As a Houston estate planning attorney, one of the questions I often get from clients is how to transfer a personal residence to a Texas revocable living trust. One of the concerns clients have is regarding the “due-on-sale” clause that is contained in virtually every mortgage. The due-on-sale clause in a mortgage contract usually states that if the owner of the property transfers any interest in the property without the consent of the lender, that the entire unpaid balance of the mortgage is immediately due (also known as being “accelerated”). Since one of the most common purposes of using a revocable trust in Texas is to avoid probate, it is usually necessary to transfer a personal residence to the revocable living trust in order to avoid having the residence treated as a personal asset? So, how does a person transfer a personal residence to their Texas revocable living trust without triggering the due-on-sale clause?
Under federal law, due-on-sale provisions are regulated by thet Garn-St. Germain Depository Institutions Act of 1982 (Garn Act). Generally speaking, the Garn Act prevents a lender from enforcing a due-on-sale clause in a mortgage when a personal residence is transferred to a revocable trust where the borrower is a beneficiary and the home is occupied by the borrower. So, the due-on-sale clause will generally not be enforceable so long as the property is “residential property” and the borrower occupies the residential property. For purposes of the law, “residential property” means “any real property which contains at least one but not more than four housing units.” If the residential property is not occupied by the borrower or if the property is commercial property, then it will be necessary to get the permission of the lender prior to transferring the property to the trust, which could prove difficult if interest rates have risen since the inception of the loan.
There may be other concerns involved that affect the decision whether to transfer your personal residence to a Texas revocable living trust. One of these concerns involves Medicaid eligibility. Generally, your personal residence is an exempt asset for Medicaid eligibility purposes, and is not considered when determine your countable resources. However, when a personal residence is placed inside a revocable living trust, it loses its exempt status for Medicaid purposes and is treated as a countable resource, which often results in a loss of Medicaid eligibility. In order to remove the residence as a countable resource, it will often need to be transferred out of the trust back to the owner.
Another concern involving transferring your personal residence to a Texas revocable living trust is the exemption for property tax. In Texas, property that qualifies as a homestead benefits from tax exemptions, including an exemption that limits the increase of the taxable value of the property from one year to the next. While it is not difficult to transfer your personal residence to a Texas revocable living trust and maintain your homestead exemption, the trust must meet certain criteria in order to be a “qualifying trust” under the Texas Property Tax Code. Before deciding whether you should transfer your home to a revocable living trust, you should speak to a qualified Texas estate planning attorney.