Archive for the 'Self Help Financing' Category

Trust Transfer System

August 25th, 2008 Categories: Self Help Financing

  

More than a simple land trust, this is a whole trust transfer system.

 

But why should you use it?

  

  What are the advantages?

  • Prevent the lender from exercising its “due on sale” clause

  • Be able to evict a defaulting buyer instead of having to foreclose on them

  • Get privacy, safety and legal protection
  •  It’s quick and easy (you can often close in 14 days or less)
  •  Defer capital gains
  •  Superior income tax treatment
  •  Preserve tax basis (property is not reassessed)
  •  Protection from litigation, creditor judgments, tax liens and probate issues
  •  Reduces the risk of selling to a buyer with a small down payment and not-so-perfect credit
  •  Acquire a property with a low down payment and no bank qualifying
  •  Allows for loan payment take-overs without violating the due-on-sale clause, or having to assume a loan
  •  Freezes the seller’s equity until some point in the future when housing has begun to appreciate again (the seller will get their equity at some point in the future)
  • Sell without short sale or foreclosure, even if you’re a little bit upside down (if you have a decent loan and you’re not too far behind on payments)

The Title-Holding Land Trust (often referred to as the “Illinois Land Trust”) is accepted throughout the United States. This may arguably be the best possible means of real property asset protection and/or transferring real estate.

It’s like taking my seller financing strategies and putting them on steroids.  (Read about the risks of various seller carry back strategies and how the Trust Transfer System avoids them)

The land trust is unique in that a property’s legal and equitable titles are vested in the trustee, rather than in the owner of record. The land trust’s beneficiaries remain fully in control of the property and the actions of the trustee. As a result of this beneficiary-directed third-party trusteeship, any property so held is effectively hidden from public view and shielded from legal actions by lawyers and creditors.

When there are multiple (unrelated) beneficiaries in the trust, the property and its title become virtually impervious to tax liens, creditor judgments, lawsuits and charging orders. Even the IRS can’t touch a property in a co-beneficiary land trust.

The Trust Transfer System includes:

  1. A Land Trust
  2. An Assignment of Beneficiary Interest
  3. A Beneficiary Agreement (a partnership agreement)
  4. An Occupancy Agreement (i.e. a tenancy agreement whereby a co-beneficiary ‘leases’ from the trust, versus holding a title interest in the property)
  5. A Power of Attorney from a non-participating beneficiary to the party handling the management of the property.

When combined, these documents effectively afford a would-be buyer all the benefits of home ownership, including income tax deductions. It protects all beneficiaries from any negative personal or legal action by or against the other parties.

A unique feature is that it converts the settlor’s ownership of realty (real estate) to ownership of personalty (i.e. ownership of the trust, rather than of the property held by it). Therefore, since personalty is not deemed subject to partition by judgment creditors, unrelated parties holding property in this manner needn’t fear the property ever becoming the subject of: a creditor judgment, lien or charging order. Neither would the property be the subject of a tax lien, any party’s bankruptcy, marital dissolution or probate . . . a most comforting feeling when carrying paper for someone else.

The Trust Transfer System gives a seller who is willing to keep his existing financing in place a quick, easy and safe method of disposing of the property, while simultaneously providing a buyer with virtually 100% of the benefits of ownership, including full mortgage interest and property tax deductions.

And without qualifying for bank financing! The down payment and qualification parameters are determined by the seller.

Because the property vested in a land trust has not been “sold,” but merely vested in a trust and leased to a successor beneficiary of the same trust, there is no overt violation of the lender’s due-on-sale (alienation) admonitions.

The trust system provides the seller an excellent means of avoiding immediate capital gains taxation, risky seller carry back scenarios, and the hassle of becoming a landlord with negative cash flow. Also, a state’s withholding tax can be avoided if the trustee is a corporation (at least in California).

More on the Due-On-Sale Clause:

The FDIRA (Federal Depository Institutions Regulation Act; or “Garn-St. Germain Law” of 1982; 12 USC 1701-j-3) limits the justification for foreclosure relative to a lender’s due-on-sale clause (over an “unauthorized title transfer”) under certain circumstances, one of which is the vesting of a mortgaged property into an inter vivos trust (such as a land trust).

As a result of that federal law, mortgagors (borrowers/property owners) cannot be prohibited from placing their real estate into a revocable, living land trust. Neither can they, following establishment of the trust, be prevented from leasing the property to whomever they might choose.

And, when a buyer (lessee/tenant) in such a trust property is also given a remainder interest (becomes a successor beneficiary or remainder agent) in the same trust, that party becomes fully entitled (under IRC 163(h)4(D)) to virtually the same incidents and benefits of home ownership that he/she would have had they financed the purchase of the property in any other manner.

It is for these reasons and more that the Trust Transfer System is a superior and logical way to convey the benefits of real estate ownership when a seller will leave the current underlying financing in place to assist the buyer.

What about the Trustee?

While almost anyone can be named the “trustee” of a land trust, there are significant benefits to using a Corporate Trustee for your land trust, including a much higher degree of safety, security, reliability, trustworthiness and credibility.

This is especially so when more than one beneficiary is involved. In such circumstances, there are severe draw-backs to using any type of trustee entity other than a third-party, non-profit mutual benefit, corporate trustee.

Appointing one’s self as trustee (or a closely related third-party not at “arms-length” to all the beneficiaries) inherently presents potential conflict of interest issues.

Additionally, if a trustee is also a beneficiary, a merger of title is created (Doctrine of Merger), invalidating the trust if challenged in court as being a bona fide land trust. It is also probable that under threat of legal action, the Trustee would likely fail to honor the privacy and anonymity of co-beneficiaries.

An individual trustee would most likely not have the resources to provide a completely separate bonded collection and bill-paying service for the beneficiaries, or be able to provide such services for free. At the same time, the attempt to charge a fee would not be seen as adequate unless the proposed trustee were bonded. On the other hand, an individual trustee’s failure to charge a fee would not support the land trust’s validity in court.

The courts would most probably not acknowledge an individual as a standard trustee, charging fees “commensurate with industry standards.” Therefore, the integrity and structure of the land trust would be severely impaired.

Additionally, an individual trustee’s death would embroil the property in his/her probate or other personal legal actions.

Using a friend or relative as trustee presents much of the same risks and issues found with appointing one’s self as trustee – particularly if the individual is not at “arms-length” with any of the co-beneficiaries. Such a trustee could also have another agenda contrary to the best interest of the co-beneficiaries, or other legal issues personal to them that may pose problems.

Using one’s own attorneywould perhaps not pose a problem as long as no other unrelated beneficiaries were involved who would have separate and independent interests and financial objectives within the arrangement.

One’s own attorney would not necessarily create a mutually trusted, unbiased third-party “fiduciary” in the trust relationship.

Though malpractice insurance may help protect against an attorney’s errors and omissions, the attorney would most likely not be bonded as a trustee for land trusts. Thus, the attempt to charge a trustee fee would not be seen as adequate, unless the attorney or law firm was a bonded entity.

Using one’s own corporation would present many of the same problems as using one’s self, or another individual as trustee. Some courts have held that this arrangement would create a merger of title, thus likely invalidating the land trust model.

Using an outside corporation as trustee. In virtually all states, any corporation used as a holding company must be either:

  1. One’s own corporation,
  2. A chartered depository trust institution (Bank & Trust, Title & Trust, etc.) or,
  3. A non-profit, charitable corporation established solely for the purpose of holding titles to real estate in trust for the benefit of its members.

The Third Party Non-Profit Corporation

Equity Holding Corporation is a professional non-profit entity specifically engaged in the holding of titles in land trusts, fully staffed by full-time knowledgeable professionals, as an unbiased third-party title holder. A reasonable trustee fee, which is well in line with industry standards, is charged enabling the creation and funding of a third-party collection and disbursement entity providing a free bill paying service.

The Corporation cannot die, thus avoiding probate issues. It is professionally administered and well informed, providing adherence to laws, rules and regulations relative to reporting while maintaining consistent good standing with the State.

It is bonded as a trustee for the title holding, beneficiary directed, third party trustee-nominee title-holding land trust and functions as an unbiased and unassociated third-party title holder.

It is recognized as a bona fide holding institution by any court that might challenge the integrity and structure of the land trust.

Data Source:  The Note Queen (http://notequeen.com/.  I received permission from Dawn Rickabaugh on 8/25/08 to re-print this article and to display it on this blog.

Both Dawn and myself suggest that you check with your attorney, CPA or tax preparer and find out if this option is suitable for your situation.

Comments are welcomed. 

Posted by John Duffner | Currently Comments Off

Brief Summary of Benefits of Seller Financing

August 23rd, 2008 Categories: Self Help Financing

Be your own banker.

Look into some of the benefits sellers can realize by carrying paper.  This is an option that should be considered when thinking of selling your property in good or bad times.

Some of the benefits:

  • Defer capital gains
  • Keep equity at work at interest rates higher than the bank is paying
  • Get a good cash down payment at close of escrow
  • Collect hassle-free monthly income for years into the future
  • The note is secured by a property the Seller understands
  • Many times the Seller gets more each month than they could collect in rent
  • No more tenant or maintenance issues
  • No more property taxes or insurance
  • If the buyer stops paying, the Seller keeps everything and gets the property back
  • If they or their heirs ever need money, they can sell all or part of the note for cash
  • Larger number of prospective buyers and a quicker sale because you offer seller financing. SELLER FINANCING or OWNER WILL CARRY are powerful words you can add to a FOR SALE sign or classified advertisement.

Contact your CPA, tax preparer or attorney and discuss the benefits for your particular case.  You may earn more money for retirement and savings from the sale of your property.  It is worth looking into.

Data Source:  The Note Queen.

Posted by John Duffner | Currently 5 Comments »