Q: What are some of the methods used to take over another person’s mortgage payments, say, in order to avoid the necessity of a new loan, down payment or a lender’s credit review and approval process?
A: Several devices have been used for this purpose for years (e.g., unilateral lease options, land-sale contracts, contract-for-deed, all-inclusive mortgages, equity shares and bi-lateral lease-purchase arrangements); however, anyone using these devices has always had to remain ever alert and aware of their volatility and inherent dangers and downsides. One of which frequently argued-about “dangers” is the open violation the lender’s alienation provisions within most (if not all) mortgages these days (i.e., the “due-on-sale clause”- DOSC).
The due-on-sale clause enforces the lender’s requirement that the property’s ownership not be transferred during the term of the loan, under most circumstances. The DOSC warns the borrower that the lender can (and likely will) foreclose on the mortgaged property should it become aware that ownership of the security for its “loan” has been relinquished in any manner without it’s express knowledge and consent…EXCEPT: When the property’s title is legitimately transferred to an immediate relative; transferred due to the death of the mortgagor (borrower); transferred to a spouse of borrower; transferred by spousal quit claim in the event of marital dissolution; and/or transferred to an inter vivos trust wherein the borrower is, and remains, “a beneficiary (i.e., ‘one of the beneficiaries’)”; and which trust is revocable, inter vivos (effective during the lives of the parties), and does not, within itself, relate to a transfer of occupancy rights (‘although a property vested in such a trust can certainly be leased-out by means of a separate lease contract for up to 3 years). [See: 12USC1701-j-3]
It should be noted here as well that all of these “subject-to” transfer devices clearly subject the property and the parties (‘buyer and seller) to each other’s personal problems and potential litigation issues: including bankruptcy, probate, utility liens, and disputes in marital dissolution and creditor and IRS claims. In some states (Texas, in particular, some of these payment assumption methods have been declared illegal by statute (i.e., specifically the Lease Option and the CFD (Contract for Deed)…unless full title can be conveyed to a buyer within six-months following inception of the executory-contract arrangement (i.e., a transaction wherein ownership is held contingently to be released only at the promise, will or whim of the executor optionor or vendor).
Q: Can this trust transfer arrangement be used to accomplish the objectives of the seller-carry (i.e., the option, contract for deed, wrap-around or equity share) while completely avoiding all the standard risks and dangers of seller-carry, subject-to financing?
A: Absolutely! By placing one’s property into a title-holding trust (‘of the Illinois land trust variety) prior to the transaction and dealing with the disposition of the trust’s beneficial interest, rather than with the property’s deed all or in part, virtually all of the risks and dangers of subject-to financing (of any type) are eliminated.
By virtue of specific IRS regulations, a would-be buyer named as a co-beneficiary in the trust and as a triple-net lessee of the property, is fully entitled, under the law (IRC 163(h)4(D), to 100% of all fee-simple “bundle of rights” in real estate ownership, including full income tax deductions, without ever needing to be named in the mortgage or placed on the property’s title (‘until such time as the property would be sold, purchased outright or refinanced by the resident-beneficiary at some designated time in the future).
Q: Are there any disadvantages in owning, managing or selling a property via the trust transfer method?
A: There are none. However some could conceivably find it inconvenient to be compelled to obtain the other party’s concurrence relative to matters relating to the property or its title that might jeopardize the other party’s interest, or that would involve permits, room-additions, major repairs or dealing with contractors and mechanic’s liens (‘although such liens would fail without full concurrence of the parties in that the owner of record is the 3rd-party trustee, who will not issue or sign a work order without constructively delivered, express direction by all beneficiaries.
Recall that the beneficiaries are merely directors of the trustee and the affairs of trust’s corpus (the property). Should a non-resident party (the “seller”) plan to be incommunicado or absent from the area for an extended time (‘or whom might simply prefer not to have to deal with any day-to-day issues), issuance of a Limited and Revocable Power of Attorney is recommended and can safely and conveniently remove all such concerns.
Q: Would the resident beneficiary be inconvenienced if the settlor beneficiary jut arbitrarily revoked the power of attorney?
A: Not really, in that such revocation would merely mean that the parties would henceforth need to abide by whatever is already written in their contract. Nothing changes. If some future occurrence or action by one party or another is agreed upon, it should be included in the documents from inception…otherwise express mutual agreement must be obtained.
Q: Can someone acquire or dispose of commercial property by this method?
A: Yes. A land trust (the generic reference to an “Inter vivos, title holding, 3rd party trustee, co-beneficiary, Illinois-type real estate holding trust”) can definitely hold commercial property as well as agricultural or industrial property). Multiple beneficiaries can hold varying percentages of beneficial interest (analogous to the structure of a corporation or partnership, but without the same reporting requirements and restrictions). Do note, however, that due-on-sale protection under the 1982 “Garn St.-Germain Act (FDIRA)” extends only to residential property of four or fewer units, which means that with commercial property one is highly advised to obtain the lender’s permission before vesting the property in an asset-protection inter vivos trust (the lender will typically send you a form for that purpose, asking you to name the trustee, the initial beneficiary and the trust number and date).
Q: Can a resident co-beneficiary in such a trust move from the property before the end of the agreement?
A. Yes. Although all provisions within the agreements that comprise the contract must be honored, a resident beneficiary may lease or rent the property out, or leave it vacant, if the other beneficiary/ies agree and are not fearful of harm in the process.
Q: What would happen if a beneficiary died during the term of the trust transfer (the EHTrust™?
A: Beneficial interest in the trust passes, to the heirs of a deceased beneficiary, which heirs inherit exactly the same obligations, responsibilities, rights, and privileges as held by the original beneficiary. Nothing changes except for the names of the beneficiaries.
Q: How is one’s placing a home into a land trust, and then leasing it out, viewed by another (new) lender with respect to the non-resident beneficiary’s applying for another home loan while he existing loan remains in place?
A: Having placed a property into the EHTrust(tm), the non-resident beneficiary will likely be evaluated as would be any “income property” owner. Although, the absence of maintenance costs and vacancy expense; and the higher than normal rent, will most often (if not always) provide for a higher-than-normal Income to Rental Expense consideration by the new lender. More likely, however, since one’s ownership of beneficiary interest in a trust is not real estate and is not listed in the property schedule on the new mortgage application, it will likely not be deleterious to the new loan’s approval once explained to the underwriter.
Q: What happens when a resident beneficiary fails to make the payments when due?
A: In the event of default, a 3-Day Notice to Pay or Quit is issued; followed by an Unlawful Detainer Action. By agreement, the default (within itself) is constructive notice (to the other beneficiary/ies) of the defaulting party’s intent to relinquish his/her interest in the land trust. The trust may then be revoked and its property either – offered for sale, or returned to the original owner. It is agreed by parties that any claim for monetary benefit due to the defaulting party (if any can be proven) will be paid in full in the form of an unsecured promissory note; which note shall become due only upon sale of the property.
It should be noted that any proof of equity (by formal MAI appraisal only) is the burden of the defaulting party who, prior to receipt of any moneys, must bring all deficiencies current, and pay a $2,000 “Default Fee” in addition to late fees and/or any delinquent taxes and insurance…plus the cost of the MAI (audit-able) appraisal,
Q: What if the property loses value during the term of the EHTrust(tm)?
A: If, at the end of the trust agreement, the property can’t be sold (or purchased by the resident beneficiary) for enough to return the non-resident beneficiary’s initial contribution (e.g., his/her equity at start); and if the non-resident were to choose not to reduce the contribution amount: then the resident beneficiary would have the right to simply vacate the property with no further obligation. Or, by mutual agreement, the parties can agree to extend the contract or reduce the buy-out amount. Note that, as is the case with any real estate purchase, down-payment moneys, or costs of improvements can always be lost due to ordinary downward trends in the economy and real estate demand.
Q: How is the “Mutually-Agreed Value” determined at the inception of the transaction, in so much as there is no sale price per sé?
A: The “MAV” (the mutually agreed value agreed-upon between the parties) is set purely for the purpose of determining the non-resident beneficiary’s initial contribution at start (e.g., his/her “equity,” or “equity-credit” and the amount of any non-recurring closing costs paid in), and is generally the greater of either: A) the fair-market-value of the property inferred by a professional Comparative Market Analysis, or B) the value of the property reflected by a mutually acceptable appraisal; or C) the total amount of all existing encumbrances against the property. Simply stated, the MAV includes all encumbrances, plus the settlor’s (the non-resident beneficiary’s) equity at inception.
Q: Why might a home-buyer choose a trust transfer acquisition, even if the underlying mortgage were to be greater than the property’s value?
A: A property’s “over-encumbrance” is often perceived as simply a trade-off for one’s ability to be a homeowner without the necessity of qualifying for a mortgage loan, or one’s lack of a standard down-payment or having weak or no credit history. In that the trust transfer arrangement may avoid the handicap of self-employment, newness on the job, new in the area or the country, limited job history, or marginal credit history – one might choose to disregard the over-encumbrance, say, seeing it more as a “prepayment” penalty for early termination. The fact is, that if by the end of the agreement’s term, the resale value of the property has not increased sufficiently to cover the loan against it and any money owed to the non-resident, then the resident may – 1) petition to extend the agreement, or 2) just move out and walk away. If the monthly (after-tax) payment is in keeping with normal rent, and if the loan need not be paid-off at any particular time, the prudent acquiring party might find an over-encumbrance wholly inconsequential.
Q: Could a mortgage lender claim that the land trust transfer method violates its due-on-sale clause?
A: It is, of course, possible but not at all practical. No one can predict what anyone–especially a mortgage lender–could [might] “claim.” Such an assertion of impropriety would, however, be unlikely and directly opposed to federal law (i.e., the Garn-St. Germain Act: 12USC1701-j-3). It’s conceivable that a lender’s clerical staff or even its legal department could, at first, misconstrue the “intent” of the trust transfer, asserting that it was a scheme to circumvent the loan’s due-on-sale clause. However, when such a claim is answered (as has happened several times in the past), the court would need to determine whether or not any laws had been broken; as well as “how” and “if” the plaintiff had been injured.
In actuality, the true (real) intent of the process is to provide asset protection for the parties and a means for passing income-tax benefits to a tenant-beneficiary in exchange for higher than normal lease payments — ‘while carefully avoiding A) a due-on-sale compromise, B) obfuscation of title and 3) unauthorized transfer of real property ownership.
The trust’s resident beneficiary does not receive real estate ownership, or any bargain purchase option at termination, ‘i.e., for any purchase amount that is less than fair-market-value (less any accrued moneys due him by the trust). If, and/or when, the resident beneficiary would choose to acquire ownership of the property, such purchase is by necessity by means of an ordinary offer and acceptance, followed by an ordinary mortgage loan application…or a petition for a bona fide lender-approved Assignment and Assumption of the existing loan (acceptance of which is unlikely).
Q: In its nearly 100 years of use in the US, has the land trust transfer method ever been challenged by a lender claiming that its due-on-sale provisions were compromised by creation of the trust, or by the unrecorded and private assignment of beneficial interest to a third party?
A: Yes. But the challenges were immediately dropped in each case when the plaintiff was advised to review the Garn St. Germain (Law) verbiage (the FDIRA 12USC1701-j-3). It might be noted, however, that the Land Trust in many states, though fully accepted, is “statutory” in nature, meaning essentially that there is no real judicial history concerning it, and that no specific “Land Trust Act” per sé exists [yet] within the state. Although we know of no such actions in recent years, a few such actions have been brought and failed in other states — whereby in every case the courts found in favor of the defending party (‘except in those cases wherein 100% of a trust’s beneficiary interest was sold or assigned, or where corporate beneficiaries have attempted to use the device to transfer ownership in a commercial enterprise without authorization).
Q: Since you folks have you own legal and accounting advisers, must I consult with my own attorney and accountant regarding the feasibility of this transfer method?
A: One should always heed the advice of his/her own legal tax advisor, as well as one’s own independent accountancy and real estate agency. We welcome inquiries from any of these professionals.
Q: Are most Attorneys and accountants familiar with the EHTrust™, or the “(Illinois) Land Trust” in general that is the basis and underpinning of the EHTrust™ transfer system?
A: No. Not at all. Were you to interview 100 attorneys, 20 or 30 might be accustomed to working with trusts; but of that number perhaps only 1 or 2 would be adequately versed in the nuances of “title holding [land] trusts.” The best advice in this regard might be to inquire early-on as to an attorney’s (or accountant’s) specific knowledge of the “Illinois Land Trust.” The most common respond by an ill-informed attorney is to suggest using another financing device with which he is more familiar (allowing him to charge more money); but which carries all the risks and pitfalls the EHTrust™ is designed to avoid.
Q: Are there states that don’t allow the formation and use of land trusts.
A. There are none. The device’s legal fiction legitimizes the land trust model in all US states. However, Tennessee, Louisiana (and possibly Washington State) do not recognize the land trust form as other than Use in Land (vs. Use in Trust), and, as a result, in those states some of the benefits of the device are lost (‘such as ease of eviction while avoidance of the necessity of foreclosure re. removing an errant resident co-beneficiary). In other words, these states alone see one’s beneficiary interest in a land trust as no more than ownership of the realty being held in trust. The EHTrust™ in these states provides anonymity, federal tax write-off for the resident and ease of transfer, but the ease of eviction and dispossession of an errant tenant-buyer is lost, and a non-paying resident beneficiary can claim having equity in the real estate in order to avoid eviction and force an arduous, costly and time-consuming judicial foreclosure war with the non-resident (owner) beneficiary.
It should be noted here that the fact that a person is a “great lawyer” or a “super accountant” (‘or a “trusted friend and specialist in Real Estate matters”), may not best serve your needs in objectively evaluating the combination of simple documents that comprise the land trust transfer system known as the “EHTrust™ (‘previously and for 25 years known as the NARS (“No. Amer. Rlty Svcs.”) PACTrust™ Transfer.”
Q: What happens in the event of an irreconcilable dispute between the beneficiaries of the EHTrust™?
A: Although such occurrences are uncommonly rare due to the comprehensive nature of EHTrust™ documentation and the presence of the 3rd-party legal and equitable title-holder (owner) of the property, the system works much like an escrow, ‘curtailing virtually all disputes. As well, the parties clearly agree in the documentation–well in advance–that any dispute between them will be settled by the rules and binding decision of an arbitrator assigned by the American Arbitration Association, i.e., with the loser paying all such costs (‘an action if employed nationally would end 90% of the useless, opportunistic and frivolous litigation in the US).
Q: What stops the grantor (settlor or non-resident beneficiary) in a revocable trust from revoking it, without the consent of the other beneficiary/ies?
A: A land trust is directed by all of its beneficiaries (i.e., by “Mutual Power of Direction”). In other words, in that the owner of the property is the trustee, and the trustee can only respond to direction by all beneficiaries in complete concert, no single beneficiary (including the settlor) can do anything to, or involving, the property or its title without the absolute concurrence and mutual direction of the other beneficiary/ies. Since the trustee must sign for any legal action, the non-resident beneficiary/ies could never alter the trust, borrow money on the trust property, or cause a lien against it, without the full agreement and direction of the resident beneficiary. Likewise, the resident couldn’t add a room, install a swimming pool or increase electrical voltage (i.e., say, to install a Jacuzzi) without the full knowledge, consent and mutual direction of the non-resident.
Q: As a prospective seller, or buyer, how and where do I begin?
A: Please contact the owner of this website to inquire about initiating the transaction for you, and to locate a suitable co-beneficiary for you. We and our legal and accounting advisors will work closely with you throughout the transaction, from the initial meeting with all parties — up to the final signing phase. We will provide and prepares all documentation; the corporate trustee and the third-party collection service, all of which will work hand-in-hand, from beginning to end with everyone involved.
Q: What might be the costs for preparation of an EHTrust™?
A: Apart from any Realtors® commission, the total costs for preparation of the EHTrust™ transaction is always the lesser of one-percent (1%) of the property’s mutually agreed value at inception or any published discounted fee. The fee for set-up of the land trust itself including facilitation and documentation is never more than the lesser of one percent (1%) of the properties mutually agreed-upon value at inception or $5,000 (‘that is to say…’whichever is less).
The balance of closings costs (that are beyond our control and beyond our purview) could include, and may not be limited to: escrow and settlement fees; title insurance premium; prorated property taxes; hazard insurance premium; credit report, home warranty insurance policy, termite inspection; and a minimum Contingency Fund (“reserve”) of at least one month’s aggregate payment obligation. These costs are determined solely by the relinquishing and acquiring parties (“buyer” and “seller”). Although not a part of the standard closing costs, one should be well aware of, and budget for, the fact that the first monthly EHTrust™ payment, in that it is tantamount to a lease payment, will be due on the day of, or shortly following, the Close of Escrow with all payments thereafter becoming due and payable on the first day of each succeeding month (unless mutually agreed otherwise).
Q: Is there a maximum allowable term for an EHTrust™?
A: Not really, although it has been stated in the literature (Kenoe on Land Trusts) that a land trust could be declared as “failed,” and taxed as a corporation if it were established for a term of less than three (3) years or more than twenty-one years. The impact of such characterization by the IRS conceivably could, if this assertion is factual (we have no verification of it by the IRS to date), deprive the resident beneficiary of the mortgage interest and property-tax deductions. Regarding a maximum term: the concept known as the Rule Against Perpetuities can be applied to any land trust with a term of more than twenty-one (21) years, or those land trusts without a precisely stated shorter term; or those in which remainder interests exceed the stated term of agreement (Hatfield, re. Perpetuities in Land Trusts. 40Ill.L.Rev.84(1945). However, with the proper contract verbiage, the land trust may be for any reasonable period, not to exceed the scheduled length of the underlying mortgage financing.