Hello, good day to all reading the post, I have some questions regarding the Due on Sale Clause, Limited Liability Company, Nars Trust and parties that are the beneficiaries in the Land Trust.
I was reading some material from another subject posted regarding transfering properties to the L.L.C., Land Trust and the due on sale clause. If I am trying to clarify my understanding about this process.
A person can quitclaim a special warranty deed or quitclaim deed to their L.L.C.
Transfering the deed from your name personally to the Limited Liability Company may be a breach of the due on sale clause.
If the investor deeds the property to the L.L.C., he might be able to circumvent the Due on Sales Clause by retaining a 10% beneficiary interest and allowing the L.L.C. to retain a 90% beneficiary interest in the property.
My question is the following?
Upon transferring the property from your personal name to the L.L.C., to avoid breaching the Due on Sales Clause, is it prudent for you and your L.L.C. to remain co-beneficiaries in the Trust
example-investor-10%
L.L.C.-90%
or
Can the trust scenario only have co-beneficiaries(with respect to the following percentages) if the trust is a NARS trust?
You asked" “My question is the following? Upon transferring the property from your personal name to the L.L.C., to avoid breaching the Due on Sales Clause, is it prudent for you and your L.L.C. to remain co-beneficiaries in the Trust example-investor-10% L.L.C.-90%
or Can the trust scenario only have co-beneficiaries(with respect to the following percentages) if the trust is a NARS trust?”
You have it right. First place the property into the trust and name your Trustee. Then retain 10% and transfer 90% to your LLC. You are not in violation of the DOSC and you can assign beneficiary interests as you choose. The percentages are not important except that the minimum share allowed by IRS regulations is 10%. You can divide your beneficiary interests any way you like.
What our attorney friend is missing is that most DOSC’s say that a “transfer of a beneficiary interest in a trust is a violation of the DOSC”. That is what he is reading and they do say that. However if he would read further he would see:
UNLESS PROHIBITED BY APPLICABLE LAW
which it is by Federal law, specifically the Garn-St. Germain Act of 1982 which was passed by Congress. Thus, no DOSC violation – EVER.
Thank you for the prompt response mtnwizard. Just to clarify my understanding, the trust scenario is only legitimate if the land trust is a NARS trust. The co-beneficiary scenario cannot exist if the trust is a basic land trust. If I am incorrect in my statements, please correct. Also, thanks for the good wishes.
No, this is not true. You can do this with a basic land trust. I prefer the NARS trust, not because I sell it as some people claim, but because all documents are reviewed by both their accounting and legal staff, and because they use Equity Holding Corporation as their non-profit corporation trustee. I believe you get what you pay for and I want to use the best professionals when I am protecting my most valuable assets. What you pay in costs, you simply pass on to your tenant as part of your closing costs so the cost to you is a net zero.
Thanks again for the information mtnwizard, I have two more inquiries regarding this subject.
If the investor in this scenario opted to transfer 100% of his beneficial interest to the L.L.C., he could risk the lender calling the complete loan due.
What are the tax considerations that an investor needs to be aware of as it relates to the percentages of the co-beneficiaries in the land trust?
1 - Yes
2 - I am not a tax expert but it is my understanding that your tax benefits are in proportion to your percentage of trust ownership, with the exception that he who pays the mortgage interest gets the writeoff.