Re: wrap arounds - another idea - Posted by Bill Gatten
Posted by Bill Gatten on December 10, 1998 at 21:18:23:
Let me take your questions in sequence.
Rather than a 100% assignment of the beneficiary interest to you: take 90% with an agreement in the Bene. Agreement that they (the seller you got it from) will forfeit their 10% percent to you when the trust is revoked. This keeps them on, so that: 1) they keep voting rights, so as not to trigger a property tax reassessment (no more than 50% of a trust’s beneficiary interest can be transferred without triggering reassessment (most counties in most states); 2) by retaining the 10%, the seller is in conformity with Garn-St. Germain and Due-on-Sale regulations; 3) 10% is the minimum a legitimate beneficiary can have under IRS guidelines, and 4) doing it this way gives the seller a real sense of secuirty and trust in you, in that he doesn?t have to put you on title until you have performed (which has no negative effect on you at all).
Now, whether you refinance, or just have your new buyer make the payments to you (after paying you whatever down payment you want); you can sell your interest in the trust by giving the new buyer an 80% interest with an agreement to relinquish your 20% as consideration for prompt payments and strict adherence to all contract provisions throughout its term? after you’ve received your $125,000. Don’t forget that the percentage of ownership of beneficiary interest has nothing to do with how much benefit any party in the trust gets. You can own 10% and still have 100% of the tax write-off and half of the appreciation. Or you could have 10% interest and have 100% of the equity build-up, use occupancy, possession, littoral rights, riparian rights (i.e. big words that mean nothing?it?s the ?Fee Simple? or ?Fee Defeasible? ‘Bundle of Rights’ in RE ownership).
No. You don’t need the AIDT (or “AITD”). You don’t want the buyer on title, or to be in any way associated with his/her potential for liens, suits, judgements, marital disputes or BK’s. The resident beneficiary gets exactly same benefits as a title interest could provide, by just leasing (triple net) from the trust in which he/she is a beneficiary. And you retain a say-so throughout, as to their care and maintenance and potential for damage to the property. In addition, by avoiding title involvement, you don’t have to worry about them trying to declarie “an equity interest” to forestall eviction or foreclosure if you should have to have him evicted. In other words, there is not need for Foreclosure, Ejectment or Quiet Title, in order to restore yourself and the property if something goes wrong.
Regarding Promissory Notes: No. Don’t do that! Secured promissory notes require income taxation long before you receive any money (a 5 year note with P&I due in five years is taxable THIS YEAR as a negotiable instrument): this is avoided with a 3rd party trustee, land trust conveyance (e.g., 10/10/80). And more importantly to foreclose on a secured note, you have to exhaust your security before you can proceed for lines against other assets
Regarding who signs when you sell… NO you can sell your beneficial interest, or any part thereof, without the concurrence of the party, if the Beneficiary Agreement doesn’t prohibit doing so. However, I would suggest not circumventing such verbiage, so as not to raise questions later by the IRS. You don?t to do anything that would make them characterize the transaction as a sham or disguised Securty Agreement (another reason to leave promissory notes out of the deal). I.e., I would set it up so that the first 10% holder agrees in advance to let you do anything you want to with your beneficiary interest… (kind’a like giving you the power of attorney to deal with your share as you please): we do it that way all the time.
Regarding ?Ease of Foreclosure?.. in a 3rd Party Land Trust Conveyance (e.g. as in a PACTrust™: Foreclosure is never necessary; and removal of an errant co-beneficiary is a quick snap for these reasons: The contract provides that any default on the part of the resident beneficiary is Constructive Notice to the non-defaulting party of the defaulting party’s intent to relinquish its interest in the trust at Fair Market value, as would (have to) be determined by an MAI appraisal, following payment of a $2,500 default fee. If it is determined that any moneys are due to the defaulting party (after subtracting the $2-3,000 MAI costs, the Default Fee, the missed payments, late charges, penalties and interest): such amount due is paid in the form of an unsecured promissory note, to be paid only at the end of the scheduled trust period, or when the property sells for a sufficient amount to be able to fully cover such amounts. Remember that since the resident beneficiary can’t claim “Equity” (in that land trust trustees are the holders of both ?Legal? AND ?Equitable title?): they are is removed with a simple Eviction (without the need for a 30 notice, in that the defaulting party is actually evicting himself by prior contract). Failure to honor the 3-Day Notice to Pay or Quit can be followed instantly with an Unlawful Detainer Action, with no escape possible by claims of “Equity,” Or ?Judge, I didn?t understand.?
Bill Brochiks?s “Get that Property out of Your Name” is an excellent piece of material, and a mainstay of my business; but it isn’t intended for 3rd party Land Trust conveyance techniques… That?s another entirely different issue.
Best of luck, and best regards,