Transferring Real Estate into an Entity - Due on Sale?

[Edward Stephens]

Dear BP Family,

I'll soon be the owner of a piece of real estate, and want to enjoy the asset protection afforded by an LLC. Has anyone on BP been successful in transferring ownership of mortgaged real estate from themselves to an LLC? I'm concerned that my lender will accelerate the mortgage when I deed my property to an LLC I control.

If you've been able to accomplish this, did you first create a Living Trust, then make the LLC the trustee of the Living Trust, thereby accomplishing asset protection? I know this is not the same thing as the LLC owning the property, but in my mind it accomplishes the same objective of asset protection. Thanks in advance.

[Bill Gulley]

The OP is in Kansas City, that's not in Utah, in Missouri, banks do and will call in loans transferred.

A loan in the name of a member or guaranteed by a member with funds used in an LLC or where assets used by an LLC are collateral for a loan made by a member do not constitute commingling of funds or assets as personal guarantees are generally required.

A revocable Trust where the borrower remains as the beneficiary which has an estate planning purpose is specifically excluded as an event subject to the due on sale clause. 

An LLC can have a Trust or any other entity as a member of that LLC.

You can transfer property to a Trust which carries estate planning goals with you as the beneficiary. Your Trust can later become a member of an LLC. The activities of your Trust are irrelevant to the due on sale aspects.

A lender may request a copy of your Trust, they may also ask that the Trust name be identified with your name, this is for title search aspects. The law also states that lenders are to reasonably afford a borrower estate planning avenues. A letter from your attorney will generally do the trick. Common sense tells the lender that the larger the estate, the more complex the estate plan can be. A string of Trusts and LLCs for a low net worth person is just a red flag. 

In MO. members of an LLC are not listed with the Secretary of State, only the organizer and the registered agent who may be the same person or entity. LLCs are either "member managed" or manager managed" any person or entity may manage a MO. LLC without being a member. Members are only named in the Operating Agreement which is not filed with the Secretary or any other public filing.

So, you can get as convoluted as you like, just remember you'll have management requirements for every entity, tax returns and filings that can't be paid with a smile. An LLC means you can't represent yourself in court, you'll need an attorney.

If you have larger multi-family units, I suggest a separate LLC, you can have 100 homes in one LLC. The difference is the concentration of risks. You take on more risk driving your car than you do owning a single family residence. If you truly understand business and real estate, good management keeps you from being negligent in the first place, then insurance kicks in.

Risks of being sued is NOT the same all over the country, Missouri is rather landlord friendly in that respect, so is Kansas. New Jersey or California is another matter, while we have our share of trip and falls, you really have to be negligent to be liable. Folks need to consult with their local attorney as to the risks assumed in their jurisdiction. 

Understand too, that if you lose a law suit for some activity outside your business ventures. like a car accident or a hunting accident, your assets are at risk and any and all of your LLCs owned are your assets, this is coming in the back door to attach your assets held, just as if you owned stock in a corporation, that stock can be sold. 

The only bullet proof way to protect "your" assets is not to own them or be able to touch them, that is an Irrevocable Trust, you better make sure the family loves you, LOL. :)