Clients occasionally come across “best practice” commentary suggesting that, when a trust owns a home, the trust should pay the mortgage and the occupants should pay fair-market rent under a lease. That structure can be appropriate in certain estate-planning contexts—but it is often unnecessary (and sometimes counterproductive) when the home is held in a self-settled, spendthrift, grantor trust, like the Bridge Trust®, that expressly permits the grantor/beneficiary to occupy the residence.
This article explains the practical and legal rationale for why many Bridge Trust® clients pay the mortgage personally even though the trust holds title, and why adding a lease is typically not required to preserve asset-protection benefits.
1) The key question: What type of trust is this, and what rights does it grant?
In a typical Bridge Trust® structure, the trust holding the residence is commonly designed as a:
- Self-settled trust (you are the grantor and a beneficiary),
- Spendthrift trust (restrictions on voluntary/involuntary transfers of beneficial interests),
- Grantor trust for income tax purposes (you are treated as the owner for federal income tax reporting).
Crucially, the trust instrument usually authorizes you—as a beneficiary—to use and occupy the home. When the trust expressly permits occupancy, there is no inherent “impropriety” in the grantor/beneficiary continuing to pay the mortgage as part of the normal economics of living in the residence.
That’s why for many similarly situated clients, paying the mortgage directly is standard practice and is not typically treated as a defect in the structure by itself.
2) Why the “lease + rent” idea exists (and when it does make sense)
The lease/rent structure is most often discussed in contexts where:
A) You made a completed gift to a trust for someone else’s benefit, but you still want to use the home
Example: a QPRT (Qualified Personal Residence Trust) or certain irrevocable gifting strategies. In those cases, paying rent after the retained term can help demonstrate that you are not retaining benefits inconsistent with the transfer and can also serve as a wealth-shift strategy (rent payments move additional value to the beneficiaries).
B) The trust is intended to be clearly “separate” from the occupant for non-grantor tax reasons
Certain non-grantor trusts or arrangements where the trust is meant to have meaningful independent economics may use a formal lease/rent framework.
But those motivations don’t usually apply when the trust is a self-settled grantor trust that expressly allows you to live in the home and is not designed as a completed-gift vehicle to other beneficiaries.
3) Asset protection reality check: Does paying the mortgage personally “weaken” the trust?
In most Bridge Trust® scenarios, simply paying the mortgage directly does not automatically weaken asset protection.
Why?
- Occupancy is authorized. If the trust says you can live there, you are not “taking a benefit” outside the trust terms.
- Grantor trust economics are common. Grantor trusts frequently involve the grantor paying expenses, taxes, or other carrying costs—because the grantor is treated as the tax owner.
- The real litigation risk is usually elsewhere. In creditor disputes, the bigger vulnerabilities typically come from issues like fraudulent transfer timing, commingling beyond reason, ignoring trust formalities entirely, using the trust as a personal checking account, or failing to respect trustee governance—not from “mortgage paid from a personal account” in isolation.
4) Tax and compliance considerations to keep in mind (non-CPA, issue-spotting only)
Even if you keep the current approach (personal mortgage payments), a few items are worth keeping clean:
A) Preserve homeowner tax benefits (when appropriate)
When the trust is a grantor trust and you are treated as owner for income tax purposes, mortgage interest and property tax deductions often continue to flow through in a familiar way—but your CPA should confirm the reporting approach.
B) Avoid creating accidental “rent income” bookkeeping if you don’t need it
If you set up rent payments, you may invite rent-income tracking questions, even if the grantor trust status ultimately neutralizes some of the income-tax impact. The administrative burden is real.
C) Maintain clean records showing what payments were for
Regardless of structure, maintain a clear paper trail (mortgage statements, insurance invoices, tax bills, and which account paid what).
5) The one “must-do” item: insurance alignment
One practical issue that is worth confirming—and often overlooked—is insurance:
- Ensure both you and the trust are properly reflected on the homeowners policy, typically as named insureds and/or that the trust is properly listed (often via a trust endorsement).
- Confirm coverage isn’t inadvertently impaired by a mismatch between the named insured and the titled owner.
This is a real-world risk area because an insurer can raise coverage questions when the named insured doesn’t match the titled owner. Cleaning this up is usually more important than whether the mortgage was paid from a personal account.
6) Bottom line
For a self-settled spendthrift grantor trust that explicitly allows you to live in the home, continuing to pay the mortgage directly is commonly used in practice and is not typically viewed as a standalone weakness. The lease/rent approach is most compelling in completed-gift scenarios (like a QPRT) or where the trust’s purpose requires arm’s-length economics.
If you want to improve “best practices,” the highest-value move is often confirming insurance is properly aligned (trust + occupants covered correctly) and maintaining clean documentation—rather than introducing a lease framework that adds ongoing administrative and accounting complexity without a clear legal payoff.
Lodmell & Lodmell, PC is one of the nations leading Asset Protection Law Firms and the creators of The Bridge Trust®. L&L serves clients nationwide and may be reached at support@lodmell.com or 602-230-2014.
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