Posted by Alex Gurevich, TX on April 01, 1999 at 08:28:20:
Jim,
I see your point about the option. I wonder if it could be remedied by having a provision in the option that it can be cancelled if the loan is called and the option money to be returned to buyer.
I do agree with you that Ron in his courses does project a desire to work out problems of this nature whenever possible, not to walk away and leave buyer or seller cleaning up the mess.
Land Trusts: Changing Beneficial Interests - Posted by Bill K. (AZ)
Posted by Bill K. (AZ) on March 28, 1999 at 17:44:31:
Hi All!
Thanks for taking a moment to read and respond to this post.
I am about to present an offer “subject to” the existing first mortgage. However, the existing loan is in default. I’m going to reinstate this loan, but I wish to leave it in place upon sale. Hence, I’m trying to avoid the “due on sale” clause.
Several folks suggested using a Land Trust. Sounds good. I’ve read up on it, but I’m not sure of the order of things. Here’s what I think.
Question: How do I ensure that step 5 occurs, and where should it occur in the process?
It appears that a change in beneficial ownership shouldn’t occur until AFTER the title is transferred into the trust. Is that correct? In other words, the “due on sale” clause couldn’t be enforced at closing since the beneficiary is still the owner at that time.
Am I on the right track, or am I missing something here?
Bill K. (AZ)
Re: Land Trusts: Changing Beneficial Interests - Posted by Bill Gatten
Posted by Bill Gatten on March 29, 1999 at 16:02:47:
As some random (and hopefully helpful) comments on all the other replies that you’ve received, may I add the following for whatever it may be worth.
Transfer of a beneficiary interest in a land trust is NOT prohibited by verbiage in a mortgage document… what it says is that IF the borrower is NOT a “natural person,” then no interest in borrower may be sold or transferred. Therefore, if you are a “natural person,” then this doesn’t apply to you, does it?
Anyone creating a land trust would be poorly advised if told not to add a co-beneficiary (transfer a partial beneficiary interest to another) in order to protect the property from legal actions and threats (re. non-partitionability of personalty by judgement creditors).
Transfer of the entire beneficiary interest would likely be seen as a breach of the Due-On-Sale admonitions, in view of the resulting divestiture of voting rights (i.e., “Power of Direction”) and loss of control over the affairs of the lender’s security.
A land trust, by its very nature, is solely directed by its beneficiary/ies. Therefore becoming the trustee of a land trust does not give one more control, any more so than if Joe Doakes were named the trustee. A trustee must do what the beneficiaries say or be [very easily and quickly] replaced: note though that a trustee more in cahoots with one beneficiary than the other could be troublesome (ergo, a 3rd party non-related corporate entity is best: bank, trust co., title co., etc.).
Naming an individual as trustee, rather than a corporation is highly unadvisable, as the entire trust and its corpus could become entangled for months or years in the trustee’s personal problems, law suits or probate proceedings with no way out.
A far as insurance (hazard and title) is concerned, when the owner/mortgagor places its property into a bona fide land trust, the insurance follows to the trust (Probate Law) and whomever the beneficiary is (ies are), is thus fully insured. It’s prudent, of course, when there are unrelated beneficiaries to have a clear understanding of how moneys from the insurer to the trust will be disbursed to (or among) the beneficiaries.
Remember, that the land trust is, in the eyes of the governmnt, a potentially troublesome vehicle and is very cautiously viewed and scrutinized by taxing authorities. 'Just got through an audit myself, as a matter of fact: had I violated any of the basic tenets or guidelines re. such vehicles, I’d have been in some deep kimshee (sp?). Contrary to what I see here on CRE at times, it is my clearest understanding that a land trust is highly likely to be failed and treated as a partnership, corporation, association (taxed as a corporation) or a disguised Security Agreement by the IRS, if any of the basic tenants and nuances of what delicately constitute an (Illinois-type) land trust are compromised.
Concerning transfer or assignment of beneficiary interest in a land trust, it’s only a matter of directing the trustee to note (add or replace) the new beneficiary. Addition or substitution of a land trust beneficiary is just as valid when written on a paper napkin with a tube of lipstick, if constructively delivered to the trustee.
Be careful with the advice you get, much less that which you take. An IRS recapture of tax benefits after 2-3 years, in what you “think” is a land trust, can be costly.
Bill
My way might not be for anyone else, but here it is: - Posted by John Katitus
Posted by John Katitus on March 29, 1999 at 24:51:21:
There are a couple things that I do to make the transition easier. Be advised that some people here will disagree:
The Trust Agreement has a space to name the Beneficial Interest. The existing owners’ name(s) go there, with a sum of 100% interest. If the bank, insurance company, or anybody else requires information about the Trust, you show them the Trust Agreement ONLY, and ONLY if you HAVE to. Assignment of Beneficial Interest is a separate form and does not get recorded or shown to anybody. No entries are made on the Trust Agreement when the Beneficial Interest is assigned, so it will always show the old owners as the Beneficial Interest. The due on sale clause is ONLY violated IF the beneficial interest changes. That is the ONLY way the loan could be called. Transferring into Trust is a right by federal law.
I make myself the Trustee. This keeps any third parties from mucking things up and puts me in complete control. Changing Beneficiaries is not a big deal, and can be done any time. In this stage I am not too concerned with anybody finding out that I’m the Trustee of the property, as they wouldn’t necessarily infer that I also hold the beneficial interest.
By being the Trustee, there are never any questions about why I am doing things. I personally take the signed deed to the Recorder’s Office. The letter to the insurance company, signed at closing by the old owner, says that the property is transferred into a Trust and that I, as Trustee, should be named on the policy. The letter to the mortgage company, also signed by the old owner at closing, tells them that the property is transferred into a Trust, that I am Trustee, and that they should address anything involving the mortgage to me and they will receive all future payments from me.
The only part the Title Company takes is to do the title search, get a mortgage payoff, and issue title insurance. I print all the forms and letters on the computer, get them signed, and send and file them as required. I might have the title company do this if they understood it. As it is, it’s easier and causes less anxiety for the old owners to do it at the kitchen table.
The one thing I don’t do, but probably should, is have them sign a cya letter about me not promising to make the payments. If I were the owner, I would balk immediately when I read that. Also, when I buy subject to, it is my obligation and I have every intention of making the payments. If you don’t, the letter might be a good idea. I’m not sure legally how obligated you are by buying subject to, and suspect someone would have to go to court and spend a lot of money to make you make the payments.
Feel free to email me for details. John
Re: Land Trusts: Changing Beneficial Interests - Posted by Jackie in Dallas
Posted by Jackie in Dallas on March 28, 1999 at 22:45:23:
There are a few other documents I use and that Ron LeGrand recommends in his course:
send a letter (signed by the seller)to the mortgage company notifying them that the deed to the property has been transferred to a Land Trust for “estate planning purposes” and any further correspondence should be directed to the trustee at such and such address and phone number ( could be your po box) - I also incluse the trustee’s signature for the mortgage company’s records
have the seller sign a CYA letter that states they understand the mortgage is staying in their name - you have no intention of assuming it nor guarantee that it will be paid off by any particular date.
They should acknowledge that there is a due on sale clause and that the mortgage company could call the whole note due - if that should happen they agree to hold you harmless.
I know this sounds like a deal killer - but I’ve never had anyone balk at it.
This is also a good place to spell out what you have agreed to do as far as paying their mortgage and maintaining the property.
Re: Land Trusts: Changing Beneficial Interests - Posted by JPiper
Posted by JPiper on March 28, 1999 at 18:19:19:
I would have the beneficial interest assigned at closing.
The due on sale clause is violated when beneficial interest is assigned…whether it’s at closing, a few days after closing, or months after closing.
The difference is that unless you do it at closing, you don’t control the property. If you had to put any money up, how would you control whether the seller assigned said interest?
JPiper
Re: Land Trusts: Changing Beneficial Interests - Posted by JPiper
Posted by JPiper on March 29, 1999 at 16:50:01:
I’d be interested in any comments that you might care to make regarding what tenets/nuances of the land trust the violation of which might cause the IRS to recharacterize the land trust as a corporation, association, partnership etc.
By the way, looking forward to receiving a copy of your book recently ordered.
JPiper
Re: My way might not be for anyone else, but here it is: - Posted by Bill K. (AZ)
Posted by Bill K. (AZ) on March 29, 1999 at 11:14:27:
John,
Your post was so thorough that I’m not sure what other detail I might need right now. But, if I think of something, I’ll ask.
Thanks so much!
Bill K. (AZ)
Re: Land Trusts: Changing Beneficial Interests - Posted by JPiper
Posted by JPiper on March 29, 1999 at 11:37:43:
Jackie:
I was interested in your comments regarding Legrand’s CYA letter.
It appears that Legrand takes no responsibility for assuming the loan or refinancing if the loan happens to be called. What I would be interested in knowing is how Legrand would handle a situation where you have either resold the property through some type of wrap around financing, or have resold using a lease/option.
How does he handle the liability to the end buyer that would be incurred through entering into these contracts if the underlying loan is called, and if he is not responsible for refinancing/assuming this loan, and yet has obligated himself to deliver a deed through his back end deal?
JPiper
Re: Land Trusts: Changing Beneficial Interests - Posted by Bill K. (AZ)
Posted by Bill K. (AZ) on March 28, 1999 at 23:02:55:
Jackie,
That information is sooooo helpful. I’ll remember that as I proceed.
Thanks for taking the time to respond.
Bill K. (AZ)
Re: Land Trusts: Changing Beneficial Interests - Posted by Bill Gatten
Posted by Bill Gatten on March 30, 1999 at 10:07:05:
Jim,
I’m enjoying your comments on this issue.
As food for thought, however, contrary to your comment about a DOS violation, remember that selling or assigning beneficiary interest in a Land Trust (per se) is technically NOT a violation of the lender’s alientation provisions (DOS), in that such a transfer is clearly of “personalty” and not of “realty” (because in a bona fide Land Trust, both legal and equitable real estate owership is vested in, and remains with, the trustee).
It’s the divestiture of control over the trust’s asset (“Power of Direction”) that a court might find adverse to the lender’s security interest. Although in several Illinois cites over the past fifty years, such findings for plaintiffs (lenders) have not been forthcoming.
Now, watch the pea under the shell below, and tell me where the DOS violation takes place (if it does):
A property is placed into a revocable inter vivos land trust by its owner, the mortgagor, for estate planning purposes (the right to do so being fully protected under the Garn St. Germain Law 12USC 1701(d) 1982).
All or a portion of the personal property interest in the borrower’s revocable, living (inter vivos) beneficiary-directed trust…NOT in the lender’s security… is assigned to another (the borrower being a “natural person”). No part of the Real Estate Security is changed, sold, disposed of, or transferred in any manner, other than to a legitimate land trust trustee.
The silent assignment itself remains private, secret, annonymous, without public notice (recordation), and without any request by borrower for alteration of documentation, or Release of Liability with respect to the underlying financing.
At this point, the lender has the same security, the same guarantor, the same income and profit, and the same right and pathway to foreclosure for cause that it has always had. And no sale or unauthorized divestiture of the Real Estate security has taken place.
Before you decide where the violation may have occurred, note that Para. 17 of the underlying loan document says that an assignment of beneficiary interest (in “the borrower”… not the borrower’s trust) is disallowed ONLY if/when borrower is NOT a natural person (e.g., a corporation, partnership, LP, joint venture, co-op, association, etc.). In other words, such divestiture of related personalty (beneficial interest) does not apply to natural persons: stating otherwise would be in opposition to Federal Law (Garn St. Germain).
In VA and FHA type loan docs, the warning is even more obfuscated by legalese in order to make you “think” you can’t do something that in fact you can. The Due-on-Sale Clause states in essence that: “…if permitted by applicable law” the lender has a right to deem such transfer [of beneficiary interst in a trust] a DOS violation. But the fact is, that a lender’s so declaring is specifically NOT PERMITTED BY APPLICABLE LAW (i.e., The Garn St. Germain Federal Depository Instituions Regulations Act of 1982)!
Nonetheless, Jim, to avoid being ultimately seen as having relinquished control, and therefore having violated the DOS: why not just have the seller retain some percentage of the beneficiary interest (to justify retention of control and voting rights), with a silent Power of Attorney on your behalf, and an agreement to forfeit all interest to you (in consideration of your prompt payments) upon revocation.
Bill
Re: Land Trusts: Changing Beneficial Interests - Posted by ScottE
Posted by ScottE on March 28, 1999 at 19:14:07:
Jim,
Wouldn’t the transfer of a property to a trust when the property is already in default send up a red flag to the lender?
Scott
Re: Land Trusts: Changing Beneficial Interests - Posted by Bill K. (AZ)
Posted by Bill K. (AZ) on March 28, 1999 at 18:30:39:
Jim,
Understood. I want to have control at the closing.
But, if I were the lender and I received a notice of change of insureds from the insurance company, I’d try to see if beneficial interest changed. Right? How aggressively do lenders pursue this issue?
Do I have to even have the seller have a beneficial interest at any time? Or, can I simply have him call his insurance company and name my trust as an additional insured?
Bill K. (AZ)
Re: Land Trusts: Changing Beneficial Interests - Posted by Bill Gatten
Posted by Bill Gatten on March 29, 1999 at 20:49:51:
To name a few, the IRS could re-characterize a so-called land trust as something else:
If the trustee collects mortgage payments (disguised Security Agreement)
If the beneficiaries hire a property manager (Association taxed as Corpn.)
If the beneficiaries don’t collect rents themselves, or appoint a free collection service
If the collection service for the beneficiaries charges a fee (Homeowner’s Association)
If the trustee does not charge a fee for its services (disguised Security Agreement or contrivance to avoid 1031 holding requirements)
If the transaction contains an Option to Purchase (Security Agreement)
If the transaction contains a Bargain Buyout (Purchase Option)
If the transaction contains a predetermined buyout amount (Security Agreement)
If any beneficiary holds less than 10% of the beneficiary interest (invalid beneficiary…contrivance to create and disguise a Security Agreement)
If there are more than ten beneficiaries (a Security Offering under S.E.C. regulations)
If the trustee is the grantor (a simple Grantor’s Trust without tax benefit to any but the grantor)
If the trustee is given no function other than holding title (a Dry Trust)
If there is interest payment consideration between beneficiaries (Security Agreement or Partnership)
If one beneficiary is designated as having duties the others haven’t (Partnership)
Ziz enough for now? There are dozens more.
Jim, I honestly have no intentions of disparaging anyone’s thoughts re. land trusts on CRE; but in all candor, I’m really concerned about the misinformation that floats around almost daily, and the seemingly blasé attitudes some folks have about what liberties they think they can take with such a volatile transfer vehicle. Just because it seems safe and logical, that doesn’t make it so. Mixing Mom’s baking soda with a little vinegar seems safe and logical too? but it can blow Mom’s windows out if you’re not reeeeel careful.
Bill
Disclose - Disclose - Disclose - Posted by Jackie in Dallas
Posted by Jackie in Dallas on March 29, 1999 at 22:21:31:
Just as you “lay it all on the table” for the seller - you do the same thing with your buyer by having them sign a similar CYA letter stating that they are aware that there is an underlying loan that has a DOS.
You explain that, although it is unlikely, the mortgage company could call the entire loan due and if that should happen it will be there responsibility to refinance or assume the loan at that time. You further state that you, nor your company, will assume the loan or refinance it and if your buyer cannot refinance for whatever reason they will hold you harmless.
Re: Land Trusts: Changing Beneficial Interests - Posted by Stacy (AZ)
Posted by Stacy (AZ) on March 29, 1999 at 12:52:40:
Jim, I’m not sure if this answers all aspects of your question, but here it is. LeGrand also has the new buyer sign a CYA letter, stating that s/he knows there is a Due On Sale clause in the original loan, and that it is his/her responsibility to either assume or refi if the loan gets called, and that if neither is possible, the house could be lost to foreclosure. It also states that should the house go into foreclosure because of this, s/he holds the seller (you) harmless.
Stacy
Re: Land Trusts: Changing Beneficial Interests - Posted by JPiper
Posted by JPiper on March 30, 1999 at 12:05:43:
Bill:
You make an interesting point here.
Your point caused me to go back and read the Garn-St Germaine Act. Here is a quote (unless I leave a word out in my typing) which covers this issue. One of the exemptions to the due on sale is “a transfer to an intervivos 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”.
So with your style trust (the PacTrust) you meet the first part of this exemption?.the borrower is and remains a beneficiary. The way I am currently setting my trusts up fails this test miserably if I do say so myself (where’s that book I ordered from you by the way?). However, as you say, even if my method fails the test, the assignment of beneficial interest is silent, and therefore the lenders ability to detect such assignment is probably next to nill.
However, in both your style trust and my style, it would appear to me that BOTH fail the second part of this exemption?.that being that they ARE related to a transfer of the rights of occupancy in the property. I suspect that you have an answer to this, so I look forward to seeing it.
Now the big question. I’ve never had any difficulties with a lender regarding a trust over the approximately 10 years or so that I have used them. However I’ve been involved with considerably fewer trusts than you have from your particular vantage point. For arguments sake, let’s assume for a second that a lender does discover the assignment of the beneficial interest?.and that you have rented the property using your technique wherein the renter receives the tax deduction because of his status under the PacTrust. Now they accelerate the loan. My question is regarding whether they would accept your arguments regarding your interpretation of Garn-St Germaine?.or whether you would be required to file suit in a court to have this issue heard? I would also be interested in knowing whether you have been involved in such a suit.
My assumption is always that the minute I have to hire a lawyer (I know your son is a lawyer so maybe this isn’t an issue for you), I have lost. Nevertheless I would be interested in your comments regarding this.
If your assumptions are true regarding Garn-St Germaine, why bother to be circumspect in regards to the lender over the assignment of beneficial interest to begin with?
One other question?.how do you handle the insurance policy in terms of the “named insured”?
Thanks for your comments Bill. I’m an old dog?but I’m certainly willing to learn a few new tricks.
JPiper
Re: Land Trusts: Changing Beneficial Interests - Posted by JPiper
Posted by JPiper on March 29, 1999 at 24:19:55:
I doubt it. The lender has already pulled the title work assuming they have filed their foreclosure. They’re not going to pull the title work again in all probability if they receive funds bringing the loan current.
But understand, federal law permits the transfer of a property to a trust, red flag or no. The loan documents will probably prohibit the assignment of the beneficial interest…but this is not a recorded event. Even with a red flag how is the lender going to detect this?
JPiper
Re: Land Trusts: Changing Beneficial Interests - Posted by JPiper
Posted by JPiper on March 28, 1999 at 18:39:35:
The way I handle this is that I create the trust…naming the seller as beneficiary. At closing the property is deeded to the trust. Then the seller assigns the beneficial interest. This is just one more piece of paper at the closing…the seller is the beneficiary for about 30 seconds.
The seller can call his insurance company and add the trust as an additional insured. Just understand that if the insurance is handled in this particular fashion that a check from the insurance company will be issued in the name of the trust and the name of the seller. Therefore I would suggest that you execute a limited power of attorney to enable you to receive and endorse this check on behalf of the seller.
JPiper
Deciding what’s right for you. - Posted by John Katitus
Posted by John Katitus on March 30, 1999 at 01:50:45:
Let’s face it - that is the essential element.
We are all constantly bombarded with opinions, and we each decide by weighing the risks of alternatives which ones to accept. Some of us tolerate more risk than others.
Here, we all communicate on the same basis. Each post is listed equally. Nobody can be loud or overbearing, and nobody should be timid or hesitant to share their opinions. That’s why I come here. I want to know what others think. If I think they might be doing something that could cause them trouble, I sometimes comment.
My guess is that the dangers of a Land Trust being recharacterized as something else by the IRS are real, but very unlikely to occur. And spreading concern about them and “misinformation that floats around almost daily, and the seemingly blasé attitudes some folks have about what liberties they think they can take with such a volatile transfer vehicle” is a thinly disguised move to promote the PacTrust.
Just my opinion.