On the Asset Protection “High Seas”: Transferring Encumbered Real Estate into Your LLC

Sailing ShipI regularly receive e-mails from distressed real estate investors who are on “troubled seas” when transferring encumbered real estate into an LLC. Often, by the time I hear from them, they’ve already consulted their lawyer, their CPA, and/or their banker…only to get nowhere fast and feel swamped. Why does this happen?

A couple of reasons.

First of all, information’s like the ocean itself: it’s all around us. But it’s knowing what to do with the information, how to use it effectively, that makes the difference. And merely having the initials J.D. or ESQ. after your name—or a professional designation such as CPA—doesn’t mean you have the “Rosetta stone” of information about all things with numbers and/or legal requirements.  So, if you find yourself adrift in that ominous sea of information about real estate investments, do yourself a favor and find the right floatation device: a land trust.

Now, this advice may echo much of what you’ve heard on the Internet or through those omnipresent REIA seminars—usually ones that give you just enough of a hint about legal ins and outs to convince you that you need their help to make it safely to “shore.” Don’t be fooled: simply put, a land trust is a title-holding vehicle. Period. Nothing mysterious, in and of itself. But its simplicity is its genius. With it, real estate investors can transfer titles on encumbered real estate without “leaking” personal financial details.

So before you think about moving anything into the LLC, think about the land trust. Make sure…

  • the land trust names you or a trustworthy associate as trustee
  • the land trust names the real estate’s titleholders as beneficiaries
  • the trustee and beneficiary classes should differ by at least one party

In plain terms, if David and Anne set up a land trust, David can serve as the trustee, while both David and Anne are beneficiaries. Once the land trust is set up, then David and Anne transfer their investment real estate into it.

What happens to the “due-on-sale” investment clause? Nothing. It’s not triggered at all, thanks to Congress. Under U.S. Code Title 12, Chapter 13, Section 1701j-3, a lender cannot accelerate a note when an investment is transferred to an “inter vivos” trust in which a borrower is and remains a beneficiary…such as a land trust!

Ingenious, no?

Now, with the transfer completed, the property is listed in the name of the trust.  At this stage of navigating these tricky waters, you’re halfway home already: the next step, then, involves assigning your beneficial interest in said land trust to your LLC.  Simply take out pen and paper and write a statement of this intent, have it notarized, and your asset has been protected.

Because this statement doesn’t become part of public record, lenders won’t take note of it, either.  No matter how curious an investigator any financial guru may be, he will find only that the owner of said assignment is the trust and its trustee. The beneficiary’s name is, and remains, private.

HOWEVER, MAKE SURE YOU TAKE THIS FINAL STEP

Skipping the transfer to the LLC, and remaining the beneficiary of your land trust, is like going into the waves without life jacket. Just when you thought it was safe to go back in the water, a neatly packaged liability may wash up on the beach with your name on it, something that’s quite common with land trust beneficiaries. So keep your individual assets safe by transferring that benefit to an LLC (or your mother-in-law, if you’re not picky about keeping family peace!). That way, your investments are protected…and so are you.

Sail on!

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