If you own real estate that has a mortgage on it, then you may be aware of a clause or provision in your loan agreement called the “due-on-sale” clause. This provision generally states that if you sell and/or transfer the property out of your name, then the lender has the right to make you pay off the loan immediately.

However, like many things in the law, there are exceptions to every rule, and the due-on-sale clause usually has several exceptions that could make the provision inapplicable in certain scenarios thanks to the Garn-St. Germain Act.

For example, when a person dies with a mortgage on their property, then the inheritor is generally allowed to assume the loan on the inherited real estate regardless of the due on sale clause - in other words, the inheritor or beneficiary is not required to pay off the loan - he or she just needs to keep making timely payments to the lender.

Similarly, there is another exception made for transfers of real estate to inter vivos (living) trusts. A living trust just means that the trust is created during your lifetime (rather than one that is created upon your death - also known as a testamentary trust). As long as you are a beneficiary of a living trust, then you could argue that the due on sale clause should not apply.

But what if you don’t retain the beneficial right to the property when transferring the real estate to your living trust?

For revocable living trusts, this is a non-issue because, as the grantor (or trust maker / creator of the trust), you generally retain full control or ownership of any property held or transferred to your trust. In other words, you generally retain all beneficial interests that you enjoyed prior to transferring the property to an REvocable trust.

But things are a little different for irrevocable trusts, which are trust made to intentionally deprive you of some or potentially all of the benefits of the property for asset protection purposes. To be clear, unlike revocable living trusts, which can be changed by the grantor at any time. Irrevocable trust (beginning with an “ I R “ in the beginning of the word) cannot be changed at any time. Once you create an irrevocable trust, they are generally set in stone.

So, if you were to draft an irrevocable trust and intentionally deprive yourself of an asset, then the question becomes - does the Garn-St. Germain Act still apply? Or can the lender call the loan and force you to repay it immediately?

In practice, I’ve never seen a lender exercise their due-on-sale clause against someone who transferred their property to an irrevocable trust - but that doesn’t mean it can’t happen. It could have just been because the lender wasn’t incentivized to force the loan to be paid off because of the interest rate environment (which has clearly changed over the last year - writing this in March of 2024). For that reason, I would not advise a client to take these transfers lightly.

What if I get written consent to transfer my mortgaged property to an irrevocable trust?

If you can get something in writing from your lender that they will not enforce the due-on-sale clause when transferring your property to a trust, then that would be the next best option. However, I’ve only seen that happen once before, and the letter was written in a way that didn’t preclude a future lender from enforcing the due-on-sale clause (in the event that the loan was ever sold off - which happens fairly often). More likely than not, you’ll just get a vague verbal promise that no one will bother you so long as you keep making your payment. - super reassuring, I know.

So what do I do if I can’t get something in writing from my lender?

The next best option is to specify that the trust guarantees you the right to continue to occupy the property. In doing so, you would still retain sufficient beneficial rights in accordance with the Garn-St. Germain Act to preclude the enforcement of the due-on-sale clause.

BUT, here’s the problem with that scenario - if you drafted an irrevocable trust specifically for Medicaid (nursing home) protection purposes, then including that right to occupy the property could be used against you when applying for Medicaid. For that reason, you should speak with an estate planning attorney licensed in your state to verify whether that risk applies to you or your trust and if there are alternate ways to structure your trust to satisfy your estate planning objectives.

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