It is important to let your estate planning attorney know if you own real estate that is subject to a mortgage. Most mortgages include due-on-sale clauses stating that, upon the transfer of the mortgaged property, the entire amount of the debt owed on the mortgage is immediately due and payable. Under the Garn–St Germain Depository Institutions Act of 1982 (Garn–St Germain Act), lenders are prohibited from enforcing due-on-sale clauses in some circumstances but not in others. If your estate plan involves the transfer of property subject to a mortgage, it is important to keep this in mind.
What Is the Garn-St Germain Act?
The Garn–St Germain Act is a federal law that allows lenders to enter into or enforce contracts, including mortgage agreements, that contain due-on-sale clauses even if a state’s constitution or laws, including their judicial decisions, prohibit them. However, the Garn–St Germain Act lists nine situations in which due-on-sale clauses are not enforceable, including some transfers that may be relevant to your estate plan. In the nine situations specified, lenders may not enforce due-on-sale provisions in real property loans “secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home.”
This generally means that the statutory exceptions apply to due-on-sale clauses in mortgages on residential—not commercial—real estate with less than five apartments. Although we will not cover every situation involving mortgages on residential real estate in which lenders are not permitted to enforce due-on-sale clauses, the following exceptions are especially relevant when you are creating or updating your estate plan:
A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety. Many spouses and other individuals co-own their homes or other real estate. In a joint tenancy, two or more co-owners (not necessarily spouses) of real property have equal rights and responsibilities and a right of survivorship, meaning that if one of the co-owners dies, their interest disappears and the other co-owners’ interests automatically and immediately increase proportionally. A tenancy by the entirety is only permitted in some states and is generally available only to married couples. Neither of the married co-owners may sell the property or obtain a mortgage without the consent of the other. Similar to joint tenants, tenants by the entirety have a right of survivorship, so if one spouse dies, the surviving spouse automatically becomes the sole owner of the property. When one of these two types of co-ownership exists, a lender may not enforce a due-on-sale provision upon the death of one of the co-owners.
A transfer to a relative resulting from the death of a borrower. This situation involves the transfer of real property when one or more relatives inherits it after the borrower’s death. As long as the beneficiaries are relatives, the due-on-sale clause will not be enforced.
Transfer to a spouse or child during the owner’s lifetime. If someone who owns property subject to a mortgage transfers it during their lifetime to their spouse or child, the due-on-sale clause may not be enforced. This could be a transfer of the owner’s entire interest in the property or a partial interest to establish joint ownership, such as a joint tenancy mentioned.
A transfer to an inter vivos trust in which the borrower is and remains a beneficiary that does not relate to a transfer of rights of occupancy in the property. An inter vivos trust is a trust that is created during the lifetime of the grantor (the creator of the trust) as opposed to at the grantor’s death. There are a couple of somewhat complicated but important elements to consider regarding this exception:
- The borrower is and must remain a beneficiary of the inter vivos trust. In the case of a revocable living trust (RLT), a grantor is often also the beneficiary of the trust: the trustee simply holds the property in trust for the benefit of the grantor. In many cases, the grantor is also the trustee. An RLT may be revoked or modified by the grantor at any time during the grantor’s lifetime, and is useful for many people because it enables them to enjoy their property as if they still owned it. The trustee is authorized to manage the property for the grantor if they become incapacitated during their lifetime, and holding the property in the trust avoids probate proceedings by enabling the property to pass according to the terms of the trust, maintaining privacy and avoiding delays and costs. Because the grantor often remains the beneficiary of an RLT, this requirement of the Garn–St Germain Act is frequently (although not always) satisfied in situations involving transfers to RLTs.
Irrevocable trusts, that is, trusts that generally cannot be revoked or changed once they are created, are often created to minimize estate taxes or protect the property held by the trust from creditors’ claims. To achieve these benefits, the grantor is often not a beneficiary of an irrevocable trust—and if the grantor is not a beneficiary, the lender may not be precluded by the Garn–St Germain Act from enforcing a due-on-sale clause when the property is transferred to the irrevocable trust.
- The borrower may need to occupy the property. Unfortunately, it is not completely clear whether the individuals who transfer real property to a trust during their lifetime need to occupy the property. The Garn–St Germain Act 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. However, the regulations issued by the Office of the Comptroller of the Currency to implement the Garn–St Germain Act state that the borrower must remain an “occupant of the property.” Because of the lack of clarity, it may be prudent to comply whenever possible with both requirements to ensure that the lender is prohibited from enforcing the due-on-sale clause.
We Can Help
Estate planning often involves transfers of real estate, either during your lifetime to a trust or family member, or at your death. Fortunately, if the property is subject to a mortgage, the Garn–St Germain Act will prevent the lender from enforcing a due-on-sale clause in many situations, especially transfers to family members. However, it is important to be cautious to avoid missteps that could result in a mortgage unexpectedly being called due. Obtaining lender approval in writing before transferring real estate with a mortgage is advised. Call us to set up an appointment so we can help ensure that your estate plan achieves your goals for your real property and does not include any unpleasant surprises.
 12 U.S.C. §1701j-3.
 12 U.S.C. §1701j-3(d). The regulations implementing the Garn–St Germain Act, Preemption of State Due-on-Sale Laws, 12 C.F.R. §§ 191.1-191.6 (2018), https://www.govinfo.gov/content/pkg/CFR-2018-title12-vol1/xml/CFR-2018-title12-vol1-part191.xml, use the word “home” instead of a “residential real property containing less than five dwelling units” as stated in the text of the Garn–St Germain Act. 12 C.F.R. § 191.5(b). Those regulations also state in 12 C.F.R.§ 191.2(e) that the word “home” has the same meaning as provided in 12 C.F.R § 141.14, which states: “The term home means real estate comprising a single-family dwelling(s) or a dwelling unit(s) for four or fewer families in the aggregate.”
 There is some authority indicating that a right of occupancy will be deemed to be a beneficial interest sufficient to satisfy the statute. Daley v. Sec’y of the Exec. Off. of Health and Hum. Servs., 477 Mass. 188 (Mass. 2017).
 Preemption of State Due-on-Sale Laws 12 C.F.R. § 191.5(b)(1)(vi)) (Jan. 1, 2018), https://www.govinfo.gov/content/pkg/CFR-2018-title12-vol1/xml/CFR-2018-title12-vol1-part191.xml. Although one case found that the OCC had exceeded its authority in requiring the borrower to be an occupant of the property to maintain the Garn St Germain protections, the case may not be considered by some courts because it was unpublished. Baldin v. Wells Fargo Bank, N.A., 2013 WL 794086 (D. Or. Feb. 12, 2013).