It is not uncommon for me to receive a weekly email from a real estate investor vexed with the problem of transferring encumbered real estate into a LLC. Many of these troubled souls have sought providence from their local attorney, CPA, or banker only to find their hopes of protection doused like a spark without the tinder to give it life.
The problem for investors is in not knowing that information can be pretty thin stuff unless mixed with experience. A JD, ESQ., CPA, or other professional designation following a surname does not necessarily translate into omnipotence. For those wayward investors adrift in their concern for the unknown and know liabilities associated with investing, staying afloat begins with the use of a land trust.
Contrary to the multiple internet gurus or guest REIA speakers that sing the vestibule of virtues offered by this rudimentary of legal tools, the land trust is simply and nothing more than a title holding vehicle. But, it is from its simplicity of design that real estate investors can successfully transfer title to encumbered real estate without alerting banks or other curious souls to your personal dealings.
To move real estate from your personal name into your LLC for asset protection you begin by creating a land trust. The land trust should name you or someone you trust as the trustee with the current titleholders of the real estate as the beneficiary. It is important to note that you should not have unanimity of trustee, grantor, and beneficiary. Whenever my office drafts a land trust we will ensure that the trustee and beneficiary class differ by at least one person e.g., if John and Jane set up a land trust then I will have John serve as the trustee with John and Jane as the beneficiary.
After the trust is established, John and Jane will deed their investment real estate into their land trust. This transfer should not trigger the due on sale clause that fosters so much angst and more likely than not will garnet scan notice from a inquisitive lender. Why? Thank congress. U.S. Code Title 12, Chapter 13, Section 1701j-3 limits a lender from accelerating a note when there is a transfer to an inter vivos trust in which the borrower is and remains a beneficiary… I forgot to mention, a land trust is an inter vivos trust.
Once the transfer is complete, your property will be titled in the name of your trust. At this stage in your planning you are within sight of safe harbor and a few more strokes will safely see you home. To reach safety the next step in your planning requires the assignment of your beneficial interest in your land trust to the LLC you created for asset protection. This is accomplished with pen and paper and a few simple lines reciting your intent (be sure to have this assignment notarized).
The assignment will escape notice by your lender because it will not become a matter of public record. The assignment remains in your possession and for the curious sole that seeks to divine the owner of said real estate shall only come upon the name of your trust and its trustee. The trust beneficiary shall remain a private matter.
This last step is the most important in terms of asset protection. If you skip the LLC and remain the beneficiary of your land trust you have not insulated yourself from the dangers associated with your investment. The land trust in and of itself offers no protection. In point of fact the land trust will neatly package and deliver any liability on the doorstep of the trust’s beneficiaries. Hence, let your LLC be the beneficiary (or your mother-in-law) rather than you individually and protect yourself from your investments and your investments from you.