The Garn-St. Germain Act: Key Implications for Estate Planning

The Garn-St. Germain Depository Institutions Act of 1982 (12 U.S.C. §1701j-3) is a pivotal law that directly impacts homeowners and mortgage holders. Most mortgages include what is known as a “due-on-sale” clause. This clause allows lenders to demand full repayment of a loan if the property is sold or transferred. It is sometimes referred to as an acceleration clause, and is designed to protect the bank by ensuring a loan is paid off in full. However, the Garn-St. Germain Act provides exceptions that are particularly relevant for family planning and estate planning purposes.

What Is the Due on Sale Clause?

The due on sale clause is a provision in mortgage agreements that protects lenders from the risk of loans being transferred to borrowers with lower creditworthiness. This ensures that the actual borrower that was originally approved for the loan remains responsible for paying the mortgage off. When the ownership of a mortgaged property is transferred, the lender can enforce the due-on-sale clause, requiring the outstanding mortgage to be paid in full immediately.

The Garn-St. Germain Act and Revocable Trusts

The Garn-St. Germain Act which was passed in 1982 has several exceptions to protect residential homeowners from the due-on-sale clause being triggered after specific types of transfers. One of the key exceptions under the Garn-St. Germain Act is for transfers of property into an "inter-vivos" trust. While most people interpret this only to mean a Revocable Trust, that is not that actual language of the Act. Under 12 U.S.C. §1701j-3 (d)(8), the "exemptions of specific transfers or dispositions" are explictly outlined, namely the prohibition that a lender may not exercise its option pursuant to a due-on-sale clause upon:

• "a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property."

In summation, this means that the following requirements must be met to avoid the due-on-sale clause from being tirggered:

• The Settlor of the Trust must retain control over the property and retain a beneficiary interest in the property. This is pretty standard for most Revocable Trusts, where the Settlor will place their primary property into the Trust, while still living at the property until their death.
• As part of the requirement to “retain control” of the property, this requirement is commonly interpreted to mean that the Settlor of the trust must continue to occupy the property as well to avoid triggering the due-on-sale clause.

The Act makes no deliberate mention of whether a Revocable or an Irrevocable Trust is cleared as an exception, only that the trust be of the "inter vivos" variety. This term is often referred to as a "living trust" and simply means that the Settlor executes the Trust document during their lifetime, where they are the primary beneficiary while they are alive. While both Revocable and Irrevocable Trusts can be executed as "inter vivos" trusts, in terms of estate planning it is frequently understood that the transfer of a property into a Revocable Trust is almost always exempted from the due-on-sale clause being exercised. This is because Revocable Living Trusts are executed during the owner's lifetime, the Settlor is the beneficiary of the trust while they are alive, and accordingly can "revoke" or amend the terms of the trust at any point during their lifetime. This complies with the language of the Act where the Settlor "retains control" over the property and retains a "beneficial interest" while they are alive. For a full overview of Revocable Trusts and their many estate planning benefits, please read our full legal blog post here. This means that if you transfer your home into a Revocable Trust for estate planning purposes, the due-on-sale clause will not be triggered. 

This exception ensures that homeowners who have yet to pay off their mortgage can still benefit from the many estate planning advantages that Revocable Trusts provide.

Irrevocable Trusts and Mortgage Implications

Despite the language of the Act cited and analyzed above, many people and banks incorrectly assume that an Irrevocable Trust is not guaranteed the aforementioned protections of the due-on-sale clause from being exercised. As the name implies, once an Irrevocable Trust is created, it cannot be changed or modified whatsoever. These trusts are most frequently used as a Medicaid (MassHealth) planning tool. Once an Irrevocable Trust has been settled for 5-years and meets the MassHealth 5-year “look-back” period, the assets within the trust receive creditor protection and cannot be counted as assets to use towards the repayment of any MassHealth long-term care or nursing home care. When creating an Irrevocable Trust, this often requires the Settlor to relinquish title of the property to a family member that will manage the property as Trustee. While the Settlor relinquishes title under this arrangement, it does not mean that they have relinquished their "beneficial interest" or "right of occupany" as the Act requires. Most Settlors of an Irrevocable Trust continue to reside in the property after executing what is called a "Use and Occupancy" agreement with the Trustees. Thus, from a legal standpoint, so long as the Settlor retains an interest and continues to occupy the property, the lender is still prohibited from exercising the due-on-sale clause. 

Notwithstanding the foregoing, most people automatically assume that because the Settlor of an Irrevocable Trust loses certain flexibilities compared to a Revocable Trust, such as the ability to revoke or amend the trust or act as Trustee during their lifetime, that the Garn-St. Germain Act does not provide an automatic exemption to the due-on-sale clause for this type of transfer. While this is not the case, you still must exercise extreme caution when transferring a property with an outstanding mortgage into an Irrevocable Trust. As a result, if you are evaluating this tool for your estate plan, it is essential to work with an experienced estate planning attorney to ensure the proper actions are taken to protect you and your home.

Settlors of an Irrevocable Trust are still be eligible for an exemption from the due-on-sale clause, but it will require working directly with your lender and reviewing their specific policies. It is advisable to always consult your mortgage lender before transferring your property into an Irrevocable Trust to avoid any unintended consequences. Our firm has dealt with some lenders in the past that allow these types of transfers right away, but some that are not as amenable. Because the Act can be somewhat convoluted, sometimes even banks aren't clear on the law. Our attorneys are experiened in working with banks across the Commonwealth, and providing them with the necessary paperwork to protect you from having the due on sale clause enforced if you are attempting to transfer your property into an Irrevocable Trust. It is imperative that you speak with your bank and your attorney before making any estate planning updates or transfers. If you or a loved one is interested in setting up an Irrevocable Trust for MassHealth protection but you still have a mortgage on the property, contact us today to get started.

The Death of a Homeowner and the Inheriting Family Member

The Garn-St. Germain Act also provides an exemption for one of the most common estate planning situations that occurs, when the homeowner dies and devises their property to a family member through their Will. Or if the decedent dies without a Will and a family member inherits the property through the laws of Massachusetts Intestate Succession. For a full overview of Massachusetts Intestacy law and what happens when you die without a Will, please read our full legal blog post here.

The only requirement here is that the person inheriting the property be a “relative” of the decedent. While this is not explicitly outlined in the Act, the common interpretation is that any close family member will qualify as a "relative" and receive the exemption from the due-on-sale clause being enforced.

This exception is extremely advantageous for a relative that inherits a property and wishes to live in the property after the death of a family member. Under the Act, the inheriting relative can take up residence in the property and continue to pay the mortgage under the original terms of the loan. Essentially when they inherit the property, they also inherit the decedent’s mortgage. This allows a relative to assume the original mortgage on the property, even if they otherwise would not have been able to qualify for that same loan using their own credit. Likewise, this can be advantageous if the decedent had an older mortgage with a much lower interest rate compared to the current interst rate climate. It also saves families from dealing with the headache and financial burden of being forced to pay off a mortgage in full immediately after losing a loved one.

Other Important Implications of the Garn-St. Germain Act

The Garn-St. Germain Act provides other notable exceptions where the due-on-sale clause does not apply, including:

• Transfers to a surviving joint tenant or tenant by the entirety upon the death of the co-owner. A benefit to holding title to property as joint tenants or tenants by the entirety, is that both tenants/owners have a right of survivorship. This means that you own 50% as a joint tenant and the other joint tenant owns 50%, and upon the other tenant’s death, you will immediately receive their interest and own 100% of the property. Tenants by the entirety is a form of joint tenancy available only to married couples. Similarly, if a married couple owns their home as tenants by the entirety, upon the death of one spouse, the surviving spouse will immediately take full 100% ownership of the house. In either form of ownership, a lender cannot enforce the due-on-sale clause upon the death of one of the owners. For a full legal blog post outlining the different ways to hold title to property in Massachusetts, click here.
• Transfers to a spouse or child. During the owner’s lifetime, they are free to transfer title of the property to a spouse or child without triggering a due-on-sale clause. This can be done as a full transfer of the property (100%) as a gift to a spouse or child, or by deeding only a partial ownership interest to a spouse or child as either a joint tenant or tenant by the entirety (spouse only). Keep in mind that there can be massive tax implications if you gift your property rather than put it into a Trust or devise it in your Will. Primarily, the beneficiary will not receive a “stepped-up” tax basis which could cost them thousands in capital gains tax. For a full overview of the stepped-up tax basis and its many considerations in estate planning, please read our full legal blog post here.
• Transfers as part of a divorce settlement. The Act offers protection to an ex-spouse if they received property as part of a divorce decree or a separation agreement. The only requirement being that they must live in the property following such divorce decree or settlement agreement. If an ex-spouse remains in the property, then they are protected from the lender enforcing the due-on-sale clause upon the transfer in ownership.

These exceptions can be instrumental in planning for life events like divorce, inheritance, and the passing of a loved one.

How This Impacts Estate Planning

Understanding how the Garn-St. Germain Act interacts with the due-on-sale clause is crucial for effective estate planning. While many people have their families’ best interests at heart, ignoring the wide-spread implications of a mortgage on a property and potential repercussions to changing ownership can end up costing your loved one’s thousands of dollars. We frequently recommend the use of Revocable Trusts to help you structure your property interests in a way that eliminates the need for probate, saves your family in legal costs and taxes, eliminates the possibility of your bank enforcing a due-on-sale clause, and overall streamlines the transfer of your assets to your loved ones in the most efficient way possible.

At Lane, Lane & Kelly, our estate planning attorneys have years of experience helping Massachusetts families navigate their estate planning journey and complex laws like the Garn-St. Germain Act. Whether you're setting up a Revocable Trust, an Irrevocable Trust, or need assistance probating the estate of a loved one, our team is here to ensure that your loved ones are properly taken care of. Contact us today to discuss how we can help you secure the ultimate peace of mind.

This blog is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By reading this blog you understand that there is no attorney client relationship between you and Lane, Lane & Kelly, LLP.