Avoiding "Due on Transfer" Provisions in Land Trusts and - - PowerPoint PPT Presentation

Avoiding "Due on Transfer" Provisions in Land Trusts and Single-Member LLCs

A Real-World Guide to Garn-St. Germain Act Exemptions

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, MARCH 22, 2017

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Today’s faculty features: William Bronchick, Principal Shareholder , Bronchick & Associates, Aurora, Colo. Bryan Dunklin, Law Offices of Bryan Dunklin, Dallas

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Avoiding "Due on Transfer" Provisions in Land Trusts and Single-Member LLCs

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Strafford Publications, Inc. 590 Dutch Valley Road NE Atlanta, GA 30324-0729 Tel: (800) 926-7926 x 12 Tel: (800) 926-7926 x 12 Fax: (404) 881-0074

Presented by Presented by William William Bronchick Bronchick and Bryan Dunklin and Bryan Dunklin March 22, 2017 March 22, 2017

5 5

William Bronchick, Esq. William Bronchick, Esq.



Self Self-unemployed for 26 years unemployed for 26 years



Admitted to practice before New York Bar in 1991 Admitted to practice before New York Bar in 1991



Admitted to practice before Colorado bar in 1996 Admitted to practice before Colorado bar in 1996

     

Admitted to practice before Colorado bar in 1996 Admitted to practice before Colorado bar in 1996



Practice limited to real estate, asset protection, and estate Practice limited to real estate, asset protection, and estate planning planning



Author of six best Author of six best-selling real estate and business books selling real estate and business books



Licensed real estate broker Licensed real estate broker

6 6

Bryan Dunklin, Esq. Bryan Dunklin, Esq.



Admitted to practice law before Texas Bar in 1980 Admitted to practice law before Texas Bar in 1980



Licensed real estate broker in Texas for 28 years Licensed real estate broker in Texas for 28 years



Taught real estate and business law at Southern Methodist University Taught real estate and business law at Southern Methodist University

       

for 23 years for 23 years



Frequent speaker and author for various bar associations Frequent speaker and author for various bar associations



Chosen as “Best Speaker” by the State Bar of Texas Advanced Real Chosen as “Best Speaker” by the State Bar of Texas Advanced Real Estate Law Course for “Texas Series LLCs” Estate Law Course for “Texas Series LLCs”



Former Chairman, Dallas Bar Association Real Property Section Former Chairman, Dallas Bar Association Real Property Section



Frustrated Frustrated musician musician



Great joke teller Great joke teller

7 7

OUTLI NE OUTLI NE

 History of the due on sale clause, and of the Garn-St.

Germain Depository Institutions Act

 Brief definition of “due-on-sale/due-on-transfer”

provisions

     

provisions

 Exceptions that the Garn-St. Germain Depository Act

provide to the enforceability of contractual due-on- transfer provisions in mortgages

 Drafting revocable living trust documents to hold

encumbered real estate

 Structuring the transaction to avoid the acceleration

provision

 Transfers into single-member LLCs

8 8

BENEFI TS BENEFI TS

 The panel will review these and other key

issues:

– What are the specified transfers exempt from enforcement of due-on-sale/acceleration clauses as



enforcement of due-on-sale/acceleration clauses as they relate to estate planning? – What are the practical requirements that a trust must have to ensure that a transfer of qualified property does not trigger an acceleration clause? – What are the specific traps that trust counsel must avoid in structuring a trust transaction? – Sample language for trust documents

9 9

LEARNI NG OBJECTI VES LEARNI NG OBJECTI VES

 After completing this course, you will be

able to:

– Identify the transfers exempt from enforcement of due-on-sale/acceleration clauses for estate planning



due-on-sale/acceleration clauses for estate planning purposes – Discern trust provision requirements to ensure that a transfer of qualified property does not trigger an acceleration clause – Determine transfers into LLC structures that will not violate “due-on-transfer” provisions – Recognize specific tax traps that trust advisers must avoid in structuring a trust transaction

10 10

History of the History of the “due on sale clause” “due on sale clause”



Before the early 1970s, mortgage loans typically did not contractually Before the early 1970s, mortgage loans typically did not contractually permit a lender to demand that a note be paid in full ( permit a lender to demand that a note be paid in full (accelerating

accelerating the debt the debt) merely because the borrower sold the property that was

) merely because the borrower sold the property that was the lender’s collateral. If the contract interest rate on such a the lender’s collateral. If the contract interest rate on such a

 

the lender’s collateral. If the contract interest rate on such a the lender’s collateral. If the contract interest rate on such a mortgage loan was at a fixed rate, and if interest rates being paid in mortgage loan was at a fixed rate, and if interest rates being paid in the market began to rise, the value of the note would decline as the market began to rise, the value of the note would decline as market interest rates rose. market interest rates rose.



When inflationary expectations and pressures began to generally When inflationary expectations and pressures began to generally cause an increase in market interest rates in the early 1970s, lenders cause an increase in market interest rates in the early 1970s, lenders sought to protect themselves from increasing interest rates in various sought to protect themselves from increasing interest rates in various ways, including the addition of contractual language in real estate ways, including the addition of contractual language in real estate mortgages that would allow the lender to require the borrower to mortgages that would allow the lender to require the borrower to pay the entire balance owing if the property securing the loan was pay the entire balance owing if the property securing the loan was sold (a sold (a “due

“due-on

• n-sale” clause

sale” clause).

).

11 11

The “due The “due-

• on
• n-
• sale” clause

sale” clause

 The following is typical due

The following is typical due-on

• n-sale language contained

sale language contained in the early mortgages: in the early mortgages:

 “In the event that the borrower sells the property

“In the event that the borrower sells the property

  “In the event that the borrower sells the property

“In the event that the borrower sells the property without the prior written consent of the lender, the without the prior written consent of the lender, the lender may, at its option, declare the entire principal lender may, at its option, declare the entire principal balance of the loan immediately due and payable.” balance of the loan immediately due and payable.”

12 12

Borrower’s tactics in dealing with Borrower’s tactics in dealing with a “due on sale” clause a “due on sale” clause

 Creative borrowers began using various

Creative borrowers began using various techniques to keep from technically “selling” techniques to keep from technically “selling” the property, to prevent the lender from being the property, to prevent the lender from being able to require immediate payment of the loan able to require immediate payment of the loan



able to require immediate payment of the loan able to require immediate payment of the loan in full, such as: in full, such as:

– Entering into contracts for deed

Entering into contracts for deed

– Using long term leases coupled with an option

Using long term leases coupled with an option granted to the tenant to purchase the property granted to the tenant to purchase the property

– Selling the shares in a corporate borrower

Selling the shares in a corporate borrower

– Transferring the beneficial interest in a trust

Transferring the beneficial interest in a trust

13 13

History of the History of the “due “due-on

• n-
• transfer” clause

transfer” clause

 Lenders then responded to such tactics by adding

Lenders then responded to such tactics by adding additional language to exercise their right to additional language to exercise their right to accelerate the debt if such specific events occurred accelerate the debt if such specific events occurred

 

accelerate the debt if such specific events occurred accelerate the debt if such specific events occurred (then referred to a “ (then referred to a “due

due-on

• n-transfer

transfer” clause).

” clause).

 The following is contractual language in a mortgage

The following is contractual language in a mortgage containing a more lender friendly “due containing a more lender friendly “due-on

• n-transfer”

transfer” clause, which makes a defined “ clause, which makes a defined “Disposition

Disposition” an

” an event of default, and which would give the lender event of default, and which would give the lender the right to accelerate the debt: the right to accelerate the debt:

14 14

Example of a lender’s Example of a lender’s “due “due-on

• n-
• transfer” clause

transfer” clause

 “Borrower will not make a Disposition without

• btaining Lender’s prior written consent to the

Disposition.”

   Disposition was then defined in the mortgage to

include:

– “Any sale, lease (except as permitted under this Deed of

Trust), exchange, assignment, conveyance, transfer, trade, or other disposition of all or any portion of the Mortgaged Property (or any interest therein) or all or any part of the beneficial ownership interest in Borrower (if Borrower is a corporation, partnership, general partnership, limited partnership, joint venture, trust, or

• ther type of business association or legal entity).”

16 16

History of the History of the “due “due-on

• n-
• transfer” clause

transfer” clause



Borrowers began to resist and started litigating the attempt Borrowers began to resist and started litigating the attempt by lenders to require the loan to be paid in full merely by lenders to require the loan to be paid in full merely because the mortgage property was transferred or some because the mortgage property was transferred or some interest in the underlying borrower was transferred, arguing interest in the underlying borrower was transferred, arguing that such limitations amounted to an that such limitations amounted to an unconstitutional

unconstitutional

 

that such limitations amounted to an that such limitations amounted to an unconstitutional

unconstitutional restraint on alienation restraint on alienation (the right to transfer your property).

(the right to transfer your property). Because lenders also sometimes charged exorbitant pre Because lenders also sometimes charged exorbitant pre- payment penalties, the courts recognized that the confluence payment penalties, the courts recognized that the confluence

• f these two contractual provisions could effectively restrain
• f these two contractual provisions could effectively restrain

alienation. alienation.



The courts in different states began to interpret these The courts in different states began to interpret these contractual provisions, and the law was interpreted differently contractual provisions, and the law was interpreted differently in virtually every state. in virtually every state.

17 17

Garn-St. Germain Depository I nstitutions Act



To eliminate the confusion surrounding the enforceability of To eliminate the confusion surrounding the enforceability of due due-on

• n-transfer clauses, on October 15, 1982, Congress

transfer clauses, on October 15, 1982, Congress decided to preempt state law by passing a federal statute. decided to preempt state law by passing a federal statute.



This act was intended to give uniform treatment of these This act was intended to give uniform treatment of these

  

This act was intended to give uniform treatment of these This act was intended to give uniform treatment of these mortgage provisions in all of the jurisdictions. mortgage provisions in all of the jurisdictions.



The Garn-St. Germain Depository Institutions Act specified when a lender could, and when it could not, require the borrower to pay the entire balance merely because of a transfer of an interest in the property securing the loan, or a transfer of an interest in the borrowing entity.

12 U.S.C. 12 U.S.C. § 1701j 1701j-3(d)(2000) 3(d)(2000)

18 18

Garn Garn-St. Germain

• St. Germain - The statute

The statute 12 U.S. Code 12 U.S. Code § 1701j 1701j-3 3 Preemption of due Preemption of due-on

• n-sale

sale prohibitions prohibitions

 (a) Definitions

– (1) the term “due-on-sale clause” means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an



declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent; – (3) the term “real property loan” means a loan, mortgage, advance, or credit sale secured by a lien on real property, the stock allocated to a dwelling unit in a cooperative housing corporation, or a residential manufactured home, whether real or personal property; and

19 19

Garn Garn-St. Germain

• St. Germain - The statute

The statute 12 U.S. Code 12 U.S. Code § 1701j 1701j-3 3 Preemption of due Preemption of due-on

• n-sale

sale prohibitions prohibitions

 (d) Exemption of specified transfers or

dispositions

– With respect to a real property loan secured by a lien on residential real property containing



lien on residential real property containing

less than five dwelling units, …

– a lender may not exercise its option

pursuant to a due-on-sale clause upon—

20 20

Garn Garn-St. Germain

• St. Germain - The statute

The statute 12 U.S. Code 12 U.S. Code § 1701j 1701j-3 3 Preemption of due Preemption of due-on

• n-sale

sale prohibitions prohibitions

 (1) the creation of a lien or other encumbrance

subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;

 (2) the creation of a purchase money security interest      (2) the creation of a purchase money security interest

for household appliances;

 (3) a transfer by devise, descent, or operation of law on

the death of a joint tenant or tenant by the entirety;

 (4) the granting of a leasehold interest of three years or

less not containing an option to purchase;

 (5) a transfer to a relative resulting from the death of a

borrower;

21 21

Garn Garn-St. Germain

• St. Germain - The statute

The statute 12 U.S. Code 12 U.S. Code § 1701j 1701j-3 3 Preemption of due Preemption of due-on

• n-sale

sale prohibitions prohibitions

 (6) a transfer where the spouse or children of the

borrower become an owner of the property;

 (7) a transfer resulting from a decree of a dissolution of

marriage, legal separation agreement, or from an incidental property settlement agreement, by which the

   

incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;

 (8) a transfer into an inter vivos trust in which the

borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or

 (9) any other transfer or disposition described in

regulations prescribed by the Federal Home Loan Bank Board.

22 22

Statutory limitations on Statutory limitations on prepayment penalties prepayment penalties

 (B)

(B) A lender shall not impose a prepayment penalty A lender shall not impose a prepayment penalty

• r equivalent fee when the lender or party acting
• r equivalent fee when the lender or party acting
• n behalf of the lender
• n behalf of the lender



(i) Declares by written notice that the loan Declares by written notice that the loan

  

(i) Declares by written notice that the loan Declares by written notice that the loan is due is due pursuant to a due pursuant to a due-on

• n-sale clause or

sale clause or



(ii) (ii) Commences a judicial or Commences a judicial or nonjudicial nonjudicial foreclosure foreclosure proceeding to enforce a proceeding to enforce a due due-on

• n-

sale sale clause or to seek payment in full as a clause or to seek payment in full as a result result of invoking such clause.

• f invoking such clause.

23 23

Garn Garn-St. Germain

• St. Germain

Regulations Regulations

 The Federal Home Loan Bank Board, in

consultation with the Comptroller of the Currency and the National Credit Union Administration Board, was authorized to

 

Administration Board, was authorized to issue rules and regulations and to publish interpretations governing the implementation of this section.

 Those regulations can be found at:

12 CFR 591.5

24 24

Garn Garn-St. Germain Regulations

• St. Germain Regulations

12 CFR 591.5 - Limitation on exercise of due-on-sale clauses



§591.5(b) 591.5(b) Specific limitations. Specific limitations. With respect to any loan on the With respect to any loan on the security of a home security of a home occupied or to be occupied by the borrower

• ccupied or to be occupied by the borrower,



(A) (A) A lender shall not A lender shall not (except with regard to a reverse mortgage) (except with regard to a reverse mortgage) exercise its option pursuant to a due exercise its option pursuant to a due-on

• n-sale clause upon

sale clause upon: … : …

   

exercise its option pursuant to a due exercise its option pursuant to a due-on

• n-sale clause upon

sale clause upon: … : …



(iii) (iii) A transfer by devise, descent, or operation of

transfer by devise, descent, or operation of law law on the death

• n the death of a joint tenant or tenant by the entirety
• f a joint tenant or tenant by the entirety;



(iv) (iv) The The granting of a leasehold interest which has a

granting of a leasehold interest which has a term term of three years or less

• f three years or less and

and which does not contain which does not contain an an option to purchase

• ption to purchase (that is, either a lease of more than

(that is, either a lease of more than three three years years or

• r a lease with an option to purchase will allow the

a lease with an option to purchase will allow the exercise exercise of a due

• f a due-on
• n-sale clause);

sale clause);

25 25

Garn Garn-St. Germain Regulations

• St. Germain Regulations

12 CFR 591.5 - Limitation on exercise of due-on-sale clauses

– (v) A v) A transfer, in which the transferee is a person who occupies or will transfer, in which the transferee is a person who occupies or will

• ccupy the property, which is:
• ccupy the property, which is:



(A) (A) A transfer to a relative resulting from the A transfer to a relative resulting from the death death of the borrower;

• f the borrower;

 



death death of the borrower;

• f the borrower;



(B) (B) A transfer where the spouse or A transfer where the spouse or child( child(ren ren) becomes an owner of the property; or ) becomes an owner of the property; or



(C) (C) A transfer resulting from a decree of A transfer resulting from a decree of dissolution dissolution of marriage, legal separation agreement,

• f marriage, legal separation agreement,
• r
• r from an incidental property settlement agreement

from an incidental property settlement agreement by by which the spouse becomes an owner of the which the spouse becomes an owner of the property property; or ; or

26 26

Garn Garn-St. Germain Regulations

• St. Germain Regulations

12 CFR 591.5 - Limitation on exercise of due-on-sale clauses



With respect to any loan on the security of a home With respect to any loan on the security of a home

• ccupied or to be occupied by the borrower
• ccupied or to be occupied by the borrower,



(A) (A) A lender shall not A lender shall not (except with regard to a reverse (except with regard to a reverse mortgage) mortgage) exercise its option pursuant to a due exercise its option pursuant to a due-on

• n-sale

sale

 

mortgage) mortgage) exercise its option pursuant to a due exercise its option pursuant to a due-on

• n-sale

sale clause upon clause upon: … : …

– – (vi) (vi) A transfer into an inter

A transfer into an inter vivos vivos trust in which the trust in which the borrower is and remains the beneficiary and borrower is and remains the beneficiary and

• ccupant of the property
• ccupant of the property, unless, as a condition

unless, as a condition precedent to such transfer, the borrower refuses precedent to such transfer, the borrower refuses to provide the lender with reasonable means to provide the lender with reasonable means acceptable to the lender by which the lender will acceptable to the lender by which the lender will be assured of timely notice of any subsequent be assured of timely notice of any subsequent transfer of the beneficial interest or change in transfer of the beneficial interest or change in

• ccupancy
• ccupancy.

27 27

Effect of Effect of Garn Garn-

• St. Germain
• St. Germain

 After

After Garn Garn-St. Germain, residential lenders

• St. Germain, residential lenders

generally generally

– Changed the language of their due Changed the language of their due-on

• n-transfer clauses to

transfer clauses to specify the exceptions stated in the Act. specify the exceptions stated in the Act.

 

specify the exceptions stated in the Act. specify the exceptions stated in the Act. – Stopped charging prepayment penalties if they accelerated Stopped charging prepayment penalties if they accelerated the debt as a result of a transfer without the lender’s the debt as a result of a transfer without the lender’s consent consent – Began to respect circumstances that fell within the Began to respect circumstances that fell within the exceptions to enforceability of a due exceptions to enforceability of a due-on

• n-transfer clause

transfer clause

 See the residential mortgage language that follows:

See the residential mortgage language that follows:

28 28

Texas Real Estate Forms Texas Real Estate Forms Manual due Manual due-

• on
• n-
• sale clause

sale clause



"I f Grantor transfers any part of the Property without I f Grantor transfers any part of the Property without Lender’s prior written consent Lender’s prior written consent, Lender may Lender may declare the declare the debt debt secured by this deed of trust

secured by this deed of trust immediately payable

immediately payable and

and invoke any remedies provided in this deed of trust for default. invoke any remedies provided in this deed of trust for default.

I f the Property is residential real property containing I f the Property is residential real property containing fewer than five dwelling units fewer than five dwelling units or a residential

• r a residential



fewer than five dwelling units fewer than five dwelling units or a residential

• r a residential

manufactured home manufactured home occupied by Grantor

• ccupied by Grantor, exceptions to

exceptions to this provision are limited to this provision are limited to (a) a subordinate lien or

(a) a subordinate lien or encumbrance that does not transfer rights of occupancy of the encumbrance that does not transfer rights of occupancy of the Property; (b) creation of a purchase Property; (b) creation of a purchase-money security interest for money security interest for household appliances; (c) transfer by devise, descent, or household appliances; (c) transfer by devise, descent, or

• peration of law on the death of a co
• peration of law on the death of a co-Grantor; (d)

Grantor; (d) grant of a

grant of a leasehold interest of three years or less without an leasehold interest of three years or less without an

• ption to purchase
• ption to purchase; (e) transfer to a spouse or children of

; (e) transfer to a spouse or children of Grantor or between co Grantor or between co-Grantors; (f) transfer to a relative of Grantors; (f) transfer to a relative of Grantor on Grantor’s death; and (g) Grantor on Grantor’s death; and (g) transfer to an inter

transfer to an inter vivos vivos trust in which Grantor is and remains a trust in which Grantor is and remains a beneficiary and occupant of the Property." beneficiary and occupant of the Property."

29 29

Can the lender call the note due if there Can the lender call the note due if there is a due on sale clause and the property is a due on sale clause and the property is sold without the lender’s consent? is sold without the lender’s consent?



Generally the answer is Generally the answer is “yes.”

“yes.”



But there’s some possibility that there might not be a due But there’s some possibility that there might not be a due-on

• n-

transfer clause if the lender is not an institution (need to transfer clause if the lender is not an institution (need to check) check)



The lender might grant permission (particularly if you assign The lender might grant permission (particularly if you assign

   

The lender might grant permission (particularly if you assign The lender might grant permission (particularly if you assign the lender additional legal rights) the lender additional legal rights)



So if a lender has this contractual right, why wouldn’t it So if a lender has this contractual right, why wouldn’t it exercise its right to call the note due? exercise its right to call the note due?

– Market Market interest rates

interest rates are below the note’s rate

are below the note’s rate – Property’s Property’s value is less

value is less than the amount owed

than the amount owed – Lenders don’t want to foreclose Lenders don’t want to foreclose – Lender’s don’t want to own property (taxes, maintenance, property is Lender’s don’t want to own property (taxes, maintenance, property is vacant) vacant) – Loan is performing, vs. recognition of loss if property is foreclosed Loan is performing, vs. recognition of loss if property is foreclosed

31 31

Will the lender exercise it’s right to call Will the lender exercise it’s right to call the note due under its due the note due under its due-on

• n-transfer

transfer clause? clause?



As mortgage interest rates have fallen from the As mortgage interest rates have fallen from the high levels of the early 1980s, lenders have high levels of the early 1980s, lenders have frequently not been aggressive in exercising their frequently not been aggressive in exercising their rights under the due rights under the due-on

• n-sale clause. Instead many

sale clause. Instead many lenders have sometimes preferred to allow the loan lenders have sometimes preferred to allow the loan

 

lenders have sometimes preferred to allow the loan lenders have sometimes preferred to allow the loan contract to remain in place so long as it is being contract to remain in place so long as it is being timely paid. As current interest rates rise, it can be timely paid. As current interest rates rise, it can be expected that more lenders will elect to accelerate expected that more lenders will elect to accelerate the debt when it is discovered that the borrower the debt when it is discovered that the borrower has transferred an interest in the property without has transferred an interest in the property without the lender’s consent. the lender’s consent.



As the market improves, they can, and they might, As the market improves, they can, and they might, call the note. call the note.

32 32

Case law on due Case law on due-

• on
• n-
• sale

sale clauses clauses



Courts in some state, like Texas, routinely uphold the Courts in some state, like Texas, routinely uphold the enforceability of due enforceability of due-on

• n-sale clauses

sale clauses



In recent case law developments in Texas, the Dallas Court In recent case law developments in Texas, the Dallas Court

• f Appeals in 2005 refused to find in favor of the borrower
• f Appeals in 2005 refused to find in favor of the borrower

asserting a cause of action for wrongful foreclosure of a asserting a cause of action for wrongful foreclosure of a

 

asserting a cause of action for wrongful foreclosure of a asserting a cause of action for wrongful foreclosure of a commercial loan as a result of the borrower’s transfer of the commercial loan as a result of the borrower’s transfer of the mortgaged property to a corporation owned by the borrower mortgaged property to a corporation owned by the borrower under an unrecorded deed which the borrower claimed was under an unrecorded deed which the borrower claimed was never delivered. never delivered. Adams Adams v. First National Bank of . First National Bank of Bells/Savoy Bells/Savoy, 154 S.W.3d 859 ( , 154 S.W.3d 859 (Tex.App Tex.App.—Dallas 2005, no Dallas 2005, no pet.). The court found that there was evidence in the pet.). The court found that there was evidence in the borrower’s corporate financial statement and in the borrower’s corporate financial statement and in the borrower’s own comments to the lender that the property borrower’s own comments to the lender that the property had been transferred. Even though the lender did not give had been transferred. Even though the lender did not give the borrower a notice of its intent to accelerate the debt, the the borrower a notice of its intent to accelerate the debt, the court found that the borrower had waived her right to notice court found that the borrower had waived her right to notice

• f intent to accelerate.
• f intent to accelerate.

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Garn Garn– –St. Germain

• St. Germain

Limitations on enforceability of Limitations on enforceability of due due-on

• n-transfer clauses

transfer clauses

 Due

Due-on

• n-sale clauses are enforceable in residential

sale clauses are enforceable in residential loan transactions except in the following situations: loan transactions except in the following situations: – 1. Death of the borrower

• 1. Death of the borrower – transfer to the heirs

transfer to the heirs



– – 1. Death of the borrower

• 1. Death of the borrower – transfer to the heirs

transfer to the heirs – 2. Divorce of the borrowers

• 2. Divorce of the borrowers – transfer to one

transfer to one spouse spouse – – 3. A lease, not coupled with an option to

• 3. A lease, not coupled with an option to

purchase, of less than three years purchase, of less than three years

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Drafting Trust Provisions Drafting Trust Provisions

 Which exemption are we relying on?

Which exemption are we relying on?

– – Transfer by devise, descent, etc. Transfer by devise, descent, etc. – does that does that include the transfer into trust? include the transfer into trust? – A transfer into an inter vivos trust in which the

  

– A transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of

• ccupancy in the property

 Does the trust exemption also apply to non-

• wner occupied properties (i.e., rentals)?

 Transfer to a spouse or children exemption?

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Definition in the Definition in the Regs Regs:

 In other words, does it only apply to the

In other words, does it only apply to the grantor’s principal residence? grantor’s principal residence?

 What if the borrower is the only person on the

What if the borrower is the only person on the mortgage and transfers into trust for benefit of mortgage and transfers into trust for benefit of

   

mortgage and transfers into trust for benefit of mortgage and transfers into trust for benefit of grantor and his spouse? grantor and his spouse?

 Does transfer to trustee in trust vs. transfer to

Does transfer to trustee in trust vs. transfer to trust itself matter? trust itself matter?

 In this regard, is transfer to an irrevocable trust

In this regard, is transfer to an irrevocable trust

• k if the beneficiaries are spouse and kids?
• k if the beneficiaries are spouse and kids?

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More Trust I ssues More Trust I ssues…

 Garn

Garn-St. Germain Act only applies to 1

• St. Germain Act only applies to 1-4 family (not

4 family (not commercial) commercial)

 What about an installment sale to a trust for the

What about an installment sale to a trust for the benefit of the borrower and/or his spouse or kids? benefit of the borrower and/or his spouse or kids?

     

benefit of the borrower and/or his spouse or kids? benefit of the borrower and/or his spouse or kids?

 QPRT (spouse and kids are remainder beneficiaries)?

QPRT (spouse and kids are remainder beneficiaries)?

– (Qualified Personal Residence Trust) (Qualified Personal Residence Trust)

 Illinois Land Trust (aka “nominee” or “realty trust

Illinois Land Trust (aka “nominee” or “realty trust”) ”)

 Does Irrevocable vs. Revocable Trust matter?

Does Irrevocable vs. Revocable Trust matter?

 Refinancing trust property

Refinancing trust property

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Practical I mplications of a Practical I mplications of a Due Due-

• on
• n-
• sale “Violation”

sale “Violation”…

 Lender’s Remedies:

Lender’s Remedies:

– – Do nothing Do nothing – – Inquire further Inquire further – – Accelerate the Accelerate the loan (personal experience loan (personal experience… …)

   

– – Accelerate the Accelerate the loan (personal experience loan (personal experience… …)

 Laches

Laches – an unreasonable delay in the exercise an unreasonable delay in the exercise

• f an equitable remedy
• f an equitable remedy

 No obligation in note or mortgage to notify

No obligation in note or mortgage to notify lender; thus is the regulation lender; thus is the regulation requiring requiring notification enforceable notification enforceable?

 Does non

Does non-notification prevent laches argument? notification prevent laches argument?

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Ultra Ultra-

• Vires Doctrine

Vires Doctrine

 Usually applies to corporate players acting beyond

Usually applies to corporate players acting beyond the scope of their authority the scope of their authority

 Sometimes applied to administrative agencies

Sometimes applied to administrative agencies action beyond the scope of their enabling statute action beyond the scope of their enabling statute

   

action beyond the scope of their enabling statute action beyond the scope of their enabling statute (more common in CA, NZ, and England) (more common in CA, NZ, and England)

 Garn

Garn-St. Germain Act refers to any other exception

• St. Germain Act refers to any other exception

promulgated by the FHLBB (and presumably its promulgated by the FHLBB (and presumably its successors) successors)

 Thus, did the FHLBB act beyond their powers in

Thus, did the FHLBB act beyond their powers in shrinking the trust exemption to owner shrinking the trust exemption to owner-occupied?

• ccupied?

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Sample Trust Language Sample Trust Language

 In the event the holder of the mortgage(s) or

In the event the holder of the mortgage(s) or liens against real property held by this trust liens against real property held by this trust seek to enforce the “due on sale” provisions of seek to enforce the “due on sale” provisions of said mortgage(s) or lien(s), the Trustee is said mortgage(s) or lien(s), the Trustee is



said mortgage(s) or lien(s), the Trustee is said mortgage(s) or lien(s), the Trustee is authorized to transfer the property to the authorized to transfer the property to the grantor(s)/borrower(s) of this trust or enter grantor(s)/borrower(s) of this trust or enter into any agreement that is required by said into any agreement that is required by said mortgage or lienholders to avoid enforcement mortgage or lienholders to avoid enforcement

• f said ”due on sale” provisions.
• f said ”due on sale” provisions.

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Transfer to LLC Transfer to LLC… …

 Property owned by LLC provides more

Property owned by LLC provides more protection than a property owned by a living protection than a property owned by a living trust. trust.

 Some courts have held that transfer from H&W

Some courts have held that transfer from H&W

   Some courts have held that transfer from H&W

Some courts have held that transfer from H&W to a limited partnership of H&W would trigger to a limited partnership of H&W would trigger due on sale. due on sale.

 Does transfer to a “disregarded” LLC trigger

Does transfer to a “disregarded” LLC trigger due on sale? LLCs were rarely used in 1983, due on sale? LLCs were rarely used in 1983, thus is a single member LLC a separate “owner” thus is a single member LLC a separate “owner” from the member? from the member?

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Tax I ssues in Transferring to Tax I ssues in Transferring to Trust Trust

 Transfer to a “grantor” trust (I.R.C. Secs 671

Transfer to a “grantor” trust (I.R.C. Secs 671- 678) is a non 678) is a non-taxable event. taxable event.

 Would apply to typical living trusts,

Would apply to typical living trusts,

   Would apply to typical living trusts,

Would apply to typical living trusts, intentionally intentionally-defective trusts, etc. defective trusts, etc.

 Does a trust file a return or get an EIN

Does a trust file a return or get an EIN number? number?

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Wrapping it Up Wrapping it Up… …

 Questions:

Questions:

 Bill Bronchick

Bill Bronchick – bill@bronchicklaw.com bill@bronchicklaw.com

   Bill Bronchick

Bill Bronchick – bill@bronchicklaw.com bill@bronchicklaw.com

 Bryan Dunklin

Bryan Dunklin – – texaslaw@email.com texaslaw@email.com

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