There are aspects of elder law that are at the intersection with other areas of practice. As an example, seniors commonly transfer their property to a trust as a part of an estate plan. The change in title may be considered to avoid probate, to assist in the management of the property or to qualify for government benefits. If the property has a loan secured by a lien, however, great care must be exercised to avoid the unintended consequence of triggering the acceleration of the loan.

What Is a Due-on-Sale Clause?

Most mortgage agreements contain a provision allowing the entire amount of the remaining debt to become due and payable upon the transfer of the property. It is commonly called a “due-on-sale” clause. Such a provision could contain the following, “Lender may require immediate payment in full of all sums secured by this security instrument if all or any part of the property, or if any right in the property, is sold or transferred without lender’s prior written permission. However, this option shall not be exercised by lender if such exercise is prohibited by applicable law.”

History of the Clause

In the 1970s, when interest rates were increasing rapidly, buyers were assuming the existing (lower rate) mortgages held by sellers. In response, lenders instituted the due-on-sale provision, making the entire outstanding balance due and payable. The buyer was then unable to assume the loan because it was accelerated. The buyer was forced to take out a new (higher rate) mortgage. In response, there were judicial challenges to the due-on sale clause in many states. The issue was resolved by the passage of the Garn-St Germain Depository Institutions Act of 1982, 12 U.S.C. §1701j-3 et seq. That act authorized the use of the due-on-sale clause and preempted state prohibitions.


However, the Garn-St Germain statute contains important exceptions to the due-on-sale provision. The exceptions apply to residential real property containing one to four units and to stock allocated to dwelling units in a cooperative housing corporation (coops).

The due-on-sale clause may not be exercised because of a subordinate lien. It may not be exercised because of a purchase money security interest for household appliances. It may not be exercised upon the death of a joint tenant. It may not be exercised when a relative becomes an owner on the death of the borrower. It may not be exercised when the spouse or children of the borrower become the owner. It may not be exercised as a result of a transfer in a divorce or legal separation when the spouse becomes the owner.

Trust Exception

The exception that is of the greatest interest to the elder law attorney, applies to transfers to a trust. The Garn-St Germain act prohibits the exercise of the due on sale clause in regard to “A transfer into an inter-vivos 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.”

In drafting a trust into which mortgaged property is to be transferred, it is important that the borrower remains a beneficiary. In drafting the trust, it is important that the borrower continues to be the occupant of the subject property. The following is an example of language that would reflect upon the right of the borrower to continue as the occupant of the property: “The Trustees are authorized and directed to retain in the Trust any premises, including a cooperative apartment, which the Grantor shall occupy as his or her residence. The Grantor shall have the right to use and occupancy of said premises during his or her lifetime. The Grantor reserves any present or future right to any real estate tax exemptions, including but not limited to senior citizen, disability, veterans and STAR exemptions.”

Transfers to a Trust

Transfers of a single-family home, subject to a mortgage, to a trust can be accomplished by deed, with the permission of the lender. Cooperative housing association stock presents a different set of issues from the real property deed.

Some coops have a rule that stock can only be issued to a natural person and therefore exclude all transfers to trusts. An inquiry should be made of the board of directors or managing agent in advance of drafting a trust agreement. If the coop will in principle allow the transfer, the client should be made aware of the common fees that are imposed. There will be a fee for the board of directors’ attorney to review the trust. A lien search will likely be required at the expense of the party requesting the transfer. The coop managing agent will impose a fee at the closing to void the current stock certificate and to issue a new stock certificate in the name of the trust.

The lender holds the original stock certificate and proprietary lease as collateral. No transfer can be made without the surrender of the current stock certificate and proprietary lease. The consent of the lender is absolutely required. The lender will require that its attorney also review the trust and will also impose a fee for that examination.

Standard provisions within a trust may be objected to by counsel for the lending institution. The lending institution attorney may require specific language regarding future transfers; authority for a trustee to delegate responsibility; the release of a trustee of liability; the power to abandon property; the power to lease or rent property; and trust situs.

At least one lender’s counsel has taken the position that a transfer to an irrevocable trust is not permissible, relying upon 12 U.S.C. §1701j-3(c)(2)(A). “… a lender may require any successor or transferee of the borrower to meet customary credit standards applied to the loans secured by similar property, and the lender may declare the loan due and payable pursuant to the terms of the contract upon the transfer to any successor or transferee of the borrower who fails to meet the customary credit standards.” In this case, the lender stated that it did not make loans to irrevocable trusts in general and by applying its customary credit standard it would not allow the borrower to transfer the coop stock and lease to an irrevocable trust.


For the client who is considering a transfer to a trust of property that is encumbered with a loan secured by a lien, great care must be exercised at the initial stage to ensure that the property can be successfully transferred and that it can be transferred without triggering the due-on-sale clause. It is best practice to submit a draft of the proposed trust agreement to counsel for the lending institution before execution.

Daniel G. Fish is a partner at McLaughlin & Stern.