Estate Planning and the Due-on-Sale Clause: What You Need to Know About Trust Transfers, LLCs, and the Garn-St. Germain Act

June 5, 2025
Paramus Estate Planning

When planning your estate, protecting real property is often a top priority. Many clients wish to transfer homes into trusts or LLCs for probate avoidance, asset protection, or tax strategy. However, one often-overlooked risk is the due-on-sale clause found in most mortgage contracts—a clause that can trigger lender action when property is transferred.

What Is the Due-on-Sale Clause?

A due-on-sale clause (also known as an acceleration clause) is a provision in most mortgage agreements that allows a lender to demand immediate repayment of the entire loan balance if the property is transferred to another person or entity without the lender’s consent.

This clause helps lenders manage risk. However, it can create unexpected problems for homeowners who engage in estate planning, particularly when transferring property into a trust or LLC.

Garn-St. Germain Depository Institutions Act of 1982: The Federal Exception

The Garn-St. Germain Act (12 U.S.C. § 1701j-3) was enacted to protect borrowers from having their loans accelerated unfairly due to estate planning-related transfers.

Under the Act, certain transfers are exempt from triggering the due-on-sale clause.

 

The most important provisions for estate planning are in part (d):

(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety

(5) a transfer to a relative resulting from the death of a borrower

(6) a transfer where the spouse or children of the borrower become an owner of the property

(8) 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

 

This means that for many people the due-on-sale clause will not be a concern – most transfers to a revocable trust are permitted, as are transfers to the spouse or children of the borrower through a Will, a deed, or even intestacy!

What About Irrevocable Trusts?

Some transfers to irrevocable trusts are exempt, and some are not.

 

While the Garn-St. Germain Act specifically includes transfers into an inter vivos trust, the statute requires that the borrower is, and remains, a beneficiary and that there is no transfer of rights of occupancy in the property.

 

If a borrower transfers property into an irrevocable trust, a provision that retains the right of occupancy may prevent enforcement of the due-on-sale clause, but only for so long as the borrower continues to live in the property.

Rental Property

The owner of a rental property is not so fortunate.  The Garn St. Germain Act states that a transfer to a Trust is permitted as long as the borrower is a beneficiary, but the regulations, 12 CFR § 191.5(b)(vi), is more specific and states that the borrower is and remains the beneficiary and occupant of the property.

 

This means that an owner-occupant can transfer their primary residence into their trust without triggering acceleration, there is no federal protection for an owner-landlord, and while some lenders may not enforce the clause in practice, the owner-landlord who transfers their property runs the risk of the lender calling in the mortgage.

Transferring Property to an LLC

 

Transferring real property into an LLC is another common estate or asset protection strategy—particularly for rental or investment properties.

However, the Garn-St. Germain Act does not protect LLC transfers. An LLC is a separate legal entity, and a transfer from an individual to their LLC, even a single-member one, can trigger a due-on-sale clause.

Even if the underlying ownership remains unchanged, the transfer is still typically considered a sale under the mortgage contract.

 

LLC Transfers: Mortgage Servicer Guidelines

The mortgage servicer may have guidelines that influence whether they enforce due-on-sale provisions when property is transferred to an LLC.  About 70% of all mortgages are supported through Fannie Mae or Freddie Mac, and both allow for transfers to an LLC under certain circumstances.

Fannie Mae Servicing Guide – D1-4.1-02

Fannie Mae’s guidance states that a transfer to an LLC is exempt if it meets the following conditions:

  • The mortgage was purchased or securitized by Fannie Mae on or after June 1, 2016,
  • The LLC is controlled by, or majority owned by, the original borrower, and
  • If the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument

Freddie Mac Servicer Guide – Section 8406.4(b)

Freddie Mac also permits transfers to an LLC, provided that:

  • The managing member/general partner is the original borrower
  • If there are multiple borrowers, all of them must be members of the LLC and at least one of them must be the managing member
  • If the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument

So essentially, a transfer to an LLC for estate planning or asset protection will be permitted if the owner of the property is the owner of the LLC, and so long as any change of occupancy conforms to the original loan documents.

Summary Table: Transfer Types and Due-on-Sale Risk

Transfer Type Triggers Due-on-Sale? Protected Under Garn-St. Germain?
To Revocable Living Trust ❌ No ✅ Yes (12 CFR § 191.5(b)(vi))
To Irrevocable Trust ⚠️ Possibly ⚠️ Possibly
To LLC ⚠️ Possibly ❌ No

Final Thoughts

Understanding the interplay between estate planning and the due-on-sale clause is crucial for protecting your assets—and avoiding an unexpected call from your lender. While federal law provides safe harbors for revocable trusts, other transfer types remain riskier and require strategic planning.

 

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