Q: Can I put my home in a revocable trust for estate planning purposes while my mortgage loan is still outstanding?
A: Yes, even if your loan documents state otherwise, as long as the trust meets certain criteria. Most (if not all) residential mortgage loans contain a "due-on-transfer" provision. These require the borrower to repay the loan in full upon selling or transferring the property to a different owner. This is logical, because the lender cannot be expected to continue the loan relationship when the collateral (the home) has been transferred to a new owner.
In 1982 however, Congress passed the Garn-St. Germain Depository Institutions Act of 1982, which subsequently became 12 U.S. Code § 1701j-3. Since 1983, under federal law, the mortgage lender cannot "call the loan" or demand repayment when an owner transfers property into an estate planning trust if the owner (1) remains a beneficiary of the trust during his or her lifetime and (2) does not transfer rights of occupancy in the property. These two criteria are typically met in most estate planning trust scenarios, which your estate planning attorney can confirm. Lenders are also entitled to confirm that your estate planning trust meets these criteria, so you may need to provide relevant portions of the trust documents if your lender requests them.
With interest rates on the rise, some lenders or mortgage brokers may be tempted to pressure homeowners into repaying or refinancing fixed low-interest-rate loans when transferring property into an estate planning trust.
Federal law expressly prohibits requiring repayment or refinancing, and the informed homeowner should resist. Some lenders also pressure homeowners into paying document review or transfer fees associated with the legally permitted transfers. Applicable federal law does not expressly state whether or not these review fees are permissible. But common sense should dictate that a mortgage lender should not charge a fee to confirm that the homeowner is doing what he or she is legally entitled to do.
The use of revocable trusts is becoming almost ubiquitous in New Hampshire estate plans. The Garn-St. Germain Depository Institutions Act of 1982, by prohibiting banks and lending institutions from accelerating mortgage loans in most circumstances, allows homeowners to fully avail themselves of this modern technique.
Published in the Union Leader (6/4/2018)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
