Im sure this has been posted before, but I wanted some clarification about my specific case if someone could help. Lets say I buy a property in my name. Now, I transfer the Warranty Deed to a Land Trust whose beneficiary in an LLC. The sole members of that LLC (taxed as partnership) are myself and my wife (50/50). Now, in reading the Garn St. Germain Act, I note the following text in section 1701j-3 that seems to allow this:
(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
(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.
Doesnt (8) allow me to do this without violating the DOS clause of the mortgage??
I submit that the LLC is a legal entity in its own right. Transferring sole beneficial ownership to your LLC does trigger the DOSC because the borrower is no longer a direct beneficiary of the trust
You make an interesting point regarding whom the beneficiary of the trust is. It would seem that the letter of the law could be complied with if the trustee is the LLC and the beneficiary of the trust is the borrower.
Ok, I have been doing some more reading about Land Trusts and how they can be implemented to protect property from lawsuits. In my scenario, we simply bought the rental in our name and want to run everything through an LLC. Here is what I have come to understand given my original scenario:
Create Trust with Us as Beneficiaries and LLC as Trustee
Transfer Title to LLC
Run All Income and Expenses through LLC
The seems to conform to the Garn Act exclusion to the DOSC violation because we remain beneficiaries of the trust where the property is held. My understanding is that our beneficial interest in the Trust is now personal property and not subject to judgements. The Tustee could be sued and this property would be the only asset available to satisfy judgements.
I guess the only real issue is that the 1098 from the lender will come in our names, but I dont think it shouldnt be an issue to take this deduction in the LLC since it paid the mortgage.
title transfers to the trustee. the trustee owns the property on behalf of the beneficiary.
If you (grantor) are also the beneficiary, then you have not accomplished anything.
The law allows this to not violate the DOSC, because it is a revocable transfer to the trustee; you own the trust and direct the trustee. so you still retain control of the property.
you want the beneficiary to be an LLC, so that in the event your are sued, your stock “investments” can be awarded to a judgement creditor, but your personal property LLC membership cannot. thus your adversary cannot gain control of the company that is the beneficiary. I’ve written many times on this difference between corporate and LLC ownership.
The trust (a legal, no-registered entity) is the legal owner of record of the property; the trustee is caretaker of the trust as whose duties are defined in the trust agreement. Usually the beneficiaries retain power of direction for the trust. The beneficial interest of the trust is personal property. Even in the worst case, if it can be taken to satisfy a judgement, but it does NOT make the creditor the beneficary. In that case, the beneficiary would simply chose not to make any distributions and the new owner( creditor) of the benficial interest would have to pay tax on the value of the beneficial interest (under IRS revenue 77-137; I think that the right number); even if no distribution are made in that year.
with that said, the important thing is the to get or keep your name out of the public record; this makes it more difficult for potential plantiffs.
sure the judge can un-wind the trust, but the longer its been in place the more unlikely (although I have seen judges do some wacky things). this is why some people record a “friendly” lien against their a property. This way if the property is taken for a judgement, you can foreclose and get the property back (I have heard of one case where someone has successful done this).
I think most people agree that the trustee should be some type of corporate entity (LLC or otherwise). Whether use an LLC as the beneficiary seem to be a subject of debate. I personally don’t see any benefit. I would guess in most really nasty situations, the plantiff is going to attack the trust itself (get it dissolved) and whether you or your LLC is the beneficiary is a mute point.
There is no perfect answer; that’s the world of asset protection
not quite. the trustee is the owner of record, not the trust. The trustee holds legal and equitable title to the property. The beneficiary holds a beneficial interest only and directs the trustee in all trust affairs. The trust is simply the “vehicle” that allows all this.
If there is to be more than one beneficiary (husband and wife) then having the beneficiary be an LLC allows each beneficiary to be free of concern about the accidental or untoward misdeeds of the other (i.e., dealings that could otherwise easily involve the property’s title by either party’s creditor’s claims, tax liens, bankruptcy, legal actions in marital disputes, probate, etc.). This is because the LLC is not liable for actions of its members. Nor are members liable for actions of other members.
Mark, as always, thanks for you input. I was under the impression that the beneficial interest in a trust was considered personal property and could not be used to satisfy judgements. This must not be the case when its the same person as the grantor and why you suggested using an LLC.
We have a recognized expert on this topic here in Georgia named Dyches Boddiford, who teaches classes every couple of months. I think I will just wait and take his next class instead of cluttering up the forum…
OK, so what I understand from the conversation so far is that for maximum protection (if ther is such a thing) you should set up a Land Trust with an LLC as the Trustee and an LLC as the beneficiary. This will keep your name out of public records.
Question:
Can the same LLC be both the Trustee and Beneficiary of the Trust ?
you use the LLC as beneficiary because members aren’t liable to other members. Otherwise, multiple beneficiaries would have trouble if, say, one filed bankruptcy, had a legal claim, died, whatever. Having a direct beneficiary tied up with a problem could tie up the property. If the beneficiary is an LLC, a member with a problem doesn’t encumber the LLC or the property.
the interest of the beneficiaries under a land trust is personal property, and since the trust agreement expressly precludes the vesting of any legal or equitable right in a beneficiary, partition is not available to a creditor.
You want a completely seperate, third-party trustee. there are companies that do this. some recommend an atty as trustee.