The Garn-St Germain Act: An Overview

The Garn-St Germain Depository Institutions Act of 1982, also known as the Garn-St Germain Act or simply 'the Act,' played a transformative role in savings and loan associations. Passed in 1982 and named after its sponsors, Senator Jake Garn and Congressman Fernand St Germain, this law diversified the activities of these associations beyond residential home mortgages, paving the way for commercial lending and other investments.

Impact on Estate Planning

A key component of the Act pertains to the 'due-on-sale clause,' a provision in mortgage agreements. This clause allows lenders to demand full loan repayment if the property is sold. The Act, however, provides exceptions to this clause, particularly relevant when an inherited property is involved.

Heirs who choose to reside in an inherited property can, under the Act, assume the existing mortgage without needing to requalify for the loan under their own credit. This provision presents a significant advantage for heirs who might face an immediate financial burden of paying off a mortgage in full.

Read more: When Should I Put My Home in a Trust?

Details and Nuances

Despite its apparent straightforwardness, the Act comes with intricate details. It doesn't explicitly define who qualifies as a 'relative,' leaving room for interpretation. Additionally, the Act also extends protection against the due-on-sale clause when a home is placed in a revocable living trust. In case of a divorce or separation, an ex-spouse receiving the property as part of the divorce decree or separation agreement can assume the mortgage without triggering the due-on-sale clause, provided they intend to live there.

Types of Loans Covered

The Garn-St Germain Act generally pertains to 'federally related mortgage loans,' including residential mortgage loans made by federally regulated financial institutions, or loans insured or guaranteed by the federal government. Commercial loans, loans made by private individuals, and some types of seller-financed loans are typically not covered.

Conclusion

The Garn-St Germain Act is an essential tool in estate planning, offering flexibility and protections crucial when dealing with an inherited property. As every case is unique, professional advice is advised for particular situations.

Read more: Avoiding the Tax Trap: Navigating Property Transfers and Trusts

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