Transferring Mortgaged Property Into an Inter Vivos Trust

Estate Planning can be a complex and overwhelming endeavor. In the Surprise and Buckeye area, one particular question that many Estate Planning clients have is whether they can transfer their new homes into a trust. The short answer is "yes". The "how" is a bit more complicated. Why? Because of a clause that is included in almost every mortgage in America: the Due on Sale Clause. The "Due on Sale" clause essentially says that any transfer of the property must satisfy the mortgage. If the mortgage is not paid off, and the mortgage company has not granted written authority to make the transfer, then the mortgage company is authorized to treat the transfer as a "default" and require the mortgage to be paid immediately. All of it.

However, there is a way around the Due on Sale clause which allow you to transfer the property without triggering the mortgage company's option to call the mortgage due. You can transfer mortgaged property into an Inter Vivos Trust by virtue of an exemption provided by federal law.

Why Does Mortgaged Property Not Effect the Due on Sale Clause?

Technically, deeding mortgaged property to a Trust is a transfer of rights and interests where one of the beneficiaries may be different than the mortgagee. Therefore, under normal circumstances it would trigger the Due on Sale clause. However, such a transfer into an Inter Vivos Trust does not effect the Due on Sale clause because federal law says it doesn't.  Under U.S.C. 1701j-3, federal law provides an exemption from the Due on Sale clause where the property is placed into an Inter Vivos Trust in which the borrower remains a beneficiary, as long as the transfer does not alter the borrowers right to occupy to the property. U.S.C. 1701j-3(d)(8).

The borrower must still retain rights in the property as a named beneficiary of the trust, and it must not alter or change their right to occupy the property. This exemption only applies to residential property, not commercial assets, such as mortgages relating to commercial interests or residential property containing more than five (5) residential units, such as an apartment complex. U.S.C. 1701j-3(d). As those would be considered business interests, other means would need to be taken to create an Estate Plan for those business interests, such as placing those assets into an LLC and naming the trust as the owner of the LLC.