The Garn-St Germain Act was passed in 1982 and signed into law by President Ronald Reagan. The act was implemented to help the loan industry, which was struggling with inflation and high interest rates. It allows lenders to enforce contracts, such as mortgage agreements, that contain due-on-sale clauses. They can be enforced even if the state’s laws, including their judicial decisions, prohibit them. However, the Garn–St Germain Act lists nine situations in which lenders are not permitted to enforce due-on-sale clauses. Notably, some exceptions may be relevant to your estate plan including:
Transfer by Devise, Descent, or Operation of Law on the Death of a Joint Tenant or Tenant by the Entirety
When you co-own a home, such as with a spouse, it is called joint tenancy. The owners have a right of survivorship, meaning that if one of the co-owners dies, their interest goes to the other owner. Furthermore, some states permit tenancy by the entirety which is available to married couples. In this situation, neither person can sell without the consent of the other. If one spouse dies, the surviving spouse becomes the sole owner of the property. In both situations, a lender may not enforce a due-on-sale provision upon the death of one of the owners.
Transfer to a Relative Resulting From the Death of a Borrower
The due-on-sale clause cannot be enforced in a situation involving the transfer of real property from an inheritance after the borrower’s death. Please note, in this case, the heirs must be relatives of the decedent.
Transfer to a Spouse or Child During the Owner’s Lifetime
A property owner is able to transfer a property carrying a mortgage to their spouse or child, and the due-on-sale clause may not be enforced. Importantly, this may be the entire interest or only partial interest to establish joint ownership of the property.
Transfer to an Inter Vivos Trust in Which the Borrower Remains a Beneficiary
Unlike many trusts that are set up after the creator of the trust’s (grantor’s) death, this type of trust is created during the grantor’s lifetime. There are a few important considerations regarding this exception. The first is that the borrower must remain a beneficiary of the inter vivos trust. A grantor is usually also the beneficiary of a revocable living trust. The trustee holds the property in trust for the grantor’s benefit. Therefore, this requirement of the Garn–St Germain Act is usually satisfied during transfers to revocable living trusts. However, in the case of irrevocable trusts, the grantor is not often a beneficiary. Consequently, when the property is transferred to the irrevocable trust, the Garn–St Germain Act does not stop lenders from enforcing a due-on-sale clause.
A second element to consider is that the borrower may need to occupy the property. Regulations issued by the Office of the Comptroller of the Currency require that the borrower remain an occupant of the property. However, it’s possible to get around this in the case of an inter vivos trust because the transfer of property to an inter vivos trust does not relate to a transfer of the rights of occupancy.
Law & Stein Can Help
Estate planning typically involves the transfer of real estate property. Therefore, you must know the steps to ensure your loved ones don’t experience a mortgage being called due. In most cases, we advise our clients to request lender approval in writing before transferring real estate that carries a mortgage. Want more information regarding real estate property transfers or any other aspect of estate planning? Contact the expert estate planning attorneys at Law & Stein today!