Can I Put My Home in a Trust If I Have a Mortgage?

One of the questions that I get with some regularity concerns whether an individual or couple can put your home in a trust if a mortgage exists on the property. The answer is yes, but there are a few considerations to pay attention to before making a transfer.

Today, every mortgage contains a “due on sale clause”. This is the portion of the mortgage that restricts your ability to transfer the loan to another without the consent of the mortgage holder. It states that the loan may be called due in full upon a sale or transfer of ownership of the property. This is an option for the lender and is not automatic. Prior to 1982, if a mortgage contained a due on sale clause, a transfer into a trust could be construed to trigger this clause which could cause the unfortunate result of accelerating the entire mortgage loan.

In response to this issue, Congress enacted the Garn-St. Germain Depository Institutions Act of 1982. The primary purpose of this legislation was to deregulate the banks and allow them to make adjustable rate mortgage loans. It is also significant because it disallowed banks from exercising their power under due on sale clauses under certain circumstances. One of the most notable was in the event a borrower transferred their property into trust. Under the Act, a borrower could transfer their property into a trust without the concern of triggering the due on sale clause.

There are two restrictions to the ability to transfer property into trust. A borrower must remain as a beneficiary of the trust agreement and the transfer must not relate to a transfer of rights of occupancy in the property. Regardless of any considerations, this was a great piece of legislation that paved the way for individuals and families to have greater control over their estate planning by allowing the transfer into trust of real property even if a mortgage exists.