California Living Trust and Mortgage Debt

[JustJack1957]

What is the name of your state (only U.S. law)? CA

I am the trustee of my aunt's calif living trust. my question is a simple one. when she passes away, will the court require an estate sale to satisfy some of the mortgage debt that will remain? the estate does not contain liquid assets.

 

[HappyWanderer]

The note is a liability which must be paid. The bank may allow another to take the property and responsibility for the note, but it would depend on the credit of the beneficiary and the equity in the house. Otherwise, the note might be paid by a refinance. Your question isn't "simple" in that the whole needs to be looked at, but the holder of the note must be satisfied and the court might require liquidation of assets if something can't be worked out.

 

[tecate]

An advantage of a living trust is no court involvement unless a beneficiary wants it.

Most likely, the trustee can transfer the home to the beneficiaries subject to the debt. Check the contract for any acceleration clauses.

 

[HappyWanderer]

While I agree the Tecate, the vast majority of home loans have an acceleration clause. That's the problem.

 

[FlyingRon]

Regardless of whether there is an acceleration clause in the mortgage, if the beneficiary is a relative, the transfer of the asset to the relative pursuant to the death of the grantor can not invoke a due-on-sale clause. The fact that the asset is held in an in vivo trust for the deceased does not alter this.

That is, if you transfer the house to a relative, they have absolute right to continue paying the existing mortgage and keep the house.

 

[anteater]

Regardless of whether there is an acceleration clause in the mortgage, if the beneficiary is a relative, the transfer of the asset to the relative pursuant to the death of the grantor can not invoke a due-on-sale clause. The fact that the asset is held in an in vivo trust for the deceased does not alter this.

That is, if you transfer the house to a relative, they have absolute right to continue paying the existing mortgage and keep the house.

Blast! I was making the same response before I saw your's, Ron.

 

[HappyWanderer]

The Garn St. Germain Act provides due-on-sale does not apply in:

* (1) the creation of a lien or other encumbrance subordinate to the lender's security instrument which does not relate to a transfer of rights of occupancy in the property;
* (2) the creation of a purchase money security interest for household appliances;
* (3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
* (4) the granting of a leasehold interest of three years or less not containing an option to purchase;
* (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;
* (7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes 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; or
* (9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

Is the OP a relative of the aunt's TRUST?

Obviously, we don't get to use the tax theory of disregarded entity as inter-vivos trusts are clearly addressed in the act as an entity.

In fact, since it's not "illegal" to not notify the bank when a transfer occurs, some commentators use an inter-vivos trust as an artifice to sell property to a third party and keep the mortgage. Seller creates a inter-vivos trust with buyer as trustee and seller as beneficiary. Seller funds trust with property, loan can't be called by law. Seller assigns beneficiary status to buyer, who was already making payments as trustee. Bank has no idea in the change of ownership.

The due on sale clause could be called in the above instance, it's just that if the buyer or seller don't tell the bank, there is no way they'd ever know.

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Now that I read a bit more, it seems many reasonable commentators believe it would still apply to a trust to grantor relative. I'm looking for a citation or case, but I take back my disagreement.