[WSBARP] Questions re due-on-sale clause and trust

[Emily Tyson-Shu]

Good evening!

I have some questions about whether a due-on-sale clause would be triggered in the event a spouse’s interest in a house, encumbered by a mortgage, is distributed to a testamentary (irrevocable) trust for the benefit of either a surviving spouse or a family member.

I currently have two cases where my client(s) might want to place his/her interest in the house into a trust upon death.

  *   Case 1: My client is a wife who is in her second marriage. She co-owns a house with her current husband. She would like to allow her husband to continue to live in the house until the husband’s death, and then my client would like to distribute her interest in the house to her children (from both marriages).
  *   Case 2: My clients are a married couple who co-own a house. They both would like to allow the wife’s mother to live in the house until the wife’s mother death even if one of them (or both of them) passes away. Upon the wife’s mother’s death, my clients both would like to distribute the deceased spouse’s interest in the house to the surviving spouse, or to their joint adult child if both of my clients pass away.

In both cases, both married couples are co-borrowers. I would like to give them some options and we have discussed the options of life estate and a trust. I did some research on Garn-St. Germain Act, but it’s still unclear to me whether the due on sale clause will be preempted, especially in the second case scenario meant to allow the mother (or mother-in-law) to stay in the house.  I have heard cases where a surviving spouse disclaimed the deceased spouse’s interest in the house to the trust, and the lender accelerated the loan.

I asked my clients to consult with their respective lenders which might help them render a decision. Any sharing is deeply appreciated!

Sincerely,

Emily Tyson-Shu
Lawyer
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