How to pass 1-4 unit investment properties to children

Question

How can someone avoid probate and the due on sale clauses when passing 1-4 unit investment properties to children?  What structure works?

I'm most interested in hearing from people who have actual experience and have been successful in accomplishing avoidance of both due on sale clauses and probate.

I have a relative with lots of 1-4 unit investment properties in several states who would like to avoid probate, taxes, and due on sale clauses and have the property passed to one of my siblings.

Thanks in advance for any responses.

Jeffrey S. Breglio · Answer

The question is incomplete. Important part is WHEN do you want to transfer the properties.

If you want to transfer AFTER death, then use the family living trust. This does NOT violate any due on sale clause and avoids probate. And it passes the asset free of estate tax up to approx. $5.5M for an individual and approx. $11M for a married couple. Only a trust can do this. Not a will! And the properties must be titled in the trust.

If you want to transfer DURING your life, each person can gift approx. $17k each year to any one tax free. So, a married couple can gift about $35k to each child each year. You can accomplish this through a trust by slowly adding benificial interest, or through a LLC by slowly giving membership interest, or by adding slowly as tenants in common on title. If you go down this road, work closely with your attorney and CPA to stay within the limitations. I've helped numerous clients with this. This could also kick in the due on sale clause. And there's no way to avoid this. The trust route will be the smallest red flag to a bank.

Happy investing!

Jeff

Jeff B. · Answer

@Jon S.  Just not true. I transferred title of my personal home AND my 6-units to my Living Trust in 2006 without any such liability.  It's all in using the right vehicle (use Quitclaim Deed) and a PCOR stating

• purpose to revest title
• sales price -0-
• taxes -0-

we do agree: consult a local lawyer and contact the County Recorder for an opinion on Revesting Title without effecting a transfer.

Renee Cato · Answer

They should consult with a lawyer (my disclaimer. ☺️). A living trust, appointing a trustee should work.

Jeffrey S. Breglio · Answer

it applies to all mortgages. including non-owner occupied.

Jon Q. · Answer

Jeff,

I'm pretty sure the Garn-St. Germain Act does not apply to investment properties.  Please confirm.

Jeffrey S. Breglio · Answer

If passing the properties at death, then use the family trust. Estate passes tax free (up to the limits i mentioned earlier). And due on sale not an issue.

But some clarifications. When your dad transfers the properties to his trust, it does NOT kick in the due on sale clause. That is a specific exemption in the Garn-St. Germain Act, the federal law covering the due on sale. And it will not kick in while he is alive.

When he dies, at that point, if they bank knows he has died they can call the note due. Not because of the trust, but because he has died.

I can't recommend this, but I've seen numerous investors simply not notify the bank and keep the loans in place for a long time. You can do as @David Dachtera says, and keep the trust as the title owner and direct the successor trustee to make payments of rent to you (and/or the other beneficiaries). These kinds of instructions can be added in the trust document when your dad creates it. So he should use an attorney familiar with real estate as investments. As a beneficiary who is to receive the property, you can direct the successor trustee to transfer title to you. At that point, because title has transferred out of the trust, it will be a bigger red flag to the bank.

Jeff

Jon Q. · Answer

@David Dachtera

Colonial Bank will do that.

David Dachtera · Answer

On death, you don't transfer, you change beneficiaries. The new beneficiary(-ies) can then direct the trustee to do what ever is legal to do in that situation. Check with your attorney.

David Dachtera · Answer

If the payments are being  made and they're current, why would they do that? Which banks have you seen do it?

Jon Q. · Answer

I actually spoke directly to one of their lenses who told me directly that they will call the loan if we put it in a trust with the owner as beneficiary.

How to pass 1-4 unit investment properties to children

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