Transfer Upon Death Clause - Promissory Note

5 Replies

Greetings - I am borrowing large sums of money from a private individual and drafting promissory notes. One thing they would like to have in the promissory note is a TOD Clause. I am not looking for legal advise, but rather an example I could model off of to put in my promissory note. In reality, the only thing we need this to do is act as an instrument that if I were to die and she were to die it goes to her daughter. Her will already states that everything goes to her daughter anyhow, and we've previously been operating without this in place, but decided that if we were both to tragically die, it's better we have this in writing than not. Thank You,

Originally posted by @Zach Schwarzmiller :

Greetings - I am borrowing large sums of money from a private individual and drafting promissory notes. One thing they would like to have in the promissory note is a TOD Clause. I am not looking for legal advise, but rather an example I could model off of to put in my promissory note. In reality, the only thing we need this to do is act as an instrument that if I were to die and she were to die it goes to her daughter. Her will already states that everything goes to her daughter anyhow, and we've previously been operating without this in place, but decided that if we were both to tragically die, it's better we have this in writing than not. Thank You,

Regarding "I am borrowing large sums of money from a private individual and drafting promissory notes", have you spoken with an Attorney to insure that you aren't violating any SEC laws, etc? Your actions likely require a license and disclosures to the investor as it sounds like you are selling a security (In my non-legal opinion).  Apologies if you know all this and have it covered already.

Rather than writing notes payable to the individual, I believe you could be making the lender's Living Trust the beneficiary on the note.  This way when the lender passes, the note would still be owed to their estate and distributed as provided in the will.  Good luck!

Scott Williams

Thank You @Scott Williams - I suppose large sums of money varies person to person. I am not borrowing above $500,000 but do have an open line of credit with the individual up to about that much. I have not consulted with an attorney and was not aware I may be violating any SEC laws. I've only spoken to my accountant about it for tax purposes. I am not selling any securities (at least to my knowledge so I haven't worried much about it). I am really not selling anything, just buy and hold properties. I just found an individual with money in the bank who is tired of collecting less than 1% so they allow me to borrow for a better rate - very informal, we have a good relationship and solid foundation of trust. If I die though, I would want them to have something on paper that shows I did indeed borrow the money. Perhaps worth meeting with an attorney at some point anyhow as much as I hate to do it. Everything always seems to become more complex than it needs!

Writing the note to their Living Trust is a brilliant idea, I love it. Thank You!

Originally posted by @Zach Schwarzmiller :

 I have not consulted with an attorney and was not aware I may be violating any SEC laws. I've only spoken to my accountant about it for tax purposes. I am not selling any securities (at least to my knowledge so I haven't worried much about it). I am really not selling anything, just buy and hold properties.

Highly recommend that you speak with an Attorney ASAP.  My understanding is that having someone fund your Trust Deed IS selling a security per the SEC.  There are legal requirements for licensing to originate Trust Deeds  (Brokers license and/or CFL license in CA), there are requirements for the investors income / net worth relative to the size of the loan they are funding.  You are required to document how the lender was qualified to fund (net worth / income) and kept with your records. BRE requires quarterly & annual reports for the number of loans originated, number foreclosed, etc.  If the borrowed money is crossing state lines, I believe there are more rules that come into play.  More rules if the funds are for your own benefit, Usury limits if not licensed, etc. etc.  Laws seem to change constantly and are mostly getting more onerous for the loan originator.  

NOT trying to be Debbie Downer here, but I think you will be very unpleasantly surprised to learn all the requirements to be compliant.  If one of your loans goes sideways, you could end up in more trouble than you realize.  

Search "Syndication", "Blue Sky Laws" and look for posts by Bill Gulley on this site, if you want to read more. 

Scott Williams

Actually, a Promissory Note, even though collateralized by real estate, is personal property.

Personal property can be held as an asset in a trust. The asset(s) held by trust are controlled by the trustee pursuant to the terms of the trust agreement, whether simple or sophisticated.

Upon certain events, such as the death of the settlor beneficiary, the asset(s) may be liquidated, distributed, or extinguished, per the trust agreement.

Therefore, the loan is an asset of the trust, and would not be subject to the decedent's will unless drafted so intentionally.

They actually have no living trust at all. They own nothing without having a direct beneficiary tied to it. They rent and keep all their money in the bank with daughter tied to accounts and will allocating all assets in accounts to single daughter. We both try and keep things so simple this seems to just be complicating it all.

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