How to Transfer House with Mortgage into Trust | Attorney Explains

Attorney Thomas B. Burton explains how to transfer a house with a mortgage into a trust. Attorney Burton explains how your can place your primary residence inside your trust even if you have a mortgage on the property due to a federal law called the Garn-St. Germain Depository Institutions Act, which allows you to place your house inside a revocable living trust for estate planning purposes without the financial institution being able to trigger the "due on sale" clause which is included in many mortgages.


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Welcome back, I'm Attorney Thomas Burton and today's topic is "How to transfer a house with a mortgage into a revocable living trust or into a trust?"


So I see this topic come up frequently in my estate planning practice. I'm an estate planning and asset protection attorney here in Wisconsin and the big question I often get asked is can I put my home into a trust if I still have a mortgage on the property?


So some people do their trust planning and they have the primary home, usually their residence paid off but many people don't have it paid off at the time we're doing their trust planning and they're concerned about if we put the home into the trust, will it trigger the do on sale clause that's contained in many mortgage provisions?


So the do on sale clause generally says, if you sell the property to someone else, transfer title, you got to pay off the bank that you got the money from, that you loaned the money from and you pay them off and the new buyer has to get a new mortgage. So in these contracts, these mortgages for the home, there's these 'due on sale' clause provisions and people are rightly concerned about triggering this, especially on the personal residence, the home. Now the good news is, there is a law, a federal law that allows you to place your home into a revocable living trust, a living trust or a living trust. The most common type of trust we use for estate planning is a revocable living trust, what we call a will substitute. We're avoiding probate and using the trust as our main method for transferring asset instead of a will but then when we set up the trust, we generally retitle real estate into the name of the trust. So the good news is there's a federal law which allows you to do this without triggering the do on sale provision and that's called the Garn–St. Germain Act.


So forgive my art skills here, I'm not an art major but here's the general schematic - we have your house, you set up your living trust and then we're going to deed the home into the living trust. The deed which you record with the registered deeds, is how you actually change title to the home into the name of your new revocable living trust and a lot of times, we'll do this with a Quitclaim deed, if you own the home you will quit claim the deed from yourself to your living trust but it's the Garn–St. Germain Act, 12USC 1701J Sub 3 which is a federal law prohibiting lenders from calling the loan due on sale when you transfer it into a trust for estate planning purposes.


So I have here the Garn–St. Germain Act 12USC and you'll see the various provisions but I'm just going to read you a few pieces applicable and it applies to any state and the term state means any state of the united states, the district of Columbia, the commonwealth of Puerto Ricco, the Virgin Islands Guam and the Northern Mariana islands, American Samoa and the trust territory of the pacific islands. So if you have a home or a mortgage in these properties, this is where it applies, in these locations, I should say.


Then we go to subsection D, exemption of specified transfers with respect to a real property loan secured by lien on residential real property, containing less than five dwelling units. So it works for a property with less than five dwelling units including a lien on the stack allocated to a dwelling unit in a cooperative housing corporation or on a residential manufactured home, a lender may not exercise its option pursuant to a 'due on sale' clause upon and then it lists these nine situations where it can exercise the 'due on sale' clause.


Now I highlighted number five here, a transfer to a relative resulting from the death of a borrower. So if it's a death and the property transfers and the new relative has it subject to the mortgage, they can't trigger the 'due on sale' clause. That's one instance this could come up in estate planning but the other is number eight here which we're gonna zero in on, a transfer into an inter-vivos trust and the term inter-vivos means inter-vivos is Latin, comes from the Latin, it means a trust you made during life which a revocable living trust you set up during life by definition, meets that because you set it up during life, not a trust that came into being after your death, such as a trust set up through a will or something like that. So that's where we get the living part of living trust. It means you set it up during your life. A transfer into an inter-vivos trust which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.


So that's the key there. You have to remain a beneficiary of this trust and it has to be an inter-vivos trust where the person who took out the loan, the borrower, remains a beneficiary and does not transfer rights of occupancy to the property.


So looking at this, I sketched out the highlights here on 12USC 1701J, sub 3, D8, so if you want to look it up google that or Garn–St. Germain Act and then go to sub-section 8, transfer to an inter-vivos trust where the borrower remains a beneficiary and does not relate to transfer of occupancy rights in the property.


Now most revocable living trusts, if you're the beneficiary and you live in the house, that's going to be just fine. So the most common situation with a revocable living trust, we set it up and if you're alive and in good health, you're often the initial creator of the trust, what we call the grantor and the initial trustee, you manage the trust and then if we transfer your home into the trust as shown here by deed, you remain living there and the home remains inside the living trust. They cannot trigger that 'due on sale' clause under the Garn–St. Germain Act.


So I know, there's a lot to unpack here but hopefully, this is helpful to you when thinking about doing your own estate planning and some folks have a concern, they've been very diligent, they read their loan documents and they know there's that 'due on sale' clause and the good news is, this is totally acceptable and quite common in estate planning to put a home into a revocable living trust for estate planning purposes.


So talk with your attorney in the state where you live, to verify but this is a federal law, so it applies to all the states today but talk about your situation with them before you proceed and if you fall into some other unique situation with your trust and the way the loan set up, just discuss it with them before you proceed but I wanted to let you know today, it's very common, to put a mortgage property into a revocable living trust and thankfully, this federal law prohibits lenders from saying, triggering the do on sale clause for the trust.


Now in some instances, many people later, some people later in life have the house paid off and that's great, then there's nothing to worry about here. There's no lender on the mortgage to even try to bring up this 'due on sale' clause. If they did bring it up, you bring up the Garn–St. Germain Act, which allows it.


The only issue to watch out here is, if you need to refinance the home, some lenders will make you take the house out of the trust to get the new loan and then put it back in. So it would be that but this is not, this is like an annoying extra step to take but in my opinion, it shouldn't be a deal breaker to stop you from doing estate planning and this varies lender to lender, not all of them require that but if you discuss this with them, they might not require it but if you did have to do that, if it's worth the refinancing, all you have to do is as trustee, you deed it back to your individual name, do the refinancing and then Quitclaim it back into the living trust and in Wisconsin, the recording fee on that deed is $30. So it's not a terrible amount of money, if you have to do it. If it's worth it to you, to get the refinancing on the home then it's worth likely worth it to do run the numbers in your own situation.


So keep in mind, Garn–St. Germain Act, in the 1980s, this is what allows you to put a house or a home with a mortgage into a revocable living trust.


I hope this video has been helpful to you. If it has, consider giving it a like, so that other people can find and benefit from this information as well.


Thanks for watching and we'll see you next time.


© 2021 Burton Law LLC. All Rights Reserved. Transcript and captions provided for ease of access for the hearing impaired. For questions about this topic, or to suggest a topic for a future blog post, please contact the office.

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