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Garn-St Germain and Your Estate Planning

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Garn-St Germain

Last week in this space we wrote about Arizona’s beneficiary deed option. The Arizona law allows you to set up an automatic transfer on death for real estate. No probate, no complications. There are things to look out for, of course, but it can work for many people. One thing you should know about: Garn-St Germain.

But one persistent concern needs to be addressed. You may know about “due on sale” clauses in mortgage contracts. They typically say that you owe the entire balance on your mortgage if you sell or transfer the underlying property. So does that mean signing a beneficiary deed — or transferring your property into a trust — can mean your entire mortgage comes due?

Enter Garn-St Germain!

In a word, no. That’s because of something called the Garn-St Germain Depository Institutions Act of 1982. It’s a federal law (so it applies in every state and territory). It prevents application of due-on-sale clauses in a number of settings.

First, a little history. Due-on-sale clauses have been around forever. They allow banks to force payment of mortgages when the borrower sells their property. For a long time, they also allowed (but did not require) banks to force payment or renegotiation when the owner transferred property to a living trust, or added new joint owners.

By 1982, inflation was squeezing banks across the country. They had to pay more in interest to depositors than they were making on their old portfolios of loans — including home loans. In general terms, banks began being more aggressive about enforcement of their due-on-sale clauses. That didn’t necessarily mean that the banks wanted to force sale of mortgage properties — they would be happy to negotiate new loans, at higher interest rates — for qualified owners.

In 1982, Utah Senator Jake Garn and Rhode Island Congressman Fernand St Germain teamed up to write an expansive new law governing lenders. Their law, dubbed the Garn-St Germain Depository Institutions Act, and signed by President Reagan in 1982, made a number of changes. It introduced adjustable rate mortgages. It removed interest rate limits on banks and savings and loans. And it prohibited lenders from exercising their due-on-sale clauses in a number of situations.

An interesting aside: Rep. St Germain never used the period after “St”. He said he wasn’t a saint, and had no pretensions to the title. The period regularly creeps back into the name of his eponymous law.

Exceptions added by Garn-St Germain

The due-on-sale portion of the 1982 law is contained in 12 U.S. Code §1701j-3. It says that lenders can use and enforce due-on-sale clauses, regardless of state law or judicial decisions. But it carves out a number of exceptions to the general rule.

For loans made against residential real estate, the lender may not force a sale upon transfers in nine specific circumstances:

  1. Creation of second mortgages
  2. Purchase money liens for household appliances
  3. Termination of joint tenancies
  4. Leases of less than three years (even if renewable)
  5. “A transfer to a relative resulting from the death of a borrower”
  6. Transfers of ownership to spouse or children of the borrower
  7. Divorce or legal separation settlements or court orders
  8. Transfers into an inter vivos trust if the borrower is a beneficiary
  9. Other transfers approved by the relevant federal agency

There are also exceptions to the exceptions (like for reverse mortgages). But that’s the basic lay of the Garn-St Germain landscape.

One thing to note: Garn-St Germain applies to residential property only. But that doesn’t mean you have to live in the property, and it can be up to a 5-unit apartment complex and still qualify.

Applying these principles

A few common scenarios:

  1. You sign a beneficiary deed, naming your three children as successors to the property. The beneficiary deed is not a transfer at all. After your death your kids become owners of the property automatically. Because they are relatives, there is no problem with the bank’s due-on-sale clause — assuming that it is not a reverse mortgage.
  2. You owned a home before you got married. Now you want to add your new spouse as a joint owner. No problem — the due-on-sale clause is no impediment. Of course, it might not (or might) be wise to make the gift to your spouse. We’re not judging.
  3. After you signed your revocable living trust, you transferred title to your house into the trust. No problem! Maybe you decided to sign a beneficiary deed, which would automatically transfer your home into the trust’s name on your death. Still no problem!
  4. Rather than mess with lawyers, you’ve decided to just put your daughter’s name on the deed to your house (despite our regular admonition: JUST DON’T DO THAT!). The good news: your mortgage isn’t automatically due. The bad news: you just made a foolish mistake that can’t be undone. But that’s a separate issue.
  5. Unfortunately, you’re getting divorced. As part of the settlement, your (now former) spouse transfers one residence into your name. But you’re no longer a relative, so does that means you have to pay the mortgage immediately? No. A transfer as part of the divorce settlement is protected. Of course, your spouse is still named on the loan, and that might be an issue — but it doesn’t prevent the transaction, at least.
  6. Your parents just died, and you inherited their house. Do you still have to pay the mortgage? Well, of course you do — but you don’t have to pay it all off immediately. You’re a relative who received the property by death of the owner. No due-on-sale clause enforcement! (Note: if your parents gave the house to you during their lives, the answer might be different.)

It’s all relative….

Remember that transfers to “relatives” are protected by Garn-St Germain. Unfortunately, the law doesn’t contain a definition of “relative.” The good news: because banks have gotten out of the habit of seeking enforcement of due-on-sale clauses, they’re probably predisposed to read “relative” expansively. Spouses, children and grandchildren are all clearly relatives. But what about step-children, or nieces/nephews? They are likely to be covered, as well — but it is less clear.

If this is your situation, you might want to talk with your estate planning attorney about the mortgage/deed of trust on your property. Are you planning on leaving property to relatives other than spouse and descendants? You might want to confirm your lender’s view of the enforceability of their due-on-sale clause. If your mortgage was written after 1982 it might even spell out what it thinks it can cover.

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Robert B. Fleming


Robert Fleming is a Fellow of both the American College of Trust and Estate Counsel and the National Academy of Elder Law Attorneys. He has been certified as a Specialist in Estate and Trust Law by the State Bar of Arizona‘s Board of Legal Specialization, and he is also a Certified Elder Law Attorney by the National Elder Law Foundation. Robert has a long history of involvement in local, state and national organizations. He is most proud of his instrumental involvement in the Special Needs Alliance, the premier national organization for lawyers dealing with special needs trusts and planning.

Robert has two adult children, two young grandchildren and a wife of over fifty years. He is devoted to all of them. He is also very fond of Rosalind Franklin (his office companion corgi), and his homebound cat Muninn. He just likes people, their pets and their stories.

Elizabeth N.R. Friman


Elizabeth Noble Rollings Friman is a principal and licensed fiduciary at Fleming & Curti, PLC. Elizabeth enjoys estate planning and helping families navigate trust and probate administrations. She is passionate about the fiduciary work that she performs as a trustee, personal representative, guardian, and conservator. Elizabeth works with CPAs, financial professionals, case managers, and medical providers to tailor solutions to complex family challenges. Elizabeth is often called upon to serve as a neutral party so that families can avoid protracted legal conflict. Elizabeth relies on the expertise of her team at Fleming & Curti, and as the Firm approaches its third decade, she is proud of the culture of care and consideration that the Firm embodies. Finding workable solutions to sensitive and complex family challenges is something that Elizabeth and the Fleming & Curti team do well.

Amy F. Matheson


Amy Farrell Matheson has worked as an attorney at Fleming & Curti since 2006. A member of the Southern Arizona Estate Planning Council, she is primarily responsible for estate planning and probate matters.

Amy graduated from Wellesley College with a double major in political science and English. She is an honors graduate of Suffolk University Law School and has been admitted to practice in Arizona, Massachusetts, New York, and the District of Columbia.

Prior to joining Fleming & Curti, Amy worked for American Public Television in Boston, and with the international trade group at White & Case, LLP, in Washington, D.C.

Amy’s husband, Tom, is an astronomer at NOIRLab and the Head of Time Domain Services, whose main project is ANTARES. Sadly, this does not involve actual time travel. Amy’s twin daughters are high school students; Finn, her Irish Red and White Setter, remains a puppy at heart.

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Matthew M. Mansour


Matthew is a law clerk who recently earned his law degree from the University of Arizona James E. Rogers College of Law. His undergraduate degree is in psychology from the University of California, Santa Barbara. Matthew has had a passion for advocacy in the Tucson community since his time as a law student representative in the Workers’ Rights Clinic. He also has worked in both the Pima County Attorney’s Office and the Pima County Public Defender’s Office. He enjoys playing basketball, caring for his cat, and listening to audiobooks narrated by the authors.