Mark Dodds, Esq. discusses your estate planning process and options when dealing with real property that is upside down:
If the property is upside-down, it is best to leave the property out of a trust. Then, when the person with the trust dies, the trustee has no obligation as to the mortgage because the mortgage is not a debt of the trust as long as the trust is not a guarantor on the mortgage (and it is rare that the trust is a guarantor, but if it were, then the trustee would have to follow the procedure described below.)
So where the trust does not own the real estate and has no obligation on the mortgage, the trustee can do his normal notice to creditors, which gives creditors of the trust 90 days to file their claim, and if no claims are filed, or after any claims are filed and paid, then the trustee can distribute the trust estate. It is unlikely that the mortgage holder will pick up on the notice to creditors, and since the estate, which holds the upside down property, is a separate legal entity from the trust, the trustee has no duties concerning the mortgage, and can proceed to distribute the trust estate even though the home is upside down.