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Trust Me, Trusts Are Great

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Individuals and families alike have been using trusts for generations as they are one of the most useful tools for estate planning. However, they are also one of the most complex tools, which means some attorneys avoid them entirely. 

Due On Sale Clause and Trusts

Chatter amongst legal circles is that individuals should be leery of transferring their residence(s) into a revocable living trust because it could trigger a “due on sale” clause. That brings us to the question: What is a “due on sale” clause? It is a contractual provision in a mortgage which allows a lender to demand that the borrower immediately repay the entire mortgage loan if the borrower transfers any interest in the mortgaged property without the lender’s written consent. A plain read of that would lead one to assume that transferring their mortgaged property into a trust is a bad idea.

That is incorrect. A quick history lesson will remove that viewpoint. Due on sale clauses started to appear in mortgages in the 1970s in response to rising interest rates. What happened was that homeowners were not paying off their low interest 30-year mortgages when they sold their homes. Rather, they sold their home subject to the existing mortgage and buyers were taking over payment of the low interest rate loans instead of taking out a new mortgage at a higher interest rate.

Good deal, right? States thought so, and borrowers began successfully challenging due on sale clauses; however the Federal government did not agree with this. As a result, Congress codified the enforceability of the “due on sale” clause, despite state law. This was done by enacting the Garn-St Germain Depository Institutions Act of 1982, named after congressmen Edwin Jacob Garn and Fernand Joseph St. Germain. The act was intended to protect lenders (not homeowners) by ensuring that no state law could interfere with a lender’s right to exercise its due on sale provision. Borrowers were provided nine carve outs to triggering the due on sale clause.

The carve out that is important for estate planning is #8- transfer into inter-vivos trust. The act states that "…a lender may not exercise its option pursuant to a due-on-sale clause upon ... a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.” (12 U.S. Code § 1701j-3 (d)(8). In summary, the requirements are that the grantor must be the beneficiary of the trust and there cannot be any transfer of rights of occupancy. However, do not attempt this yourself! Consult our office or an experienced estate planning attorney to find out if a trust is right for your needs.*

*This does not constitute legal advice or an attorney client relationship.

Contact our office online or call us at (206) 203-8802 for assistance generating a trust. 

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