Transfer Tax And The Family LLC
I am looking for information regarding transfer tax and the family LLC. My brother owns three properties, and he would like to form a company with my other brother and myself. (An LLC) that included these three properties. We were told two contradicting theories concerning the transfer tax law. First being that there would be none, because the division of assets is between family members and the second being that we would in fact have to pay transfer tax because we were rolling the properties into a company. We would like to start this company but do not have enough money to start it if we are going to be liable for the tax on three properties. We want to avoid this tax. Are there any loopholes that would allow for such a scenario that you are award of?
Thank you very much as any help will be helpful
JeanMarie
:-? :-?
I was wondering a similar thing. What about if your brother sells it to the LLC for what he paid?
I don't know. Good question. If my brother sold his property to the LLC, I wonder if he would have to a) pay the transfer taxes on that amount, or b) trigger a due on sale clause with the bank. (Meaning he would have to go through the whole financing thing again) I am really new at this, so bear with me if I have things wrong. What about a trust? Having the LLC be the beneficiary, and an appointed relative without the same last name be the trustee. Would he be able to deed his titles over to the trust and then avoid a tax and dos clause?
Thanks again all!
JeanMarie
Been there tried that in Pa !!Pa is the only state that makes you pay the trans fer tax even if you put it in a land trust. !!! At the prothery office told did not have to pay so put it in land trust... But state jumped in charged int . & penalty on trans tax .. hired lawyer no go had to pay .. As other gurus have said in Pa consider that tax a part of doing business.. :-( SORRY) Wish i had better answer!!???
Wow. That really sucks. Man, that is a real downer. Taxes will get ya' every time!
Thanks for your input! Anyone else have the same experience in PA?
I helped move 3 into trust and then assigned beneficial interest into LLC over a year ago.
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Stockpro99,
Thanks for the great information! I'm suprised my real estate attorney didn't think of that. I'll be sure to use it.
Hi,
I am a newbie at this, want to also roll some properties into an LLC. I have gotten mixed opinions about this. Do you know if I will have to pay a tranfer tax upon rolling the properties over, or is 'rolling' different from 'selling' them to your LLC? And what exactly is a trust, and what did you mean when you said that you rolled the properties into a trust and then you assigened the beneficiaries to the LLC?
Any help will be extremely helpful. Like I said, I am new.
Thank you
JeanMarie
I purchased a property in my personal name to take advantage of the mortgage rates. Then after the closing (1 week later), I deeded over the property to my LLC. This was over a year ago and there have been no issues with the DOS...
Good Luck!
[addsig]
OK, mattfish11
When it is time to sell? Wouldn't there be a conflect with the deed in a LLC or a Trust and the mortgage in your name? At closing, would the profit be your personal or that of the LLC?
Sorry, Im also a newbe...but I thought that this might clear a few concerns.
[addsig]
Do you really think a bank hundreds or thousands of miles away is constantly scanning public records in your area for a change in ownership on the deed so they can "trigger" a DOS? The bank knows that most people would simply refinance if a DOS was enforced and probably lose a loan that was being paid on time each month. I've never kept any property I've owned for more than a couple of days outside an LLC and I have never heard a word from any of the banks. And my LLCs are all "owned" by my other entities, my name doesn't even appear as an owner of the LLCs!
4KASH,
You say that all of your LLC's are owne by your other entities. Can you explain how this works.
Thanks!
TRATT.
When an LLC is set up in Nevada you fill out an “initial list of members” You simply list other valid, legitimate entities (LLCs, FLPs, etc) as the members. You also denote a resident agent. This can be another entity, a friend, even you if you wish. That entity (RA) obviously needs to be physically located in the state the LLC was formed in. Nevada wants the tremendous revenue generated by the fees and enforces the LLC and FLP statutes, favoring these entities. By the way, a “member” of an LLC in Nevada need not indicate ownership, i.e., a member need not have any economic interest in the LLC, just like the manager of a store need not own it. If a Nevada LLC is then conveyed to a Nevada LP or especially an FLP, via a Grant, Gift an Bequest, for example, of which the the general partner is another LLC and holds only a 1% interest in the LP, you have structured a very secure asset protection vehicle. Remember, conveying assets to an FLP in no way constitute ownership of the FLP.
No, the bank probably isn't going to dig through public records but aren't you going to want to change your insurance to your LLC? If you don't own the property is your insurance policy still valid since you no longer have an insurable interest? I don't know the answer but would definitely want to get a solid answer before moving the properties. I do know that if your bank gets an insurance bill with info that doesn't match theirs it doesn't get paid. If the policy has changed you had better believe that they'll take an interest because they will want to make sure that they're listed as mortgagee on the new policy. I think it would be likely that this would come up unless your insurance is paid outside of escrow.
The insurance company can throw a dart at a board w/ the listed members of my LLCs on it for all I care to determine who to pay in the event of a claim. I will be paid in full in any event. I also have an umbrella policy that goes well beyond the limits of the individual rental property policies. It lists me personally and every LLC/FLP I have may have an interest in and exactly what that interest is. Whether a public records search shows me personally as a member of the LLC that may own rental property or not has nothing to do with whether I can definitively prove that I own the entities listed. I can but I don’t have to. They will pay the companies listed and will go to the mail box and pick up my check.
We had to get our first rental property in our own names because the lender refused to give us a loan if it was under the LLC. The lender would not give the LLC a loan because of no credit history, collateral, etc. (being a newly formed LLC). So what we did was have the title company put the house in our name and then have another paper ready to transfer title to the LLC once everything was done in underwriting and the loan docs were totallly closed. Our lender seemed to be OK with this, as long as we are personally reliable for the loan. The government website can give you links for starting your LLC. Good Luck.
Tratt,
You will need to check the laws in CA, but in general with regard to the Due on Sale clause, the bank cannot call the Due on Sale clause if you transfer it into an inter vivos trust, otherwise known as a land trust. Have someone other than you be the trustee, so your name cannot be found. Then you, another trust, an LLC, or another entity can be the beneficiary of the trust. The beneficiary is not public record.
bnorton,
I actually live in California but my properties are in Arizona. My realtor has actually mentioned the land trust method but he said that this can be very complicated. Is this true?
TRATT[ Edited by TRATT on Date 09/19/2004 ]
I have not found it to be that complicated. You will want to work with an attorney though.
bnorton,
If I were to start by forming a land trust and have someone other than myself be the trustee wouldn't that make that person liable in the event of a lawsuit?
It depends on the suit. I am not an attorney, so I would recommend you see an attorney about that one. However, the purpose of the land trust is not really for asset protection as a separate entity. The land trust doesn't do that. What the land trust does is provide anonymity, so you are less likely to be sued because your name is not on title. You need LLCs, FLPs, Incs, and RLTs to provide you with asset protection.
Coming back to the original question.
The lawyer is living by the spirit and the letter of the law. The lenders have explained the reasons why you cannot use the LLC with their loans.
The Realtor is correct in that many people do what is being suggested and many lenders do not cause an issue. I would say this is mostly because many lenders do not have the time to look for such transfers. If the payments are on time then they largely ignore the details based on volume.
Because there are rules that let people do tax and estate planning, there is an exemption in the statues concerning a person putting their property into a trust that they set up. The idea is if you were planning on being dead in the future, you might want to decide who will get what and to legally avoid probate. Wills are good but they do not avoid probate. Hence the trust is a way to separate the beneficial owner of a property from the legal owner. It also provides a legal way to mask who the individual is as the trust is what is listed for the public records concerning ownership.
Because of the purpose stated above the laws were made to comply and lenders can not exercise the DOS when a transfer is from a person to a trust they have created.
As BNorton noted you can include an LLC as the beneficial owner. I believe this model meets both the spirit and the letter of the law rather then counting on the lender not to notice.
To back up a bit you have to decide just want you want to accomplish and which risks or costs you are managing. Privacy, tax, ability to finance, liability are all different objectives and you can be gaining in one area while weakening you position in another. The structure suggested provides a good mix but it will come at some cost in complexity and lack of flexibility for obtaining new financing.
For example...
More or less if you want to borrow using your credit score it needs to be you doing the borrowing. Once you are on the note a bit of the records are now public. Less easy to find them but they are there. So, a later transfer to an LLC of trust does not completely hide things.
Some advice from my lawyer....
If you are sued and the other lawyer is competent they will ask enough questions that you will have to disclose what you own and/or beneficial interests. Hence the privacy is more about when someone is doing a search to decide if they should sue. It will not hide the assets if you are sued and they ask questions.
John
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Active_re_investor,
I have two properties that are rentals (SFH) what would you recommend I ask my attorney about in terms of getting tax breaks and asset protection.
One property is in my name and so is the note, the other is titled to my corporation and there is no mortgage yet but I am in the process of getting one on it and it will be in my name as well. I cannot find any lenders that with put the loan in my corporation name, why is that?
Thank you
active_re_investor,
Thanks much for the info. Obviously I can't form an LLC to buy properties since it would have no assests for credit and therefore no one would lend it money. The only way that I have to buy property right now is by using my credit. According to you even if I were to later put the properties into trusts + LLC's I would still be vulnerable to law suits since I bought the property under my own name which would leave some record of this. I am concerned about finding some additional protection other than the homeowners & umbrella policies that I currently have. If I do form a trust or LLC or both I run into some other problems since I live in CA and my properties are in AZ which means that I have property management involved. Also if I had an LLC I would need a statutory agent and a business mailing address within the state. What are your thoughts????????
To quote William Bronchick he says something on the order of " If you have one and use it and the bank asks you must tell them other wise you are not he could have been talking about Land Trusts but I would suppose both being legal entities the idea is the same.
Tratt,
Putting it into the trust and LLC will still benefit you even though you have to take title to it for at least a minute.
REPrincess, I've discovered that lenders and insurance companies get nervous about working with LLCs and corps, esp, new ones, for the same reason we like to use them. We want protection in case something goes wrong. They want to be sure they'll get paid, even if something goes wrong. See the conflict?
If you offer a personal guarantee tied to your personal credit, some lenders will lend to your LLC or corp., and your name will probably not likely appear in public records.
active_re_investor
Regarding the advice from your lawyer. He says that if you are sued and they ask enough questions then you will have to disclose what you own.
If this is the case how do you protect your assests?
TRATT
Quote:
On 2004-09-21 11:49, active_re_investor wrote:
Coming back to the original question.
The lawyer is living by the spirit and the letter of the law. The lenders have explained the reasons why you cannot use the LLC with their loans.
The Realtor is correct in that many people do what is being suggested and many lenders do not cause an issue. I would say this is mostly because many lenders do not have the time to look for such transfers. If the payments are on time then they largely ignore the details based on volume.
Because there are rules that let people do tax and estate planning, there is an exemption in the statues concerning a person putting their property into a trust that they set up. The idea is if you were planning on being dead in the future, you might want to decide who will get what and to legally avoid probate. Wills are good but they do not avoid probate. Hence the trust is a way to separate the beneficial owner of a property from the legal owner. It also provides a legal way to mask who the individual is as the trust is what is listed for the public records concerning ownership.
Because of the purpose stated above the laws were made to comply and lenders can not exercise the DOS when a transfer is from a person to a trust they have created.
As BNorton noted you can include an LLC as the beneficial owner. I believe this model meets both the spirit and the letter of the law rather then counting on the lender not to notice.
To back up a bit you have to decide just want you want to accomplish and which risks or costs you are managing. Privacy, tax, ability to finance, liability are all different objectives and you can be gaining in one area while weakening you position in another. The structure suggested provides a good mix but it will come at some cost in complexity and lack of flexibility for obtaining new financing.
For example...
More or less if you want to borrow using your credit score it needs to be you doing the borrowing. Once you are on the note a bit of the records are now public. Less easy to find them but they are there. So, a later transfer to an LLC of trust does not completely hide things.
Some advice from my lawyer....
If you are sued and the other lawyer is competent they will ask enough questions that you will have to disclose what you own and/or beneficial interests. Hence the privacy is more about when someone is doing a search to decide if they should sue. It will not hide the assets if you are sued and they ask questions.
John
Genuine asset protection does not rely on “hiding” things. Establishing an LLC is a genuine asset protection strategy held up by courts in many states. A revocable trust like a land trust is not an asset protection vehicle. It has other uses but asset protection is not one of them. You want to be able to answer truthfully in the unlikely event that you are sued and called to the witness stand. If you answer that you are the beneficiary of a land trust the creditor can reach the assets as easily as if they were titled in your name personally. If you answer that you have an ownership interest in the LLC, the outcome will be very different. If you loose the case the the ONLY remedy for the judgment creditor is a charging order, which is essentially useless. The LLC would not be liable to pay out anything to the judgment creditor unless there were a disbursement. You simply choose not to make a disbursement, ever. They do immediately become liable to the IRS for any taxes incurred by the LLC. You can see that LLCs, esp when combined with FLPs, deter lawsuits before they begin in many cases because the plaintiffs attorney will advise not even to pursue the matter. Anonymity has nothing o do with it. Where they very rarely decide to pursue the case is when the case involves a large amount of money (tens of millions min) and/or in a state that simply does not have LLC statutes that uphold this entity, i.e., not very business friendly.