I’ve heard a lot of recent rumbling from clients about banks and mortgage servicers that are just plain uncooperative and unreasonable when it comes to transferring property into an asset protection trusts. Banks seem to be doing a good job scaring people who want to refinance their homes.
A Typical Asset Protection Funding
Most scenarios go something like this: A client holds title to her home in the name of an asset protection trust. She decides to refinance while rates are at historic lows. The bank, however, has other plans. The bank offers to refinance but only on the condition that the trust be amended to erode all of its asset protection features. It would actually be worth considering if lenders just wanted to give themselves more rights in the asset protection trust, but in most cases they insiste on completely obliterating the trust, which would open it to all future creditors. That is simply unacceptable.
My clients are savvy, so they have a better idea. Many clients simply remove the home from the asset protection trust and then refinance it. That used work just about ever time, and lenders never complained. Recently, however, lenders have been successfully scaring my clients by stating that if the home is ever deeded back to the asset protection trust, the due-on-sale clause will be triggered. Effectively, that means that the bank can accelerate the loan. In other words, they can force you to pay off the entire mortgage immediately.
It’s usually at this point that the client calls asking for help. In most cases, the bank’s behavior seems pretty insane to me. Financing a home held in an asset protection trust does not impair the bank’s rights and security interest in the home at all! It simply keeps your other creditors away from the home. In short, bank are massively wasting everyone’s time by making this an issue.
Federal Law Supports Asset Protection Trusts
The solution to the due-on-sale clause dilemma can be found in federal law. The Garn St. Germain Act, which states that a due-on-sale clause cannot be triggered when real estate is transferred “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 other words, it would be unlawful for a bank to carry out the threat of triggering a due-on-sale clause if you deed your property into your asset protection trust.
How to Proceed When You Refinance
There is a simple formula you can follow when you want to refinance your home that’s held in an asset protection trust:
- Deed the home into your personal name.
- Refinance with your bank.
- Deed the home back to your asset protection trust, regardless of whether the bank tried to scare you with a due-on-sale clause scenario.
- If the bank does try to call your loan early, pass your lender a copy of the Garn St. Germain Act!