October 23, 2018
Beware of Due on Transfer Clauses If You Are Considering Using a Trust to Avoid Probate
One of the ways some individuals avoid probate and engage in Medicaid planning is to transfer title to real estate into a trust agreement. The trust becomes the owner of the real estate; thereby decreasing the assets a person owns for Medicaid eligibility. This strategy can be of great use when planning for long-term care. Transferring title to real estate to a trust can also avoid probate for that asset and may have certain tax advantages for you and your heirs.
However, if you are considering placing your home or other real estate in a trust, it is best to consult with a Michigan trust attorney before signing any agreements or deeds. There are numerous factors that you must consider to ensure this estate planning strategy is right for your situation, such as a “due on sale clause.” Furthermore, once you transfer title to real estate to a trust, it may be difficult, if not impossible, to undo the transfer depending on the type of trust and the terms of the trust agreement.
What is a Due on Sale Clause and Why Do I Need to Worry About It?
A due on sale clause is a term mortgage lenders use in loan agreements and mortgage agreements to protect the lender’s interest in the property. The clause states that the entire amount of the mortgage loan will become due and payable in full if the real estate securing the loan is transferred. The provision protects a property owner from transferring the property without paying the mortgage debt.
However, many lenders include additional language that permits the lender to require immediate payment of all sums if “any right in the property is sold or transferred.” This portion of a due on sale clause could be a problem if the owner wishes to transfer the property to a trust or even transfer the property to a child or other heir while retaining a life estate interest in the property.
Exceptions to the Due on Sale Clause
There are exceptions to the due on sale clause that apply in some cases. For example, the clause may not be exercised when a relative inherits the property upon the death of the borrower. Furthermore, the clause may not apply when a spouse or children of the borrower are the new owners, or the transfer is the result of a legal separation or divorce action.
The exception that is important for estate planning is the one that applies to transfers to trusts. The Garn-St German Act specifically exempts transfers to an inter-vivos trust from the due on sale clause if the mortgage borrower remains a beneficiary of the trust and the transfer does not relate to occupancy rights.
However, you need to consult an experienced Michigan trust attorney for assistance in drafting the trust. If you do not use the correct type of trust, exact wording, and specific terms in the trust, you may have problems.
Transferring Other Real Estate and Using Other Types of Trust Agreements
When you want to transfer an interest in real estate other than your home or utilize different types of trust agreements with various terms, you must be extremely careful. If a due on transfer clause is exercised, you could face paying hundreds of thousands of dollars in one lump sum to the mortgage company. To avoid making a costly mistake, contact our law firm to discuss your estate planning goals with a lawyer.
Estate Planning and Trust Agreements in Michigan
The attorneys of The Elder Care Firm of Christopher J. Berry, CELA assists individuals and couples devise strategies for estate planning, retirement planning, and long-term care. We want to help you put a plan in place that protects you, your family, and your property.
Call 888-390-4360 or use the contact form on our website to schedule an appointment with a Michigan estate planning lawyer.