How the Garn-St Germain Act Simplifies Real Estate Transfers in Estate Planning

The Garn-St Germain and Estate Planning Overview

Planning for your legal and financial future isn’t just socking money away without thinking about it, a plan for your future also includes working with professionals to maximize opportunities and avoid pitfalls. I often work with clients to ensure their assets are distributed according to their wishes, and one often-forgotten law that comes up is what we refer to as Garn-St Germain.

Although Garn-St Germain might sound like a place in Europe you can visit, or a place you can buy an expensive watch, it’s not. Instead, this federal legislation was a response to the savings and loan crisis of the 1980s, and is a reminder to estate planners and clients alike of the importance of discussing your real estate and financial holdings thoroughly with your tax and estate planning professionals. Avoiding traps for the unwary is what we do for a living. In this blog post, we’ll take a quick look at Garn-St Germain and explore its implications for estate planning.

Impact on Estate Planning

A due-on-sale clause, also known as an acceleration clause, is a contractual provision commonly found in mortgage agreements (in Washington, a “deed of trust.”). The due-on-sale clause gives the bank or financial institution the right to demand the loan be repaid if the real estate put up as collateral for the loan is sold, or is transferred to a new owner.

Before the Garn-St Germain Act became law, due-on-sale clauses were commonly enforced by lenders, making it much more prohibitive for property owners to transfer real estate without running afoul of the due-on-sale clause, thereby triggering repayment of the mortgage. Garn-St Germain introduced certain exceptions to this rule, providing relief for certain types of transfers, including those occurring upon death.

Some of the specific situations where lenders may not enforce due-on-sale clauses thanks to Garn-St German include:

1. Transfer to a Spouse

Garn-St Germain allows for the property to be transferred to a surviving spouse upon death, without triggering the due-on-sale clause. This provision facilitates the transfer of real estate within a family and ensures that surviving spouses will be able to stay in their homes without the added pressure of having to refinance the house or even sell. A spouse being added to the title of property, most commonly after marriage, will also not trigger the due-on-sale clause.

2. Transfer to a Child or Children:

The Garn-St Germain Act also exempts transfers of property to children from enforcement of due-on-sale clauses. Parents can create their estate plan and know that the mortgage may not be foreclosed solely because of their passing. So long as the heir is a child who continues to pay the mortgage current, Garn-St Germain allows a child who may not otherwise qualify for a loan to continue to reside in the property. Absolute transfers of real estate can be tricky and often have tax consequences, so be sure to consult with your attorney and accountant before transferring real estate to your children.

3. Transfer to a Trust:

Garn-St Germain also protects certain transfers involving trusts, allowing property owners to transfer real estate into a revocable living trust, without triggering the due-on-sale clause, so long as certain other requirements are met. This is an instrumental piece of modern estate plans, allowing not just the establishment of a living trust, but enabling a trust-driven estate plan to be funded using real estate during the trust creator’s lifetime. It is important to note that Garn-St Germain does not exempt a transfer to an LLC or other ownership vehicle.

There is a conflict between the text of the Garn-St Germain Act, which states that the property must be a “residential” dwelling of up to five (5) units and need not be owner-occupied, and the regulations which apply only to a “home” without reference to the size of the home, and which indicate an occupancy is required. Any unusual situation besides your principal residence should be discussed with your estate planning attorney.

Practical Considerations for Estate Planning

Here are some practical considerations to think about:

1. Consult with Legal and Tax Professionals

Estate planning is a very complex area of law, and the implications of the Garn-St Germain Act will vary depending on your individual circumstances. It’s crucial to consult with experienced estate planning attorneys who can provide personalized guidance based on your specific needs and objectives.

2. Review Mortgage Documents

If you’re considering transferring real property as part of your estate plan, carefully review your mortgage documents. It’s usually a safe bet that most mortgage loans will have a due-on-sale clause in the boilerplate language in the recorded mortgage documents. While the Garn-St Germain Act provides exemptions for certain transfers, it’s important to be sure you understand the terms of your mortgage.

3. Regularly Update Your Estate Plan

Life circumstances and financial situations can change over time, necessitating updates to your estate plan. You should touch base with your estate planning attorney and tax professional at least annually, to review your situation and if needed, revise your plan to reflect any changes in assets, beneficiaries, or relevant laws.

Conclusion