Trust Deed: What it Is and How it Works
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Trust deeds are sometimes used instead of mortgages to secure a loan against the property in some states. In other states, trust deeds are used in conjunction with a mortgage loan. They offer lenders protection to take swift legal action if the home loan defaults. It’s essential to have the correct language in place to serve this document’s intended purpose.
In this article, we examine what to know about drafting and using trust deeds:
What is a Trust Deed?
A trust deed, also known as deeds of trust, is a real estate agreement between a borrower and a lender when transferring a property’s title to a trustee for purposes of future ownership. The trustee holds the legal title on behalf of the lender, but the borrower retains ownership and possession of the property. Trust deeds are usually signed alongside loan documents outlining repayment terms while guaranteeing ownership upon satisfactory repayment. Some states use trust deeds as a type of security instrument along with a mortgage loan. Furthermore, some states use trust deeds instead of mortgages to secure the loan against the property.
Ordinarily, trust deeds will record the following information:
- Consideration for the home’s purchase
- Amount of money held in trust
- Force of sale rights
- Foreclosure procedures
Also, they can describe the home purchase details and the owner’s intention regarding the trust. For more information, this web page also defines trust deeds.
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How do Trust Deeds work?
Trust deeds work by providing a real estate transaction lender with legal protections. However, the protection varies from state to state. Typically, the borrower must sign a promissory note for a trust deed to become effective. Promissory notes are legal contracts signed by the trustor and signify an agreement to repay a home loan while detailing the loan’s terms and conditions.
These are primarily the three parties involved in trust deeds:
- Beneficiaries: Lenders are the beneficiaries. They are beneficiaries since the established trust seeks to protect their interests. Of the three parties, investors or lenders have the most to lose in real estate transactions, and a trust deed provides reassurance.
- Trustees: Third-party trustees hold the property ownership title until the home loan is paid in full. A title insurance company or bank usually fulfills this role. Lenders facilitate this relationship and often have authority over selecting the party. Trustees must stay impartial throughout the transaction.
- Trustors: Borrowers are designated as trustees. They can legally retain this designation as long as they meet the terms and conditions contained within the promissory note. This payment consistency gives them an equitable title, meaning that they claim equity while making loan payments.
The trustee is generally the party that prepares the trust deeds, promissory notes, and other documentation involved in a real estate transaction.
Example of How Trust Deeds Work
More than twenty states require the use of trust deeds versus mortgages. If you live in one of these states, it’s critical to understand the transaction clearly when investing, buying, or selling property. Each state follows various procedures and laws, which means that you should first determine which ones apply to your trust deeds.
Let’s solidify our understanding of how trust deeds work with a concrete example:
- Jack, a prospective borrower, wants to buy a home
- Jack visits his banker to apply for a home loan
- His bank, Horizon Financial, approves Jack
- Horizon Financial drafts a trust deed as a beneficiary
- They also prepare a promissory note to set the terms of the loan
- Horizon Financial names First Title & Trust as the trustee
- Jack agrees to the loan’s terms and signs as the trustor
- Jack repays the loan after 15 years
- Horizon Financial informs First Title & Trust of term completion
- First Title & Trust initiates the trust deed transfer process
- First Title & Trust presents Jack a quitclaim or warranty deed
- First Title & Trust is the grantor during the transfer
- Jack signs the documents as the grantee
- Jack now owns the property outright
All parties must follow the terms of the loan documents explicitly to avoid legal issues. Poorly drafted documents can also create unwanted problems, so it’s a good idea to seek legal advice during the legal drafting phase from a real estate lawyer. They can also give you valuable advice regarding situations they represented in the past to make the process more efficient for you.
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Purpose of a Trust Deed
The purpose of a trust deed is to protect the beneficiary lender if the borrower does not repay the home loan. In the event of default, the trust deed gives the lender authority to resell the home and pay off the debt. The level of protection for the lender depends on the laws and regulations of the state where the trust deed is executed. Trust deeds create a lien on the property in favor of the lender once the trust deed or mortgage is created. The trust deed needs to be registered with the county clerk & recorder’s office.
The clerk will notify the lender that they have a record of their security interests on file. If more than one lender funded the home loan, then they receive repayment from a lien based on the order in which it was recorded.
Difference between a Mortgage and Trust Deed
Trust deeds are similar to traditional mortgages, but they are also two very different documents with exclusive legal implications. The most significant differences between a mortgage and trust deed include party designations, default loan terms, redemption rights, availability, contract types, securities backing, cost,
Let’s take a much closer look at each of the differences between mortgages and trust deeds:
Difference 1. Party Designations
Mortgages utilize the terms mortgagors and mortgagees, when referring to lenders and borrowers, respectively. In contrast, trust deeds name three parties, including trustors, trustees, and beneficiaries. Title companies typically serve as trustees, while lenders function as beneficiaries and borrowers as trustors.
Difference 2. Default Loan Terms
Each type of real estate transaction enacts a unique foreclosure procedure. Typically, trust deeds utilize a non-judicial foreclosure process, whereas a mortgage follows a judicial foreclosure process. As such, lenders must obtain a formal court order before they can foreclose on one’s home.
Difference 3. Redemption Rights
If a foreclosure procedure occurs, a property auction is a final step in remedying a defaulted loan. Generally, borrowers have ample opportunity to save the house, but it cannot be repurchased once sold. On the other hand, mortgages recognize a redemption period, which means that borrowers could reclaim their property within several months or years.
Difference 4. Availability
There are more than thirty states that permit the use of trust deeds. Some of these states enable the use of both trust deeds and mortgages. Speak with real estate lawyers in your state to determine which laws apply to your specific situation.
Difference 5. Contracts Types
The types of repayment contracts also differ when it comes to mortgages vs. trust deeds. Trust deeds utilize promissory notes to facilitate the transaction. In contrast, lenders offer mortgage notes to manage it.
Difference 6. Securities Backing
People erroneously refer to all home loans like mortgages. However, a mortgage is only genuine when a mortgage note backs it. Trust deeds are the legal instruments that support a non-mortgage home loan.
Difference 7. Cost
Due to a lender’s responsibility to seek judicial foreclosure, mortgages often utilize more resources than trust deeds. Consequently, mortgagors favor trust deeds in states that permit them. They will always spend less money, time, and attention on trust deeds over mortgages.
Get Help With A Trust Deed
Whether you’re investing in a property or lending to a prospective buyer, it’s critical to get legal help when working with trust deeds. These transactions are significant, and vulnerable parties need to protect their financial interests. Real estate lawyers in your state can offer legal advice and guidance throughout the drafting or negotiating process. Post a project in ContractsCounsel’s marketplace to get free bids from vetted lawyers.
ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
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Daehoon P.
Daehoon P.
Corporate, M&A & Securities Lawyer | Managing Attorney, DP Counsel PLLC Practice Areas: Business Formation | Commercial Contracts | Contract Drafting & Review | Mergers & Acquisitions | Venture Capital | Securities Offerings | Franchise Law | Employment & Equity Compensation | Intellectual Property | Cross-Border Transactions About/Bio: I represent companies, investors, and fund sponsors in corporate transactions, commercial contracting, and private securities matters, from entity formation and early-stage financings to acquisitions, exits, and ongoing strategic counsel. As Managing Attorney of DP Counsel PLLC, I help clients structure transactions clearly, allocate risk thoughtfully, and move deals forward with documentation that is practical, enforceable, and aligned with business objectives. My practice includes both day-to-day commercial matters and more complex transactional work, including venture financings, private offerings, M&A deals, fund-related documents, and cross-border structuring. What I Do: Corporate & Commercial • Entity formation and structuring for corporations, LLCs, and limited partnerships • Operating agreements, shareholder agreements, and governance documents • Commercial contract drafting, review, and negotiation • Vendor, distribution, manufacturing, SaaS, and licensing agreements • Employment, consulting, confidentiality, and equity compensation agreements • Outside general counsel support for growing companies Securities & Private Capital • Private offerings under Regulation D and Regulation S • Private placement memoranda, subscription agreements, and investor documents • SAFE, convertible note, and priced equity financings • Venture capital and private fund formation matters • Fund governing documents and offering document packages • Securities law analysis for private capital raising transactions Mergers & Acquisitions • Letters of intent and term sheets • Stock purchase, asset purchase, and merger agreements • Due diligence coordination and transaction support • Disclosure schedules, closing documents, and post-closing matters • Earnouts, rollover equity, indemnity structures, and related deal terms • HSR, CFIUS, and related regulatory issue spotting for qualifying transactions Digital Assets & Emerging Technologies • Federal-law digital asset and token securities analysis • Entity structuring for blockchain and Web3 ventures • Digital asset fund and operating structures • AML/KYC documentation support and regulatory issue spotting Franchising • Franchise Disclosure Documents (FDDs) • Franchise agreements • Master franchise and area development agreements • Franchise structuring and registration coordination Real Estate Transactions • Commercial real estate acquisitions and dispositions • Real estate joint ventures and syndications • Commercial lease drafting and negotiation • Real estate investment structures and related offering documents Cross-Border & International • U.S. market entry and entity structuring for international clients • Delaware and multi-entity holding structures • Cross-border transaction planning and documentation • Coordination with foreign counsel and tax advisors on cross-border matters Why Clients Hire Me: • Big-law-level drafting with boutique responsiveness • Practical, business-focused advice grounded in execution reality • Clear scoping and transparent fee arrangements • Experience across financings, acquisitions, fund formations, and cross-border transactions Typical Projects: • Contract drafting and negotiation • Entity formation and governance packages • Private offering document suites • Venture financing documentation • M&A transactions from LOI through closing • Fractional or outside general counsel support Industries Technology | SaaS | FinTech | Digital Assets | E-commerce | Healthcare | Real Estate | Food & Beverage | Professional Services
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Josh Bernstein has been serving real estate and corporate transactional clients since 2002. His experience is varied, and he enjoys working on and puzzling out novel and complex corporate and real estate matters. Josh’s experience includes, among other things, the following: representation of public companies in connection with SEC reporting and compliance work (proxies, 10-K’s; 10-Q’s; 8-K’s, etc.); representation of public and private company securities issuances (including private placements, and other similar offerings); assistance in structuring and drafting joint ventures, both for investors and operating partners, and including both real estate and corporate ventures; handling public and private company mergers and acquisitions; and asset sales and dispositions; assisting clients, big and small, with real estate acquisitions, sales and financings; managing large-scale and multi-state real estate portfolio acquisitions, dispositions and financings; complex condominium creation, structuring and governance work, including: commercial condominiums, use of condominiums as a land planning tool, wholesale condominium property acquisitions and dispositions, and rehabilitating failed or faulty condominium legal structures to make ready for sale; development of restrictive covenants and owners’ association documents for master-planned communities; compliance with federal statutes governing real estate sale and development (including, without limitation, the Interstate Land Sales Full Disclosure Act, the Housing for Older Persons Act, and the Americans with Disabilities Act); representation of real estate lenders, for both improved and unimproved property, and including numerous construction financings secured by real estate; assistance with commercial leasing; from both the landlord and tenant side, and including condominium leasing; training residential home and condominium sales staff for compliance with applicable local and federal law; and workouts of all kinds. When he’s not busy lawyering, Josh may be found watching 80’s commercials, flying a single-engine plane, playing poker, or trying to be a good dad.
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Can a trust deed be revoked or modified after it has been established?
I recently inherited a property that was placed in a trust deed by my late father, who named me as the beneficiary. The trust deed was established several years ago and outlines specific conditions for the distribution of the property. However, I am now considering making some changes to the property, such as adding an additional structure or dividing it into separate lots. I am wondering if it is possible to revoke or modify the trust deed to accommodate these changes, or if I am bound by its original terms.
Dolan W.
Hello! My name is Dolan and I'm happy to answer your question. If your father placed the property into trust and has passed, it's important to look at the trust terms to see if the trustee has any authority to transfer the property over to you. If there is no authority for that, then you have to determine whether the property requires the trustee to approve modifications or if your dad gave you the right to make these improvements yourself. Nevertheless, when a person dies, the trust becomes irrevocable, so modifications or revocations are not permitted. Revocations are allowed if something happens like you die and there is no backup beneficiary or if the property is condemned by the state,for example. Otherwise, you have to look at the trust terms and/or speak to the trustee. We can always review these things for you here on the site. Thanks again!
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