortgage transfer can be beneficial for both the original homeowner and the person taking over the loan. Here are a few of the pros and cons involved with a mortgage transfer:

Benefits

•   Lower interest rate for the new borrower: If the owner’s interest rate is lower than current market rates, a transfer could result in significant savings for the new borrower.

•   Fewer closing costs: Assuming a loan typically can mean fewer closing costs than getting a new mortgage. The new borrower may be able to avoid paying an origination fee, appraisal fee, and other costs typically associated with the standard mortgage process.

•   Savings can make a home more appealing to buyers: If buyers see that they can get a lower interest rate and avoid some closing costs, it might make the sale more attractive.

Drawbacks

•   Higher upfront costs: As part of transferring the loan, buyers typically must cover the equity the seller has built up in the home, which may require a hefty upfront payment.

•   Limited loan options: Since most mortgages can’t be transferred, few sellers can offer this option to buyers. Those that do will likely be transferring FHA, VA, or USDA loans, which means as a buyer, you likely won’t have your choice of different mortgage types.

•   Mortgage insurance: If the transferred mortgage is an FHA loan with an annual mortgage insurance premium (MIP), the buyer should expect to continue paying that amount in addition to other loan costs. FHA MIP is unavoidable, and payments typically last for the life of the loan.

The Takeaway

A mortgage transfer can have benefits for both homeowners and homebuyers, especially if mortgage rates at the time of the transaction are significantly higher than the rate assigned to the original home loan. But most conventional loans aren’t eligible for mortgage transfers, except in specific circumstances. And even if you have a mortgage that is assumable (such as an FHA loan), a transfer isn’t automatic. The lender must approve the new borrower before the transfer can go through.
Before moving forward with a mortgage transfer, which can be a complicated process, it can be a good idea to compare the pros and cons of different loan options to be sure you’re making the best choice for your needs.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Are there fees associated with transferring a mortgage?

Yes, there may be some fees associated with transferring a mortgage, but closing costs are typically lower than with the standard mortgage process.

What documents are needed for a mortgage transfer?

Documents required for a mortgage transfer may include the original loan agreement/mortgage documents, new borrower’s loan application, original borrower’s authorization for the transfer, and proof of income and other financial documentation for the buyer.

How does a mortgage transfer affect interest rates?

When you transfer a mortgage, the interest rate and other terms of the original loan stay the same.

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Photo credit: iStock/Delmaine Donson

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
This article is not intended to be legal advice. Please consult an attorney for advice.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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Homeowners with a mortgage typically make monthly payments toward the loan principal and interest. But borrowers can choose to make biweekly mortgage payments instead, resulting in 13 full payments over a one-year period.

Opting for this mortgage payment strategy may come with advantages and drawbacks, including impacts on your savings and reducing the interest you pay over the life of the loan. Here’s what to know about the potential pros and cons of making mortgage payments biweekly.

Understanding Biweekly Mortgage Payments

So how do biweekly mortgage payments work in practice? A biweekly mortgage payment involves a borrower paying half of their monthly payment every two weeks rather than in full each month.

With 52 weeks in a year, these 26 biweekly payments amount to an extra month’s payment every year. Over the course of a 30-year mortgage term, this can help whittle down your mortgage principal — the amount you borrowed to buy your home — and speed up your mortgage repayment by several years.

Before you start making extra or biweekly payments, it’s a good idea to check to make sure you won’t encounter a prepayment penalty for paying off the mortgage before the end of the loan term.

Recommended: Mortgage Repayment Calculator

Pros of Biweekly Mortgage Payments

If you’re looking to pay off your mortgage early, paying the mortgage biweekly could be beneficial. Below are some advantages of paying your mortgage biweekly.

•   Save thousands in interest payments over the life of the loan by reducing the accumulation of interest on your mortgage.

•   Build home equity faster by making additional payments toward the loan principal.

•   If you have private mortgage insurance (PMI), reach 20% equity in your home sooner to cancel PMI and lower your mortgage payment.

•   Pay off your mortgage several years in advance, freeing up finances for other financial goals, such as retirement.

Cons of Biweekly Mortgage Payments

Paying off your mortgage early has a lot of appeal, but it’s important to consider the potential disadvantages of biweekly mortgage payments.

Here are some drawbacks of this mortgage repayment strategy to keep in mind.

•   Potential risk of facing prepayment penalties if you pay your mortgage off early, depending on the terms of the loan agreement.

•   Lenders may charge a fee for setting up biweekly mortgage payments to recoup lost interest from paying off the mortgage early.

•   Committing to a biweekly payment plan consumes more of your budget, which can impact your ability to manage the other costs of owning a home and your financial goals.

Recommended: Home Equity Line of Credit

How to Calculate Potential Savings

How much could you save by making mortgage payments biweekly? Here’s an example of how to crunch the numbers and determine how much you could save.

Let’s say you make a 20% down payment on a home and have a $240,000 mortgage principal with a 6.50% interest rate and 30-year loan term. This amounts to a monthly payment of around $1,516, not accounting for property taxes and home insurance. As a biweekly mortgage payment, you’d pay $758.

Every year, this means putting an extra $1,516 toward the mortgage principal on top of your monthly mortgage payments. Here’s how a biweekly vs. monthly mortgage payment breaks down in terms of loan term and potential savings, assuming you begin making biweekly payments from the outset of the loan.

With monthly mortgage payments:

•   Monthly payment: $1,516

•   Total annual payment: $18,912

•   Loan term: 30 years

•   Total interest paid: $306,106

With biweekly mortgage payments:

•   Biweekly payment: $758

•   Total annual payment: $19,708

•   Loan term: 24 years

•   Total interest paid: $235,609

By setting up biweekly payments from the start, you’d pay off the mortgage six years early and save $70,497 in interest. Even if you have fewer years left on your mortgage, there’s still potential for significant savings on the mortgage interest. (You can use a mortgage calculator to see how much interest you pay over the life of your mortgage.)

Who Benefits Most from Biweekly Payments?

Getting out of debt and paying off a mortgage sooner could be advantageous for any homeowner, but there are some scenarios when it might make more financial sense.

Borrowers with high interest rates on their mortgage could benefit from making biweekly mortgage payments. Putting an extra monthly payment toward the loan principal each year helps diminish how much interest accrues on the mortgage, adding up to considerable savings.

However, it’s important to take a comprehensive look at your finances to determine where extra payments on debt could be the most effective. If you have a personal loan or credit card debt with a higher interest rate than your mortgage rate, you could save more by tackling these high-interest debts first before setting up biweekly mortgage payments.

Since this approach essentially adds an additional monthly payment each year, it’s worth reevaluating your household budget to ensure you can cover the cost without impacting other financial goals. From a budgeting standpoint, making biweekly mortgage payments could be easier for those who have steady income and receive a paycheck every two weeks.

Implementing Biweekly Payments

There are some steps to follow and key considerations when setting up biweekly mortgage payments.

First, reach out to your lender to see if it allows biweekly payments and if you’ll be liable for prepayment penalties. (Fortunately, prepayment penalties are typically limited to instances where a borrower pays off the mortgage within five years or less.)

It’s also worth asking how the lender will apply extra payments if you set up biweekly payments. Specifically, confirm that the extra funds are applied to the mortgage principal rather than interest or your escrow. Note that having the half monthly payment applied right away can lead to more savings than if the lender waits until the second half is received.

Alternatives to Biweekly Mortgage Payments

Biweekly mortgage payments might not work for everyone. If you’re not ready to commit to paying your mortgage biweekly, there are some alternative options that could help save money on mortgage loans.

•   Increase your monthly payment: Round up monthly payments to the nearest hundred dollar amount (e.g., paying $1,600 instead of $1,516) to put more money toward the mortgage principal.

•   Make a lump-sum payment: Apply a tax refund, extra savings, or bonus as a one-off payment toward the principal when it makes sense for your budget.

•   Mortgage refinance: Reduce your mortgage term from 30 years to 15 years to save on interest, though this will result in a larger monthly payment.

The Takeaway

Paying off your mortgage early with biweekly payments could save you thousands in interest and shorten your mortgage term by several years. But first, it’s worth paying off other high-interest debt and checking how your lender applies extra payments before committing to this payoff strategy.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can I switch to biweekly payments on an existing mortgage?

You may be able to switch an existing mortgage to biweekly payments, but you’ll need to check with your lender first. Otherwise, making payments every two weeks may not get applied to the mortgage principal as intended.

Will biweekly payments affect my taxes or escrow?

Biweekly payments do not affect your taxes, but it’s a good idea to verify that the appropriate amount is going to escrow from each mortgage payment.

What if I can’t make a biweekly payment occasionally?

Missing a biweekly payment or any mortgage payment could involve late fees and harm your credit score. To avoid these risks, reach out to your lender as soon as possible to discuss options.

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Photo credit: iStock/anchiy

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOHL-Q125-060

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Homeowners have multiple options to save money on mortgage interest. A mortgage offset account can reduce the home loan balance that borrowers pay interest on. The amount of the loan that is “offset” depends on the type of offset account and the total funds set aside in the account.

Here’s what you need to know about this mortgage savings strategy. We’ll cover what are offset accounts, and how offset accounts work with your home loan. You’ll also learn the benefits of using an offset account, and get wise to what to consider before opening an offset home loan account. (Note: Offset accounts are uncommon in the U.S., and SoFi does not offer this account option. These accounts are more common in the United Kingdom and Australia.)

Types of Offset Accounts for Home Loans

A mortgage offset account is like a normal savings account, but the funds that you keep in it are used to “offset” what you owe on your home loan. So the balance in your offset account is subtracted from your outstanding home loan balance when the interest you owe on your loan is calculated. You can add funds to an offset account and withdraw them when needed — so, for example, an offset account could be a good place to park your rainy-day savings.

How the lender applies the offset account against the mortgage depends on the type of offset account. Options can vary by lender, but there are two main types of offset accounts: full and partial.

Full Offset Accounts

As its name suggests, a full offset account applies the entire balance in the account against the mortgage balance. (Unsure how your mortgage balance is computed? Read up on the mortgage basics.)

For example, a borrower with a $350,000 mortgage and $30,000 in a full offset account would only pay mortgage interest on $320,000. In other words, you pay interest on the difference between the two account totals. This can add up to considerable savings over the life of the home loan.

Partial Offset Accounts

Meanwhile, money in a partial offset account does not provide a one-for-one offset against an outstanding mortgage, Instead, the mortgage balance is offset by a set portion of the funds in the account, such as 50%.

Using the same example of a $350,000 mortgage, the borrower would pay interest on $335,000 if the partial offset account was set at 50%.

Recommended: What Is a Good Mortgage Interest Rate Right Now?

How Offset Accounts Work with Your Home Loan

So, what is a mortgage offset account in practice and how does it work?

An offset account is linked to a mortgage — usually under the same lender. It functions like a checking account or savings account in that you can withdraw funds from an ATM and typically pay for transactions using a debit card that is linked to the account. However, these accounts typically don’t earn interest like a high-yield savings account.

As the balance in the mortgage offset account fluctuates from month to month, so does the amount of interest charged on the remaining mortgage principal — the amount you initially borrowed. This can translate to differences in the total mortgage payment due each month. To see how much you might save in interest, you can plug different mortgage principal amounts into a mortgage calculator.

Generally, you can add and withdraw funds from an offset account as desired, meaning this money can be used for other financial goals like saving for a vacation or a new car purchase. Borrowers might consider setting up a direct deposit to their offset account to maintain a higher balance.

Benefits of Using an Offset Account for Your Mortgage

Using a mortgage offset account can deliver a number of benefits for borrowers. Here’s a closer look at some of the key advantages.

Interest Savings on Your Home Loan

The money in an offset account effectively lowers the mortgage balance, meaning you pay less in interest. This is true for each monthly payment, as well as over the life of the mortgage.

Say you have a $300,000 fixed-rate mortgage with a 30-year term and 6.00% interest rate. By making monthly payments in full without additional payments to pay off your mortgage early, you’d be charged approximately $347,515 in interest.

In this same scenario, starting with a full offset account with a $1,000 balance that you add $250 to monthly could shorten the loan term by five years and one month. Increasing monthly contributions to $500 would shave 7.5 years off the mortgage term.

Flexible Access to Funds

Another benefit of an offset account is that your money can be used for other purposes as needed.

This gives the borrowers plenty of flexibility to use this money for other financial goals. For example, it could serve as an emergency fund to be prepared for unexpected costs. Additionally, other long-term savings goals can be managed in an offset account to maximize mortgage interest savings.

Recommended: First-Time Homebuyer Guide

Potential Tax Efficiency

Homeowners can deduct interest payments on home loan products, such as FHA loans and HELOCs (home equity lines of credit). While an offset account reduces the amount of interest paid on a mortgage, this reduced interest is still tax deductible.

Generally, offset accounts do not earn interest like a savings account, which is considered taxable income. Furthermore, the interest savings on your mortgage from an offset account are not taxable. Thus, an offset home loan account can offer savings without increasing a borrower’s tax liability.

Considerations Before Opening an Offset Account for a Home Loan

Offset accounts vary by lender and there are some potential tradeoffs to factor into your decision-making before moving forward, especially because offset accounts aren’t the only way to reduce the interest you pay (you could, for example, consider a mortgage refinance). Below are a few things to keep in mind when considering an offset account.

Fees and Charges

It’s possible that an offset account may carry fees for withdrawing funds, which could diminish the value if you intend to use the money in your offset account for other purposes. In any case, it’s important to fully understand the lender’s terms and conditions to weigh the potential savings vs. added costs.

Minimum Balance Requirements

When you open an offset account, you may be required to maintain a minimum balance. While the intent of an offset account is to increasingly add funds to reduce interest payments, it’s worth noting if a lender requires this and whether the minimum balance could be an issue.

Eligibility for Offset Accounts with Home Loans

You may need to make a higher down payment of 20% or more to get an offset mortgage account. Meanwhile, conventional mortgage loans may require as little as 3-5% toward a down payment, with the lowest down payment amounts allowed for eligible first-time buyers. And as noted above, it can be difficult to find a lender that offers offset accounts for home loans.

The Takeaway

An offset account can help borrowers reduce the interest paid on their mortgage while keeping funds accessible for other financial goals. If a lender offers offset accounts, thoroughly explore what is an offset account with the lender, and take note of any fees and minimum balance requirements to determine whether you can expect to save money by using one.
Otherwise, consider other ways to lower the interest rate on your home loan, perhaps including a refinance or even paying off your mortgage early.

FAQ

What is the primary purpose of an offset account for home loans?

An offset account for home loans is meant to reduce interest on a home loan and pay off the loan sooner. They usually can be used for making other transactions, too, similar to a checking account.

Can I access the funds in my offset account while paying my mortgage?

Borrowers can typically access the money in an offset account, assuming they maintain the minimum balance requirement, if applicable. Note that withdrawing funds can reduce how much you might save in interest.

Are there tax benefits to using an offset account with a home loan?

An offset account usually doesn’t accrue interest, meaning it doesn’t create any taxable income. The amount you might save in interest is also not considered taxable.

Do all home loans qualify for an offset account?

Not every home loan qualifies for an offset account. It’s essential to check with your lender to determine your options.

Are there any drawbacks to using an offset account for a mortgage?

Potential drawbacks to using an offset account for a mortgage include account fees, transaction charges, and minimum balance requirements. It’s also possible that you could achieve greater savings via other mortgage repayment strategies, such as biweekly payments.

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Photo credit: iStock/nortonrsx

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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A spousal lifetime access trust (SLAT) is a specific type of trust that’s designed to help married couples reduce estate taxes while retaining access to their assets. Trusts can serve as a tool to help you preserve your wealth and potentially minimize some of your tax burden when planning your estate. A SLAT trust is established by one spouse for the benefit of the other and may be particularly appealing to higher-net-worth couples with larger estates.

Understanding the Basics of a Spousal Lifetime Access Trust

What is a SLAT? As noted, it’s an irrevocable trust that’s created by a grantor (spouse A) for a beneficiary (spouse B). If the grantor wishes to include additional beneficiaries, such as children or grandchildren, they have the flexibility to do so.1

In effect, a SLAT can be an addition to your overall financial plan, along with your saving and investing activities. To fund the trust, the grantor must transfer ownership of assets that will be held in trust to a trustee. This trustee has a fiduciary duty to manage the trust according to the grantor’s wishes and in the best interests of the beneficiary or beneficiaries. Spousal lifetime access trust can hold a variety of asset types, including:

•   Real estate

•   Bank accounts

•   Investment accounts

•   Individual shares of stock

•   Bonds

•   Life insurance policies

An irrevocable SLAT trust is permanent; once it’s established its terms cannot be changed. Any assets transferred to the trust cannot be removed, which is an important consideration for estate planning. If you’d prefer to have the option of changing trust terms, you’d likely need to establish a revocable trust instead.

A SLAT trust allows the beneficiary spouse to have access to those assets during their lifetime. They can draw on trust assets or any interest those assets earn for income should they need to do so.

SLAT trusts are generally protected from creditors, though state laws may vary. If your spouse, who is named as beneficiary, is sued for a debt, the creditor might be barred from attempting to attach any assets in a SLAT trust to satisfy a judgment. It may be wise to speak with a lawyer or financial professional to get a sense of your exact situation.

Key Benefits of Establishing a SLAT

Setting up a trust can be time-consuming and costly, so there typically needs to be a good reason to do it. With that in mind, it’s worth asking what advantages a spousal lifetime access trust may offer you, and maybe even thinking more about money and marriage tips that could further help you build out a comprehensive estate plan.

SLAT trusts do one simple but very powerful thing from an estate and tax planning perspective: They remove assets from the grantor spouse’s taxable estate. This means that any future appreciation of those assets is free of estate tax.

Federal tax rules allow for annual gift tax exclusions, as well as lifetime gift and estate tax exemption. The annual gift tax exclusion allows you to make gifts up to a certain threshold, without triggering gift tax.

•   For 2024, the annual gift tax exclusion limit was $18,000.

•   For 2025, the limit is $19,000.

These amounts double for married couples. So, if you have three children you could gift each one of them $38,000 in 2025 if you and your spouse agree to “split” the gift on your joint tax return.

Amounts exceeding the annual gift tax exclusion limit count against your lifetime gift and estate tax exemption. This is the amount of assets you can give away during your lifetime without triggering federal estate or gift tax.

•   For 2024, the exemption limit was $13,610,000.

•   For 2025, the is $13,990,000.

Again, those limits double for married couples. The current limits took effect under the Tax Cuts and Jobs Act of 2017, which is set to expire at the end of 2025. Without new legislation, the lifetime gift and estate tax exemption limit will revert to its pre-TCJA level of $5 million, which works out to about $7 million when adjusted for inflation.4

Now, here’s where the SLAT fits in. When you establish a SLAT, you lock in the gift tax value at the time assets are transferred to the trust. Funding a spousal lifetime access trust now could help you hedge against less favorable changes to the gift and estate tax exemption in the future.

How to Set Up and Fund a SLAT

A SLAT estate planning attorney can help you establish and fund your trust. They can also walk you through which assets to include and how a SLAT trust may affect your tax liability.

The basic steps in creating a SLAT trust are as follows:

•   Trust creation. The first step is establishing the trust on paper. An estate planning attorney can draft the necessary documents for you. You’ll need to designate one or more beneficiaries and select someone to act as trustee. When drafting the trust document, you can include instructions for how trust assets should be managed.

•   Asset selection. Once the paperwork is out of the way you can fund the trust. Here, you’ll need to decide which assets it makes the most sense to include. Your SLAT estate planning attorney might advise you to include any assets that are likely to appreciate significantly in value, as well as life insurance policies or other assets you want your spouse to have access to.

•   Trust funding. If you know what you want to put into a SLAT trust, the remaining step is funding. Here, you’ll work with your attorney to transfer ownership of assets to the trustee. Remember, once assets are transferred to a SLAT trust the move is permanent.

Your beneficiary spouse can also act as trustee but you may prefer to have a third party take on this role. When choosing a trustee, look for an individual or entity that’s reliable and trustworthy. You might ask your attorney, financial advisor, or bank to handle trustee duties, depending on your situation and needs.

Tax Implications of a Spousal Lifetime Access Trust

SLAT trusts can offer some tax benefits if you’re able to reduce what you owe in estate taxes during your lifetime. Needing a trust is a sign that you’ve accumulated some wealth, which is a good thing, but there are a few important tax rules to keep in mind.

•   Annual gift tax exclusion limits still apply. When you transfer assets to a SLAT trust you’re making a financial gift to your spouse. Ordinarily, gifts to spouses are not subject to gift tax but SLAT trusts are an exception. As the gifting spouse, you’re responsible for any gift tax that may be due if the value of assets donated exceeds the annual gift tax exclusion limit.

•   Gifts must be reported. You’ll need to tell the IRS about the assets you’ve transferred to a SLAT trust. Gifts to the trust are reported on IRS Form 709.

•   Income tax returns are required for the trust. You’ll also need to handle annual income tax filing for any income tax generated by trust assets. Income includes dividends, interest, and capital gains. The trustee should file a blank Form 1041 to let the IRS know that any trust income and/or deductions will be reported on your personal income tax return.5,6

Potential Drawbacks and Considerations

SLAT trusts may have some downsides that could make them a less-than-ideal choice for your estate plan. As you weigh spousal lifetime access trust pros and cons, here are a few things to note.

•   SLAT trusts are irrevocable; if your financial situation or marital situation changes, you would be locked in to the trust terms even if they’re no longer suitable for your needs.

•   Transferring your assets to a SLAT trust means you give up control of them and become dependent on your beneficiary spouse to retain a connection to them.

•   If your beneficiary spouse passes away first, you lose the benefit of having indirect access to trust assets without estate tax implications.

•   Any heirs who inherit assets from a SLAT trust also inherit your original tax basis, which could result in a significant capital gains tax bill if those assets have greatly appreciated.

There’s also the time and expense of setting up a SLAT trust to consider. If you have a smaller estate, it may not be worth it to create this type of trust. A different type of trust may be more appropriate if you’re not in danger of hitting the estate tax exclusion limit.

Recommended: Can You Use your Spouse’s Income for a Personal Loan?

How Does SLAT Help With Retirement?

SLAT trusts can help you create a secure retirement by creating an additional income stream, should your beneficiary spouse need one. While you would be cut off from any assets you transfer, your spouse could still draw on the interest from assets held in the trust. That income can supplement a 401(k) plan, an IRA, Social Security benefits, or any other type of retirement assets you might have.

This income is good for the beneficiary spouse’s lifetime. How valuable that is to you may depend on the size of your estate and what income streams you already have in place for retirement.

Keep in mind that if your spouse should pass away first, assets in the trust would not automatically revert to you. Instead, they would be distributed to any other beneficiaries named in the trust. You would need to ensure that you have other retirement assets to rely on in that scenario.

Recommended: Am I Responsible for My Spouse’s Debt?

SLATs vs. Other Estate Planning Tools

SLAT trusts are just one way to plan your estate. You may consider other types of trusts instead, including:

•   Marital trusts

•   Bypass trusts (also known as AB trusts)

•   Special needs trusts

•   Life insurance trusts

These types of trusts are designed to meet different needs. For example, say that you and your spouse are parents to a child with a permanent disability that prevents them from living on their own. You might establish a special needs trust to plan and pay for their care during your lifetime and after you’re gone.

At a minimum, it’s wise to have a will in your estate plan. A will is a legal document that allows you to specify how you’d like your assets to be distributed when you pass away. You can also use a will to name a legal guardian for minor children or specify care instructions for any pets you may leave behind.

Wills may not offer the same level of creditor protection as a trust and they don’t convey any tax benefits either. Wills are subject to probate whereas trusts are not so it’s important to consider what you want your estate plan to look like when deciding what to include.

Recommended: What Is a Collective Income Trust?

The Takeaway

A SLAT trust is a power estate planning tool for preserving wealth. Your financial advisor can help you weigh the advantages and disadvantages to help you decide if a spousal lifetime access trust is a good fit for your needs.

When considering how you’ll build your future estate, opening an online brokerage account is a good first step. You can create and fund your account in minutes to begin building a diversified portfolio.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Who can be the beneficiary of a SLAT?

SLATs are designed to benefit a spouse primarily, though you may name one or more other beneficiaries. For example, if you’d like to ensure that your wealth stays within the family you could name your children or grandchildren as beneficiaries. If your spouse passes away, the trust’s assets would be passed on to the other beneficiaries you named.

Can both spouses create SLATs for each other?

Spouses can create a SLAT trust fund for one another but doing so tends to be tricky, as you’ll need to ensure that you’re funding each one with distinct and separate assets. Each trust would also need to have a distinct structure and terms so the IRS doesn’t perceive them as being too similar in nature. In that scenario, you risk them canceling one another out and losing any anticipated tax benefits.

What happens to a SLAT in case of divorce?

Since SLAT trusts are irrevocable, divorce typically won’t change much. Your ex-spouse would remain the beneficiary and they would have access to the trust assets. None of your other beneficiary designations would change either if you added children or grandchildren to the trust. You may have to continue paying income tax on the trust income as well, unless the terms of your divorce state otherwise.

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Photo credit: iStock/Hiraman

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