Too often, homeowners dismiss the idea of transferring their real property to an inter vivos trust (i.e., a trust that is created during one’s lifetime as opposed to a trust that is created under the terms of a Last Will & Testament) because the real property is subject to a mortgage. The concern is usually that the lender will either forbid such transfer from occurring or that the due-on-sale (DOS) clause of the loan agreement will be triggered by the transfer, allowing the lender to demand full repayment of the loan and to foreclose on the property if said loan is not repaid immediately. Thanks to the Garn-St. Germain Depository Institutions Act of 1982 (the “GSG Act”), this is not always the case.
The GSG Act, enacted by Congress in an effort to ease pressures on banks following the high inflation of the 1970s, deregulated savings and loan associations, permitted adjustable rate mortgages, and afforded protections against the DOS clause of mortgages. Although the GSG Act provides for the enforcement of DOS clauses in a general sense, it also carves out a number of exceptions, one of which is the protection afforded to owners of residential real estate (containing less than five dwelling units), a residential manufactured home, and/or shares of stock associated with a cooperative apartment. 12 U.S.C. §1701j-3(d).
Specifically, if a person or government agency issues a loan, mortgage, advance, or credit sale that is secured by a lien against one’s home as defined by the GSG Act, the transfer of said home to an inter vivos trust with respect to which “the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property” will not trigger the DOS clause. 12 U.S.C. §1701j-3(d)(8).
Strategically, Revocable Living Trusts (RLTs) and Irrevocable Medicaid Asset Protection Trusts (MAPTs) give the trust’s creator (also known as the Grantor) the right to the use and possession of any real property or cooperative apartment that is titled to the trust and utilized as the Grantor’s primary residence during the Grantor’s lifetime. Insofar as the Grantor / mortgage holder retains these exclusive rights and is a beneficiary of the trust throughout the Grantor’s life, the DOS clause cannot be triggered by such transfer. In fact, there is no requirement that the lender even be provided with notice of the transfer!
The GSG Act, though little known to most laypersons, is extremely beneficial to mortgage holders who wish to plan for their future by protecting their assets from the cost of long-term care and/or avoiding probate. By retitling one’s assets to an MAPT and/or a RLT, one can safely accomplish their estate planning goals without fear of adverse repercussions from the mortgage lender by triggering the DOS clause on an outstanding mortgage.
