Like many people, you may be considering using a living trust as an incapacity planning tool. When properly drafted and funded, a living trust can provide an immediate shift of control over important assets to a spouse or someone else of your choosing should you suddenly become incapacitated. One question people often have, however, when contemplating the inclusion of a living trust into their overall estate plan is “If I transfer real estate into a trust can the bank call me loan?” The question is certainly a relevant and important question considering the fact that most people do plan to transfer their home into the trust. The good news is that the answer to the question is most likely “no.”
Your concern most likely stems from the “due on sale” clause found in most mortgage loan agreements. Though the language may differ somewhat from one loan agreement to the next, the purpose and effect of the clause is the same in all agreements. A “due on sale” clause allows a lender to force a borrower to pay the entire balance due and owning on a mortgage loan upon the sale of the property. Typically, the language states that the balance is due if the title to the property is transferred, not just if the property is sold. Because the title to your home will be transferred into the name of the trust agreement you create you may be concerned that your lender can call your loan and require you to pay the entire balance due at the time you transfer the property into the trust. Fortunately, your lender cannot do that because the transfer of real property into a living trust is an exception to the ability of a lender to enforce a “due on sale” clause.
The Garn-St. German Depository Institutions Act of 1982 (the “Act”) governs “due on sale” clauses as they apply to residential real estate. While the Act does allow a lender to call a loan when title to property changes, there are a number of exceptions, including when property is transferred into an inter vivos trust “on which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.” This exemption applies to residential real property containing less than five dwelling units. [12 USC Sec. 1701j-3(d)] As a result, the transfer of your residential property into your living trust cannot be used as a reason to enforce a “due on sale” clause in your mortgage loan agreement.
If you have additional questions or concerns about living trusts or estate planning in general, contact the experienced New York estate planning attorneys at The Law Offices of Saul Kobrick, P.C. by calling 800-295-1917 to schedule your appointment.