Mortgaged Real Estate and Trusts

It is common for a person (hereinafter the “trustor”) to create a living trust to avoid the expense and time of probate.

The creation of the trust is not the sole step in avoiding the probate process – the trust must be “funded”.

“Funding” a trust is the process of the trustor conveying the title of his or her property into the name of the trust.  For real property, this process requires the preparation, execution, and recordation of a deed.  Some initially fear that their mortgaged real property cannot be conveyed to their trusts.  The fear is based upon the “due-on-sale” clause contained in the mortgage agreement.  Fortunately, federal law has brought clarity to the issue of mortgaged property and trusts.  What is known as the Garn St. Germain Act prevents a lender from exercising its “due-on-sale” clause option to take action for “a transfer to an inter-vivos [living] trust in which the borrower is and remains a beneficiary”.  There are a few limitations with regard to what type of dwelling would fall under this exemption, but for the person who has a single family residence or condominium such relief is applicable.