Family Trusts and the Mortgage Due-on-Sale Clause

Stephen Howard — Stone River Law

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Family Trusts and the Mortgage Due-on-Sale Clause

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Creating a living trust (sometimes called a family trust or revocable trust) can be an important part of a comprehensive estate plan. Transferring your home or other real estate into your living trust is part of funding your trust, and is an important step toward avoiding an expensive and lengthy probate process.

Does transferring my home to a living trust trigger a mortgage “due-on-sale” clause in Utah?

There is some confusion that perpetuates in regard to the question of whether a transfer into a living trust will trigger a due-on-sale clause in a residential mortgage. In most cases, a person who transfers his home into a living trust of which he is also a beneficiary will not trigger a due-on-sale clause. Below is a partial explanation of why confusion on this issue continues.

In the 1970’s and early 1980’s, there were several state appellate court opinions from other states that addressed the enforceability of due-on-sale clauses in the context of a residential mortgage. Ultimately, the issue ended up with the United State Supreme Court holding that due-on-sale could be enforced. In response to this litigation, the federal government enacted what is sometimes called the Garn-St. Germain Act. This act provides for the enforcement of due-on-sale clauses, but also provides some important exceptions.

The most important exception to the enforceability of a due-on-sale clause comes under 12 U.S.C. 1701j-3(d)(8) which provides 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. . . .” A similar provision is found in 12 C.F.R. 591.5.

Mortgage loans made subsequent to the enactment of this legislation are subject to its requirements in regard to transfers of real estate into living trusts. It has now been more than 30 years since the passing of the Garn-St.Germain Act. Since most U.S. mortgages do not involve loan payback periods longer than 30 years, as a general rule now a due-on-sale clause will not be triggered by a transfer of a home occupied by the borrower into a living trust in which the borrower is a beneficiary.