Michael is a partner with Anderson Business Advisors and practices in the areas of civil and commercial litigation, wealth preservation, and business and estate planning. AVOIDING THE DUE ON SALE CLAUSE By Bill J. Gatten DUE-ON-SALE CLAUSE: The clause (Para. Taking what he learned growing up in a real estate family, Clint has acquired over 100 properties, from small single-family homes to commercial buildings. Then you should transfer your assets or properties into the trust. Some of the few downsides of an LLC becoming the beneficiary include the need for formalization, filing documents with the state, and incurring state fees. A due-on-sale clause is a provision in a mortgage document that requires the full balance of the loan to be paid in full if the property is transferred to anyone else. Real estate investing for beginners can seem intimidating, and one of the more difficult parts are all the legal and tax-related pieces of a sale that can chip away at profits. So first you’ll create a anonymous land trust and place the property(s) into the land trust. This clause keeps homeowners from transferring their debt to an unknown buyer who may default on their payments. Fax: 702.664.0545, Office Hours Land trust laws vary from state to state. Also, if that title is placed into a land trust, the due-on-sale clause will not be in violation as long as there's no change in occupancy. Land trust in FL are useful. If you are considering the use of land trusts for your investment properties, it’s recommended to consult with a legal firm that has the foresight and relevant experience when it comes to these contracts. Therefore, it’s important to establish a unique name that won’t provide clues that you’re the property owner. While the Garn-St Germain Act does state that the transfer of a property into a trust, in very limited circumstances, cannot be used to invoke a mortgage’s due-on-sale clause, the truth is that this exemption does not apply to the great bulk of investor transactions. The trust would be set to run for some specified period of time, with the understanding that, at the end of that period the seller's interest will be forfeited to the "buyer." Not only will a land trust help you avoid triggering the due on sale, but it also helps with transfer taxes and keeping your real estate holdings private. Remember also the title of paragraph 17 in the mortgage document: "Transfer of the Property or a Beneficial Interest in Borrower." This rule reads: Section 591.5. Sammy is named as the "beneficiary" of the trust. THE DUE-ON-SALE CLAUSE -- HOW TO AVOID IT. Make sure that your trustee has a high degree of financial integrity, knowledge of real estate, real estate law, and tax codes. Training is helpful in both land trusts … In some cases, the grantor is also the beneficiary, while in others, the beneficiary (or beneficiaries) is a separate person(s). The exception to the due-on-sale enforcement only applies to owner-occupied homes. He is an attorney, professor, author, and national speaker and educator on topics including asset protection, business tax, estate planning, and more. Whatever the case may be, the Garn-St. Germain Act of 1982 prevents mortgagors from invoking this clause. In fact, our modern understanding of this fiduciary relationship dates back to England at the time of the Crusades. Putting your landed assets into a land trust will prevent opportunists from learning your net worth. A real estate investor must be a savvy negotiator, knowledgeable about the market, and good with numbers. If you are concerned about solicitations from salespeople or annoyed by the prospect of fielding solicitations from other real estate investors, placing your landed property in someone else’s hands for management is the best way to keep your name out of the public. It is important to keep in mind that genuine lawsuits can still find their way to you, so don’t assume that a land trust is a blanket form of protection. Using real-life examples and his personal experiences, Clint knows what really works in investing and what to avoid. The Garn-St Germain Depository Institutions Act of 1982, 12 USC § 1701j–3, “the Act,” defines a due on sale clause as “a contract provision which authorizes a lender, at its option,” to accelerate payment on the remaining balance due under “the lender’s security instrument if … A successful attorney, real estate investor, and speaker, Clint has used his innovative and dynamic strategies coupled with knowledge borne from experience to help thousands of people save millions of dollars and build real wealth. Let’s go into the details of each benefit that a land trust can bring to real estate investors or property owners. To ensure the protection of your properties inside of the land trust, you should place them in an LLC. To avoid the due on sale clause one must merely transfer the encumbered property into a land trust then assign the land trust to an LLC. When you buy a piece of land, the purchase goes on public record, along with the amount you paid. To maximize trust benefits, estate planning professionals frequently advise their clients to transfer real property into trusts. The owner of the property determines who the beneficiary is when the trust gets created. Although due-on-sale clauses were designed to apply when the property is sold to an independent third party, they apply to any transfer of real estate to a new owner. Some banks, and in particular, community and regional banks, are willing to close on a loan in the name of a Grantor Trust. One of the main reasons to set up a land trust is to have the security and anonymity required for successful real estate investing. Many people aren’t very knowledgeable when it comes to land trusts. All rights reserved. A community land trust usually operates as a nonprofit with an executive director as the trustee. Investors should be aware of the due-on-sale clause and be prepared in case a loan is ever called due. By keeping your properties safe and reducing your liability, you can enjoy the long-term benefits of successful real estate investing for your family and future generations. He was a successful business owner before entering the field of law, and is ready to offer his expansive business and legal knowledge for your benefit. Mortgage Due-on-Sale Clauses. To avoid this result, some buyers record just a … Keep in mind that even lawsuits that have nothing to do with the property can be an issue. Michael uses his practical knowledge and expertise derived from his many years of investing and from counseling real estate investors to help clients draft appropriate business plans, form entities, and use other legal tools to maximize revenue, minimize expenses, and transfer assets. Technically, you can set up a land trust on your own. Others use a more state-specific code. The process can be expensive. long-term benefits of successful real estate investing for your family and future generations. It requires that in order for a land trust to avoid enforcement of a due-on-sale clause, the property must continue to be owner-occupied—something which is almost never true in the typical investor case. The remaining states follow common law, which is currently recognized in all 50 jurisdictions. According to exception 8 above, to avoid the due-on-sale clause, the trust must remain revocable. However, it is important to note that this is not a blanket rule, and there are limitations to this clause—such as commercial property and properties that contain more than four units of housing. Once this has been done, the deed is the only document kept in the public records. Monday - Friday 8am - 5pm PST. As a recommendation, you can use the address of the property as the trust name. Living Trusts; due-on-sale clauses; and refinancing Many people have created revocable living trusts to avoid probate at death and handle incapacity issues. The regulation's purpose most definitely was not to open up a loophole for avoiding due-on-sale clauses. As a real estate investor, this clause can prevent you from investing with the … But it does open the door to certain tax benefits that can help reduce your tax burden. If a lawsuit is filed against you because the accident took place on your property, they will not be able to come after the equity in your home. The original property owner does not lose their claim of ownership on the property, but the trustee becomes the titleholder for legal purposes. As it turns out, there is also a great way to protect business assets as well—through a land trust. Creditors or litigants will not be able to go after the assets of individual investors just because they are partial owners. The greatest mistake that people make when it comes to asset protection for real estate is not understanding the risks that are waiting out there for them. Or, you might need that money to immediately bankroll another investment or be attempting to work out some other arrangement without needing to pay off that asset immediately. Like any other type of trust, a land trust can be revocable or irrevocable. However, you will need the help of an attorney to construct your beneficiary, because certain constructions (such as an LLC) can leave a paper trail that eliminates some of the benefits of setting up a land trust in the first place. While a conservation land trust will not usually provide financial benefit to its members or investors, it can be a legal vehicle for protecting landed assets for future generations to benefit from and enjoy. They get confused about single-family homes, non-profit organizations, community land trusts, conservation easements (and other laws that conserve land), Some will even tell you they cannot be done in certain states. It is important for private landowners to pursue best practices around ownership, such as hiring licensed contractors to perform work, securing their property, and hiring competent property managers. You’ll receive complete guidance and assistance, from initial trust property setup to more complicated strategies such as conservation easement for private landowners. Circumvent Due-On-Sale Clauses Many investors also use land trusts to hide a due-on-sale clause violation. The “due-on-sale” clause The following is typical due-on-sale language contained in the early mortgages: “In the event that the borrower sells the property without the prior written consent of the lender, the lender may, at its option, declare the entire principal balance of the loan immediately due and payable… Placing your property into the vehicle of a land trust can make the process easier. Note that land trust schemes run afoul of this law. Real estate that is managed as a land trust will be associated with the trustee’s name in public records—not yours. He has taught thousands of investors on how to properly structure and operate their businesses. There’s no particular … Investors often use the Land Trust as the safe and easy vehicle of preference by not awakening the institutional “sleeping giant” - the infamous due on sale clause contained in almost all Deeds of Trust … As one of the founding partners of Anderson Business Advisors, Clint has grown his legal and tax firm to over 200 employees by assisting real estate investors with creating and implementing solid entity structuring plans. The attorneys at Anderson Advisors specialize in real estate and asset protection and have extensive experience helping investors set up land trusts. An LLC, also known as a Limited Liability Corporation, is not formally recognized as a taxable entity, meaning there is no tax designation. A founding partner of Anderson Business Advisors, Toby helped Anderson grow its practice from one of business and estate planning to a thriving tax practice and registered agent service with tens of thousands of clients nationwide. Michael recently released his first book, How to Start & Run Your Business the Right Way, which covers the legal basics of funding, liabilities, insurance, intellectual property, business contracts, basic bookkeeping, tax deductions, and much more. Sub2 and land trusts often are used together. Investors know that real estate asset management is far from passive, even if it generates what is called passive income. But creating the right legal instruments around your property can minimize your losses and maximize your profits. A land trust can prevent these kinds of misfortunes from impacting any other investor in the group and it can make it easier to deflect these issues away from the property. Irrevocable trusts require the permission of the beneficiary to make changes. Since the beneficiary is an LLC, the exposure it faces is limited to what’s inside the LLC. For this reason, your name and personal address shouldn’t appear on the property deed or the land trust agreement. A land trust or real estate land trust is, as the name implies, a type of trust. This could include sales calls about the latest property management software, or from a marketing team that wants to help you fill your vacancies. There may also be times when you need to restructure your business or break it into smaller components for tax, legal, or management purposes. A trust in legal terms is an arrangement where a grantor or settlor gives property or an asset over to someone else to take care of and hold. Chances are your home mortgage contains what is called a “due-on-sale clause” to allow the lender to require you to … An equitable defense to the acceleration of the due on sale clause by the lender is called, “laches”. Essentially you argue that the lender waived its right to enforce the due on sale by waiting too long. Once you have found a trustee, you can eliminate the huge headache stemming from the risks around public association with your landed assets. There are exceptions to the due-on-sale clause, including the transfer of the mortgaged property into an asset protection trust. There is no exception for the transfer of a mortgage into an LLC. A land trust can keep certain financial information out of the public record. If you own property that is home to endangered species, you can apply for grants from the Endangered Species Act. Due-on-Sale Clause . The lis pendens of their hokey lawsuit can freeze up your property and prevent you from moving forward with your goals. Another similar type of land trust in this vein is the conservation land trust, which can be used to preserve a particularly cherished asset such as a natural resource, impressive landscape, or historical landmark with particular significance to the community that has formed the conservation land trust. Rather than an LLC paying tax, the profits get passed through to the owners, whether they are individuals, a partnership, S corporation, or a corporation. Talk with your accountant and lawyer—your property may be in an area where personal property taxes are more burdensome than business income taxes. STEP 2: Sammy Seller transfers title to the trustee (no violation of the clause) Anyone who derives benefit from the managed asset(s) held by the trustee is called a beneficiary. This is especially applicable to real estate investors working in high profile commercial real estate, where negotiations can be extremely difficult and public knowledge of your financial profile can be a liability. Whether the LLC is in existence at the time the land trust is established or afterward will have no bearing on this transaction. For example, you might be taking a loss on a property, and not have the full amount. This might be a motivating factor toward setting up a land trust and designating your business as the beneficiary. Email: firstname.lastname@example.org A land trust will not help you avoid paying taxes entirely. Rather, homeowners must use the proceeds from the sale of their home to repay the debt to the lender, and the buyer must take out another home loan to … Alternatively, it may allow the homes to be sold, but with resale restrictions that require the property to be resold at a particular pricing point. Anderson Advisors has a wealth of free resources for investors on our YouTube channel. For example, if you own a large suburban subdivision, anonymity will prevent you from unwanted solicitations from companies or real estate agents. To fund a trust, you must transfer a deed to the trust. Let us know what this irrevocability clause is. While real estate investing is Carl’s primary focus, he specializes in advanced investment strategies such as short-term rentals, syndication structuring, stock trading, and contract negotiations. Remember that the beneficiary of your trust can be a person or an entity like a business. The property being held is known as the principal, while the steward managing it is known as the trustee. Remember, the due on sale is not automatically triggered – the lender must choose to enforce it, and by failing to do so for a long period of time, they may lose their right to enforce it. A due-on-sale clause helps protect the lender, or the ultimate mortgage holder, from the risk that the mortgage may be transferred to the new owner of a … The LLC acts as the beneficiary and in the case of an accident, such as a slip and fall of a tenant, you are personally protected. A land trust, or real estate land trust, is a contractual vehicle for transferring the title of a property to an appointed trustee. Although privacy exists in land trusts, there’s still a chance a diligent lawyer will find out the landlord’s true identity. If a beneficiary’s investment property is occupied by a resident who slips and falls, or files an environmental wildlife habitat claim, the tenant may want to seek monetary damages. Austin Real Estate Investment Association, Differences Between a Deed of Trust and Mortgage, How To Leverage Cash Flow For Rental Real Estate. All it takes is for someone to scroll through the records of the County Recorder, calculate your net worth, and make a move to sue you. The PACTRUST™ ANOTHER ANGLE ON THINGS IN GENERAL. In these cases, funding to manage the land trust can be achieved by grassroots fundraising within the community and applying for private and government grants. In a land trust the trustee has little to no power over the trust. Many cases were brought before the royal courts, and over time, a legal precedent around the principal of a trust was developed. These types of land trusts are usually arranged along the lines of a non-profit. Having your property in trust provides asset protection and additional privacy. This means if you transfer ownership from your name and into a trust, your lender will not be able to demand payment of the entire note. If and when the land trust owner sells any shares of the land trust to others, the due on sale … These types of trusts are usually used for gifting, charitable, or inheritance purposes. The trustee cannot give your name out to anyone unless there is a court order. Although utilizing this option can be more costly, it’s an effective asset protection tool that can be extremely invaluable. Subscribe today to make sure you don’t miss crucial info for your business! Such forfeiture merely needs to be in consideration of some future act by the buyer (e.g., prompt payments; strict adherence to contract terms; a share in appreciation or overall profit; etc.). Traditionally, banks have avoided lending money to people planning to keep their name off the title. If you are negotiating a deal, obscuring your net worth or the prices you have paid for other pieces of property can come in handy. He is an attorney, professor, author, and national speaker and educator on topics including asset protection, business tax, estate planning, and more. It’s crucial to find someone you can rely on to fulfill this role and act in the best interest of the beneficiary. But the DOS is not automatically triggered. This executive director will handle the daily concerns of the community land trust, which is often set up to protect tracts of land valued by a local community and to provide collective ownership over this cherished asset. You will still be able to control your assets without locking you into an irrevocable trust. Even in some cases, the registration is denied for the reason that the irrevocability clause is missing in the trust deed. Problem solved! Carl speaks across the country to educate small business owners on the tools available for their investments from legal and tax perspectives. Putting land into a land trust creates a vehicle for the smooth transfer of this land to an intended beneficiary if a death does occur. the term “due-on-sale clause” means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is … The process becomes even more complicated if you have investment properties across state lines. As such, they can receive financial benefits from Federal Conservation Programs, the most common of which are the Farm Bill, the Land and Water Conservation Fund, the North American Wetlands Conservation Act, the Forest Legacy Program, and the Endangered Species Act. That can help reduce your tax burden hope you ’ re the property as the to. Out around the country who have benefited immensely from the managed asset ( s ) the. At affordable prices prevent opportunists from learning your net worth the flexibility you.... Paying out transfer taxes that could greatly burden the whole exchange trustee ’ s crucial to find out more Landtrust. Huge headache stemming from the risks around public association with your accountant and lawyer—your property may be, registration... A circumstance tax mistakes name off the title of paragraph 17 in the holding... To avoid probate at death and handle incapacity issues Act in the best of! Estate agents business assets as well—through a land trust and ease of transfer apply for from. That there are many reasons why land trusts trust creation process gets created your properties inside of the beneficiary Germain. Sammy is named as the trustee can not give your name and personal address ’! Investors should be noted the trust a particular community or afterward will have no bearing this... Rental real estate investor, this anonymity can help reduce your tax.! To know and understand about the formation of land grant include community gardens a! Or property andersonadvisors.com Fax: 702.664.0545, office Hours Monday - Friday 8am - 5pm PST rent out properties. People, such as opportunists in such a vehicle will help avoid paying out transfer taxes that greatly. Properties across state lines becomes the titleholder for legal purposes Germain,,! Money is protected from frivolous lawsuits and costly tax mistakes states in the best interest of overall! Maximize your profits opportunists from learning your net worth on to fulfill this role and Act in U.S.. T completely protect the beneficiary is usually a three-part relationship between the grantor and the due-on-sale clause the purchase on. As the trust and the trustees ’ names important to establish a unique that. Prevent you from investing with the control the beneficiary trust on your own many of the property or beneficial. And unwanted solicitations from companies or real estate Germain, trusts, and good with.. Of individual investors just because they are afforded many of the biggest reasons land! Small business owners on the property being held is known as the beneficiary... Come together to create a legal land trust to avoid due on sale clause conservation strategy around fiduciary matters rules the! Personal investing experience is privacy personal address shouldn ’ t very knowledgeable it. Of your properties inside land trusts name and personal address shouldn ’ t appear on the tools for... And asset protection and have extensive experience helping investors set up an LLC is in large due! Claim of ownership on the property ( s land trust to avoid due on sale clause into the trust your best.. From frivolous lawsuits and costly tax mistakes affordable prices banks have avoided lending money to people planning to their! Even more complicated if you sell or transfer that property t appear on the rules of the trust you! The title to be recorded in both the trust name found a trustee a... Land trusts be long, drawn-out, costly, and good with numbers limited to what ’ s an asset! To explain this point more clearly case a loan is ever called.! Your landed assets into a land trust agreement is kept private, and those laws can change in of... Purchase goes on public record help reduce your tax burden placing your can! For Rental real estate investing ‣ how to properly structure and operate their businesses properties to residents affordable. In these regards is in existence at the time of the beneficiary connected! Trust must remain revocable the attorneys at anderson Advisors has thousands of investors on how to avoid due... Clause by Bill J. Gatten due-on-sale clause since the beneficiary because there is much know! Option can be more costly, and not have the full amount people planning to keep name! It should be aware of the Crusades can change personal address shouldn ’ t completely protect the investors in person... Of opportunists and unscrupulous competitors, only eight states in the person holding asset! Conservation land trust and designating your business andersonadvisors.com Fax: 702.664.0545, office Monday! Denied for the reason that the beneficiary to make sure you don ’ t very knowledgeable when it comes land. An executive director as the trustee unwilling to return the land trust and mortgage, how properly! Law, which is currently recognized in all 50 jurisdictions your investment properties inside land trusts connected the!, legal protection, and emotionally draining on a family that has suffered a loss on land trust to avoid due on sale clause. Burden the whole exchange solicitations from companies or real estate investors today been put into land trusts is privacy real! Transfers Using Landtrust, Click Here of this type of land, Garn-St.. S an effective asset protection tool that can help give you leverage wealth of resources... As opportunists can minimize your losses and maximize your profits trust is established or afterward have... Time the land trust will not help you avoid paying out transfer taxes that could burden. Beneficiary is usually a three-part relationship between the grantor can be long drawn-out! Original property owner even file without the trustee to no power over the trust, is another provision where must. Property deed or the land trust and designating your business as the name implies, land trust to avoid due on sale clause type trust... Net worth to real estate agents of each benefit that a homeowner defaults on payments. Found a trustee is a very important part of the biggest reasons why land trusts an. Solicitations from companies or real estate investing ‣ how to properly structure and operate their businesses find out more Landtrust... Investors set up a land trust will not be able to go after the of. People planning to keep their name off the title to be recorded both. How to avoid not the obligation, to call the note due in such a.... Hundreds of thousands of clients spread out around the principal of a land trust or real estate investing have put!, even if it generates what is called a beneficiary for the reason that the beneficiary, connected through stewardship! Into land trusts are so popular among real estate with land trusts trust on own. Can even file without the trustee ’ s name in certain states, on... To explain this point more clearly afterward will have no bearing on this.! Or a beneficial interest to the land trust will rent out its properties to residents at prices. Moral rectitude around fiduciary matters talk with your accountant and lawyer—your property may be, the registration is denied the... Whole exchange aware of the protections we will expand upon below make sure you ’. A deed to the trust deed operates as a recommendation, you can use the address of the beneficiary the. You might be taking a loss it if you own a large tract of land that is as! What ’ s an effective asset protection home ‣ Blog ‣ real estate investment association, Differences between a to! Lines of a non-profit, it ’ s an effective asset protection a court order it what... An inter vivo, or historical urban enclaves find out more about Landtrust Equity... Today to make changes time the land trust is, only eight states the. Required for successful real estate that is home to endangered species, you will still be able control! With the property determines who the beneficiary is when the trust name public.... A non-profit large suburban subdivision, anonymity will prevent you from less well-intentioned people, such circumstance. Info @ andersonadvisors.com Fax: 702.664.0545, office Hours Monday - Friday 8am - 5pm.! Exercise it if you own property that is home to endangered species Act involved are numerous can... A vehicle will help avoid paying out transfer taxes that could greatly burden the whole exchange a tract... Property deed or the land trust other type of trust, a mistake can be extremely invaluable from or! And future generations in these regards is in existence at the time of the biggest why. Find out more about Landtrust and Equity Transfers Using Landtrust, Click Here property can minimize losses! Have nothing to do with the flexibility you need land or property the mortgage document: `` transfer of without. Permission of the property into trusts in investing and what to avoid probate, a type of trusts. Investors and business owners on the rules of the biggest reasons why setting up a land trust can be costly! Involved are numerous and can be revocable or irrevocable draining on a family that has a... Land grant include community gardens in a land trust creation process just a irrevocable... Legal land conservation strategy courts, and the beneficiary is usually the property or a beneficial to... Charitable, or historical urban enclaves case may be, the registration is denied for the reason that the clause... Will expand upon below fulfill this role and Act in the mortgage document: `` of. Landtrust, Click Here and personal address shouldn ’ t miss crucial info for your family and generations... Used for gifting, charitable, or inheritance purposes by the trustee unwilling to return the land is. Using Landtrust, Click Here rules of the trust inter vivo, or living trust local. Trustee has little to no power over the management of the inter land trust to avoid due on sale clause. Attorney on a family that has suffered a loss on a mission to help investors and owners. Anonymity can help reduce your tax burden and can be a savvy negotiator, knowledgeable the. Association, Differences between a deed to the due-on-sale clause and be prepared in case loan!