The Garn-St. Germain Act is a federal law that has had a significant impact on residential mortgages, particularly in the context of due-on-sale clauses. One of the most notable aspects of this Act is its implications for the use of trusts in estate planning.

The Due-on-Sale Clause

A ‘due-on-sale' clause is a provision commonly found in mortgage contracts. It typically necessitated the full repayment of a mortgage upon the transfer of the property. This clause essentially allowed the lender to demand immediate payment of the remaining balance of the loan if the homeowner decided to sell the property or transfer the title to someone else.

However, the Garn-St. Germain Act introduced a significant shift in this area. Under this federal law, ‘due-on-sale' clauses are recognized as enforceable. However, the Act also provides a few notable exceptions. These exceptions are where the real practicality of the Act comes into play, especially in the realms of probate and estate planning.

The Power of Trusts

Trusts are a powerful tool in estate planning. They allow individuals to manage their assets during their lifetime and ensure a smooth transition of these assets upon their death. Trusts can provide a range of benefits, including potential tax advantages and the ability to avoid probate.

The Intersection of Trusts and the Garn-St. Germain Act

The Garn-St. Germain Act intersects with the world of trusts in a very significant way. It provides an exception to the enforcement of due-on-sale clauses when a property is transferred into an inter vivos trust in which the borrower is and remains a beneficiary and occupant of the property.

This means that a homeowner can transfer their property into a trust without triggering the due-on-sale clause, as long as they remain a beneficiary and occupant of the property. This exception does not require occupancy of the property being transferred to an inter vivos trust, but simply mandates that the transfer does not relate to a transfer of the rights of occupancy in the property.

The Benefits of Using Trusts under the Garn-St. Germain Act

This provision of the Garn-St. Germain Act can be particularly beneficial in estate planning. For instance, a homeowner can pass away before fully repaying their mortgage, leaving the property to a family member through a will or by default succession laws. The new owner can continue paying the existing mortgage—no need for a new loan or a stressful refinancing process.

Moreover, the use of trusts under the Garn-St. Germain Act can provide significant protection for homeowners. By transferring their property into a trust, homeowners can potentially avoid the enforcement of a due-on-sale clause, thereby preventing the lender from demanding full repayment of the loan upon the transfer of the property.

In conclusion, the Garn-St. Germain Act provides a legal framework that can prevent a lender from triggering the “due on sale” clause under certain circumstances, such as a transfer from an individual to a trust. This can have significant implications for homeowners, beneficiaries, and estate planning.

CONTACT THE D'ORLANDO FIRM, PLLC TODAY

Actions taken at the intersection of estate planning and encumbered real property should be carefully measured to avoid disaster and achieve the desired effect, whether as part of your estate planning in life or by you or your family in the probate process after death. At The D'Orlando Firm, PLLC, we can help. Contact us today either online or at (267) 392-5428 to schedule a free consultation.

Disclaimer: This blog post is for informational purposes only and should not be construed as legal advice. Always consult with a licensed attorney for legal advice.