Asset Protection! Land Trust with LLC as beneficiary

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Asset Protection! Land Trust with LLC as beneficiary

Krystin Aversa
Member since 2020 · 19 posts · 17 votes

First time investor here, and would like to know if anyone has done this in practice. I have read a lot about the importance of asset protection, specifically with rental properties, and note that most investors advise to purchase property used for passive rental income in an LLC. However, I have also learned that financing is difficult to obtain as an LLC, particularly if the LLC is new. In my reading I came across a suggested strategy in which property is purchased by an individual, therefore qualifying for a conventional mortgage loan, and then transferred to a land trust, with the LLC named as beneficiary; in this way, the due on sale clause is not triggered, and the benefits of both privacy and asset protection can be achieved. Appreciate any opinions/advice on this!

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    5y

    Interesting. The land trust just gives anonymity, but the LLC provides the asset protection. The LLC beneficiary is not recorded only the trustee.

    I think the due on sale clause can still be technically triggered because it is being transferred from you to the Land Trust. 

    Most banks aren't going to call the loan even if you transfered to a LLC as long as the mortgage payments are made on time.

    I'm interested to hear other opinions on this.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    5y

    Hi @Krystin Aversa, 

    The strategy that you suggest can work.  There are pros and cons depending on what you are trying to do.  However, you will lose the confidentiality and privacy benefit of the Land Trust if you take title in your name first.  Those who want to find you merely have to do a grantor/grantee index search that will show any property that you are or were on title to.  

    The due on sale clause can not be triggered under Federal law as long as the Land Trust and the LLC are both "disregarded entities" and you are the sole owner. However, I completely agree with @John Underwood that it would trigger the due on sale clause if you were to transfer/assign the membership interest to a third-party.  I know there are some that would disagree with me on this, but if you read the loan docs as drafted today, it would be considered a conveyance of title and would trigger the due on sale clause.  If done on purpose, could be lender fraud. 

    It is difficult to find a lender that will end to a Land Trust, and many title insurance companies avoid insuring title held in a Land Trust because of the abuse (due on sale clause issue and reassessment for property tax purposes, among others).  

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  • Krystin Aversa
    OP
    Member since 2020 · 19 posts · 17 votes
    5y

    Hi @Bill Exeter,

    I really appreciate your input. What I am essentially trying to accomplish is bypassing the challenges associated with securing financing as an LLC, but still finding an effective way to protect my assets once I have obtained them by transferring them into an LLC. As you described, I would transfer the property to the land trust and name the LLC as beneficiary, of which I am the sole owner. Based on what you've said, since I am not transferring/assigning membership to a third-party, this should not trigger the due on sale clause correct?

    Also, you mentioned that lenders will typically not lend to a land trust and that it is difficult to find title insurance companies that will insure title held in a land trust; will this apply if the original loan is being made to me as an individual, and the property is later transferred to the land trust with LLC as beneficiary? Thanks again for your input!

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  • Malida Suong
    New to Real Estate · NH/MA · Member since 2016 · 19 posts · 12 votes
    5y

    Hi Krystin, any update on your situation? I have been reading about this a lot as well and currently in the same boat. What I'm told at this point by the attorney that is setting up the trust is that a change to the beneficiary would still be risky and can trigger a due on sale clause if it is assigned to a 3rd party (in my case, an LLC, even if i'm the only member).
    I also asked about the trustee, initially the lawyer to hide my name on deed, then reassigning to myself but it would be re-recorded. So the trust would hide my name but as Bill mentioned above, a simple search and someone can still associate me with the property. Not much protection really. 
    I’ve come to the conclusion that I need to get a commercial loan if I want the next property to be in an LLC or refinance current properties using a commercial loan. The interest rate was higher obviously but seems worth it. 

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