Creating a Living Trust While Your Home Has a Due on Sale Clause

Creating a living trust is one common way individuals plan their estates and keep valuable assets like homes and other real estate out of the costly and timely probate process. For individuals own their home outright, a living or revocable trust is an easy way to instantly pass on a home but if there a mortgage or another lien on the property there may be a “due on sale” clause that requires the debtor to pay the lender immediately.


Typically, a due on sale clause is understood that the debtor must pay the bank the balance of a mortgage when the home is sold or otherwise transferred. While placing a home into a living trust is technically transferring the home from one owner to another, an important piece of legislation called the Garn-St. Germain Act allows individuals to transfer a personal residence to make “a transfer into an inter vivos (also known as “living”) 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.”


The exemption for due on sale clauses for these transfer rules allows the property to be placed into a revocable living trust so long as the loan is on residential properties containing less than five dwelling units. For New Yorkers, this is important because it can include homes such as a duplex, triplex, fourplex or even a coop and not just single family houses. So long as there is no change in occupancy to the estate, that is the person creating the trust stays in the home, the due on sale clause can not be enforced.


To create the trust, known as a land trust, the grantors (those who create the trust) will need a trust agreement in writing as well as the deed to the residence. With the creation of the trust the trustee will hold the tile but it is important for the sake of keeping things overly complicated that the name on the deed not change, the name on the mortgage checks not change, nor the name on the home’s hazard insurance be altered. If the bank holding the mortgage does notice the residence is placed into a trust it may be necessary to provide documentation of the trust and with a letter from an estate planning attorney.

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