Posted by Bill Gatten on January 22, 1999 at 14:05:08:
JP, I tried to post this to your inquiry, but it wont take.
JPiper,
Thank you! Thank you! Sometimes, trying to get this idea across is like trying drag a dead elephant over land on eight-pound test fishing line. If folks understood it, there would virtually be no need for the risks inherent in so many Creative RE Financing schemes: who?s going to cloud title? Who?s going to get the property embroiled in their own law suits, martial disputes or BK?s? What will the lender do if the DOS is violated? Can the ?buyer? be evicted for non-payment, in lieu of expensive and lengthy judicial processes? Will income tax be due on gain at inception? Will the 180-day Exchange window be overshot by the time the sale occurred (as happens in many Lease Options, Equity Shares, etc.)? Etc., etc.
In answer to your questions:
QUESTION: Why does your program involve sharing the (at least “some”) beneficiary interest (a several-sided answer is required here):
ANSWER:
#1) Bear in mind that 99% of our ‘initiating’ clients are Realtors and Sellers. They come to us for consultation documentation, guidance, provision of the trustee, collection/disbursement services, etc. They (rightly or wrongly) almost always see the ?Due-on-Sale Clause? as singularly the most important obstacle to L/O’s, AITD’s, Land Contracts, Equity Shares, and the like. However, the fact of the matter is that in our program?The “PACTrust™”?the DOS is not affected, and it?s easy to explain, document and put the client at rest: the Seller needs merely retain “some” interest in THEIR OWN [land] trust. If the trust is in their own name and is inter-vivos, and majority voting rights are not relinquished (and no Release of Liability is requested): then they haven’t sold the property: only a personal property interest in their estate). Therefore, they retain control and full voting rights throughout the term of the Agreement… and the DOS is not violated in the process (FDIRA 1982). Understand that the 3rd party trustee is the legal owner, and may not, by law and contract, respond to any direction of any beneficiary unless all beneficiaries are 100% in accord (this protects the title, the property and both [all] of beneficiaries against any untoward actions of the other/s).
#2) On audit, the IRS will not recognize a land trust, or any ownership benefits in one, wherein a beneficiary holds LESS than 10% of the beneficiary interest (Keno on Trusts, IICLE, 1989). This limits the number of land trust beneficiaries to 10, in order to remain beyond the fray of the SEC (12 to 15 participants, I believe), and prevents confusion with failed REIT’s [i.e., investment trusts with less than 99 participants], etc. 100% transference of beneficiary is legal, of course, but it does nullify all the control and protection between parties (and, too, it does violate the DOS, whether it?s important or not, and it triggers property tax reassessment? and?in some jurisdictions?reconveyance tax and expense).
#3) The County or state (all that we know of anyway: see a states R&TC on the issue) requires that no more than 50% of a living trust’s voting rights be relinquished, if property tax reassessment is not to be effected, and if [re]Conveyance Tax is not to apply.
Therefore: If one wanted to create what is tantamount to an AITD?he/she would merely structure the PACTrust? so that the seller relinquished all of his ownership to the buyer (at the end), in consideration of, say, ?strict adherence to contract terms and a prompt paying record.? On the other hand, if one wanted to accomplish the objectives of an Equity-Share, then they would make the ownership 50:50 (75:25, or whatever) with an agreement to share profits at the end in the same proportions as the interest held…without forfeiture. Still, if one wanted to use it to shield the objectives of a Lease Option, the same transaction would be structured so that at termination, the resident beneficiary has the right to acquire the property at some predetermined amount. Such specific buy-out, of course, would have to be by "Silent Rider,? because ?predetermination of a purchase price? triggers IRS characterization as a Contract of Sale, a ?Partnership, a Corporation, or in the least, a disguised Security Agreement.
YOUR QUESTION: I keep reading that you always assign your “buyer” a portion of the beneficial interest, ranging between 10-50%. Then later, you forfeit your beneficial interest to the resident beneficiary when he buys the property from the trust. My question is: What dictates the percentage of beneficial interest that you assign your buyer? What difference does it make whether it is 10% or 50%? Is there any implication to the particular percentage assigned?
ANSWER: Generally the percentage of ?split? dictates how much of the profit is going to be shared (if any) at the end of the Agreement (50:50, 80:20; etc.). However, if forfeiture is to occur at the end, it doesn’t matter, as long as the mortgagor retains at least a 10% beneficiary interest. The fact is that a 25% RESIDENT BENEFICIARY could be designated to receive 100% of the tax write-off; 30% of the appreciation, 50% of the voting rights throughout the Agreement, and 100% of the loan?s principal reduction upon sale. At the same time, irrespective of the percentage of beneficiary interest held, the NON-RESIDENT BENEFICIARY retains access to any percentage of profit share he/she would dictate at inception, as well as 100% of the passive loss (Depreciation) and 50% of the voting rights throughout the Agreement.
In closing, remember that the 3rd Party Co-Beneficiary Land Trust Conveyance (which we refer to as ?The PACTrust??is designed primarily as a Legal Shield to protect virtually ANY aspect or objective of Creative RE Financing that you can think of.
Here are just a few (I could list a hundred more):
Buy Now ? Finance Later
No Money Down Acquisition
No Bank Qualifying Acquisition
No Credit: Minimal Cash Acquisition
Elimination of Neg. CF and Costs in Income Property Ownership
Nothing Down: Nothing Per-Month Income Property Ownership
Seller Assisted Bridge Financing, without Credit Qualification
Seller Assisted Carries, without Due on Sale violation
Objectives of Equity-Share, Lease Option; Land Contract; AITD Acquisition, without DOS Viol or undue Risk and Legal exposure
Income Tax Deferment without a 1031 Exchange
Conversion of Residential Property to Income Property for Tax Treatment
An Excellent Alternative to Foreclosure and/or Short Sale (Offer in Compromise)
A Way to Lease with a Tax Write-Off for the Tenant
A Way to ?Sell? Tax Write-Offs
A Way to Obtain Future Profits NOW, by Trading for Homeownership Benefits for Higher Rents
Respectfully,
Bill