In a previous post, I wrote about how to protect your investment property (and some reasons why you might want to). Let’s say that you have decided that you DO want to protect your investment or rental property by getting it out of your own name and into an LLC for liability protection. Great! Well, here are some issues that you may encounter along the way AND some ideas for how you might deal with those issues.
And if you’re not sure if this is right for you, you can always ask a trusted professional for their advice.
If you own the property outright, you could simply transfer the property into your newly minted LLC.
BUT if your property is mortgaged then by transferring the property into your business entity, you could risk triggering a “due-on-sale” clause from your lender. What that means: it’s a clause commonly found in mortgages to restrict transferring ownership of the property. If your lender finds out you have transferred ownership out of your name and into an LLC, your lender could call in payment for the entire remaining balance on the note. At this point, you could pay off your mortgage or you could refinance the mortgage (which incurs fees, hassle, and you probably won’t get the same terms as before). Many people find dealing with that to be a pain.
If you are ok with refinancing, then the prospect of triggering the due-on-sale clause might not bother you too much. On the other hand, if you have a great loan that you want to keep, or don’t want to go through the hassle of refinancing, then there is a neat way to avoid triggering the due-on-sale clause.
There are exceptions to the due-on-sale clause, including the transfer of the mortgaged property into an asset protection trust. This means if you transfer ownership from your name and into a trust, your lender will not be able to demand payment of the entire note.
Having your property in trust provides asset protection and additional privacy. When real estate is not owned directly in your name, attorneys looking to sue you won’t see the property in an asset search. If attorneys don’t think you have assets to take, you can avoid a lawsuit from even happening.
Colin Ley is a Seattle asset protection attorney and the creator of the PREP Trust® and Better LLC™. He is also the co-founder of LayRoots (along with with partner in life & business – Shreya Ley)
Being successful in America makes you a target for bogus lawsuits from shameless lawyers. We created an effective, asset protection solution, so you don’t have to worry anymore, happily knowing your family’s future is protected. Get started now by scheduling a free, 30-minute call at livemorecarefree.com.
