I have several investment properties that I purchased in my name. I also have a Living Trust set up for my family with myself established as the Trustee. If I removed my name on the deeds and transferred title on my properties to my Living Trust, does that trigger the Due on Sale clause in my mortgages? Is there any strategy or technique available to transfer title to another entity without triggering the due on sale clause?
Thanks
The lender is expressly forbidden by law from exercising the due on sale clause in this case.
Thanks for the quick reply. Does the Family Living Trust shield me from personal liability? In other words, if I’m sued individually by someone in relation to my investment properties does the existence of the Living Trust protect me from being personally liable to a third party?
What about foreclosure proceedings by a lender? How would it work if the title of the property is no longer in my name but is in the name of the Living Trust? Could a lender go after other properties held in the name of my Living Trust?
The trust will not protect you from foreclosure, other wise everybody would have a trust and banks would go broke. If your trust is penetrated by a lawyer they will have acces to the other properties in the trust . some investors have a max dollar figure for value they put in each trust others put each property into seperate trusts. How much protection do you need.?
Darin
Grantor trusts provide no protection. The only way to protect assets from personal liability is to lien them or give them away. If you give away too much, then the transfer becomes fraudulent and is subject to undoing by the courts. If the transfer was made to delay, hinder, or defraud a creditor from collecting a valid debt, then the transfer is also fraudulent and subject to undoing by the courts. This includes future, unknown creditors who have a claim due to some unknown, future action you take.
Fake liens do not work either. They must be registered and cash must exchange hands
Liens go with the asset. Lenders have a right to take the asset if the borrower violates the debt agreement. In most cases, the debtor is also personally liable for the loan.
Separate trusts, LLCs, ect. are a waste of time and money and don’t protect anything held in the entity. Two entities, UCC liens and equity stripping provide better protection and work in the case where all the separate entities are merged together, undoing all the separation and making all the assets available to creditors.
[i]I have several investment properties that I purchased in my name. I also have a Living Trust set up for my family with myself established as the Trustee. [/i]YOU SHOULD NEVER BE BOTH A BENEFICIARY AND TRUSTEE. IT IS A VIOLATION OF THE DOCTRINE OF MERGERS INVALIDATING THE TRUST IF IT SHOULD BE CHALLENGED.
[i]If I removed my name on the deeds and transferred title on my properties to my Living Trust, does that trigger the Due on Sale clause in my mortgages?[/i]NO.
[i]Is there any strategy or technique available to transfer title to another entity without triggering the due on sale clause? [/i]YOU ARE NOT IN VIOLATION OF THE DOSC AS LONG AS YOU RETAIN A 10% BENEFICIARY OWNERSHIP. UNLIKE A LAND TRUST, WHERE REAL PROPERTY IS CONVERTED TO PERSONAL PROPERTY, AND TITLE IS HELD BY YOUR TRUSTEE WITH ALL SUBSEQUENT TRANSACTIONS LEGALLY UNRECORDED AND THE IDENTITY OF BENEFICIARIES UNDISCLOSED, ALL TRANSACTIONS WITH A FAMILY TRUST ARE PUBLIC RECORD. IF YOU TRANSFER FULL TITLE, YOU ARE IN VIOLATION OF THE DOSC.
Please excuse the all caps, but I wanted to make the answers easily read and apart from the questions.
Thanks for information. I truly appreciate it!
[
[/quote]
Separate trusts, LLCs, ect. are a waste of time and money and don’t protect anything held in the entity. Two entities, UCC liens and equity stripping provide better protection and work in the case where all the separate entities are merged together, undoing all the separation and making all the assets available to creditors.
[/quote]
What is a UCC lien and equity stripping ? Why doesn’t a trust, LLC protect any thing in the entity ?
Thanks , Darin
For the record, trusts, LLCs, etc. do work and have their place. I’m saying that using them to protect property leaves some holes.
Equity stripping is nothing more than using mortgages to extract (i. e. strip) value from real property. The term usually implies using related companies to make loans between each other, but it also applies to using a mortgage in the traditional sense with a non-related lender. Most people mean related equity stripping when they use the term.
Equity stripping use a lender entity to place real liens on the property held in the entity that manages the property. The liens prevent a creditor from getting access to the entity’s assets because the lien holder gets paid before the creditor. Many times, it is set up with liens in excess of 100% of the property equity, which is not the case with traditional lenders. In fact, many lenders won’t lend more than 80-90% of the property value. Equity stripping protects 100% of the equity with only 2 entities. If a creditor gets smart and manages to put a lien on the property. The lender can foreclose on the note and the creditor’s lien will be removed by the foreclosure action.
It is superior to the separate entity approach because the separate entity approach does not protect the assets in the entity. Any equity in the entity is available to satisfy judgements against the entity. Even one LLC, trust, etc. per property has this issue. There is a cost issue in a place like CA that charges $800/year for each LLC and there is also tax reporting and accounting for each entity. That can become a hassle very quickly. Equity stripping only has the maintenance and costs of 2 entities regardless of the number of properties involved.
The loans are usually 30 day demand notes with no payments due until the lender calls the loan. Keep in mind that a real closing is required and actual cash must exchange hands. This is not some kind of fake scam. It is a real loan with real terms and real money. Interest payments to the lender entity are tax deductible to the managing entity, but income to the lender. It become a wash when the lender and managing entities are LLCs owned by the same tax payer. I don’t like this approach because there are legal theories that can be used to merge the two entities together and wipe out the loans. My personal choice is to use a c-corp, which is not owned by the people/entity that own the managing entity.
It is a little more complicated than what I have described, but that is the general idea. Some folks use IRA money to do the equity stripping so that the loan payments end up in Roth IRA where they are never taxed. The interest payments to the lender can be used to create tax deductible expenses like a private health care plan, employee benefit association, or private retirement plan. Another twist is to actually use 3rd party lenders to get the cash and invest the proceeds in life insurance that has returns in excess of the cost of the loan. Life insurance has statutory protections that are much more powerful than those of LLCs and other entities. This kind of set up requires professional advice because there can be adverse tax implications if not done properly.
A UCC lien is a mortgage for personal property, like jewelry, cars, etc. In the case of asset protection, UCC liens are placed on shares in corporations or LLC membership interests so that in the case the individual has a personal judgement, the creditor cannot take the assets.
WOW …must print and digest.
Why would it be ilegal for the lender to execise the “due on sale clause”??
Because the law says so.
To be specific, the law says that if you sell your property subject to and transfer title to your buyer, you are in violation of the DOSC and the lender has the right to call the loan due within 90 days. Has it happened? Yes, in rare cases. In today’s market it is highly doubtful that a lender would call a performing loan.
The law further states that the way to legally utilize the sub 2 method, is for the property to be placed in trust and the seller retain at least a 10% beneficiary interest in the trust. The Seller can then legally lease the property for less than 3 years and without an option to buy. My leases run 2 years, 11 months, and the tenant/buyer has the right of first refusal to purchase the property at FMV upon lease termination. Those are the criteria for exemption from the DOSC.
with interest rates going up wouldn’t it be more likely they would exercise it.
They would call the loan, much like they did with impunity in the 1980’s, once the interest rates got high enough so that it would be profitable for them to do so. At the present time, those conditions do not exist.