Living Trusts; due-on-sale clauses; and refinancing

Many people have created revocable living trusts to avoid probate at death and handle incapacity issues.  Chances are your home mortgage contains what is called a “due-on-sale clause” to allow the lender to require you to pay off the loan in full if you transfer your home.  But what if you are simply transferring your home to your revocable living trust to avoid probate when you die?


Thanks to the Garn-St. Germain Act, you are allowed to transfer your 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.”  This provision is included in the list of exemptions from the due-on-sale restrictions, along with a transfer to a relative resulting from the death of the borrower, a transfer related to a divorce, among others.  Specifically, this exemption for the transfer to a revocable living trust deals with loans on residential properties containing less than five dwelling units and covers interests in cooperative housing units as well.  So, a transfer to a trust would be acceptable if you lived in a duplex, triplex or four-plex or even a coop in Manhattan.


When you go to refinance a home that is held in your revocable living trust, you will generally find lenders in two categories.  Most lenders will ask for information on your trust and a letter from an attorney, usually the attorney who prepared your trust.  The other category of lender is either uninformed or too lazy to understand the process with a trust.  These lenders will ask you to transfer your home back to your individual name and then, when the loan is finalized, allow you to transfer your home back to your trust.  This route works, but is time consuming and more expensive.  The enlightened lenders will want an attorney to provide an opinion letter along the following lines: (1) that in the attorney’s opinion, the trust is validly created, duly existing and enforceable under state law, and that holding title to the property in the trust does not in any way diminish the lender’s rights as a creditor; (2) that the trust is revocable and the borrower established the trust during the borrower’s lifetime to be effective during the Borrower’s lifetime; (3) that the borrower is settlor (maker of the trust), beneficiary and a trustee of the trust; and (4) that the borrower is duly qualified under applicable law to serve as trustee and is fully authorized under the trust and applicable law to hold title to, manage the property placed in trust, borrow money, and pledge or otherwise encumber the Trust assets absent written consent from the beneficiary or if consent of the beneficiary is required it has been so granted.  This opinion may be obtained from any attorney, but the attorney who drafted your trust will be in the position to readily render this opinion, saving you time and money.