The FDIRA (Federal expository Institution Regulation Act; or “Garm St. Germain Law” of 1982; 12 USC 1701-j-3) limits the justification for foreclosure relative to a lender’s due-on-sale clause (re, and “unauthorized title transfer”) under certain circumstances, one of which is the vesting of a mortgaged property into an inter vivos trust (such as a land trust, or Michigan Land Trust). 

As a result of that federal law, mortgagors (borrowers/property owners) cannot be prohibited from placing their real estate into a revocable, living [land] trust.  Neither can they, following establishment of the trust, be prevented from leasing the property to whomever they might choose (so long as the lease is for less than 3 years and does not relate to an option to purchase). 

To wit: when a lessee (the tenant) in such a trust property is also given a remainder interest that party becomes fully entitled [under IRC 163(h)4(D)] to virtually the same incidents and benefits of homeownership that he/she would have, had they financed the purchase of the property in any other manner.

There are various older and more dangerous home seller-financing concepts with which you may be familiar. These are common options that home sellers frequently consider:

Straight Lease: Rental for a specific period of time.  Generally incurs a negative cash-flow along with unrecoverable costs of management, maintenance and vacancies.  No chance for elevated income.

Lease Option: A unilateral agreement to sell with bargain terms at a future date.  So what’s wrong with an L/O?  They’ve been done for years.  The L/O violates a lender’s due-on-sale clause A L/O can (if an option fee is taken or rent credits given) lead to an inability to evict a defaulting tenant.  Such a tenant in default can claim having “Equity” in the property, and in so doing, force a judicial foreclosure process versus an eviction.  This can afford him/her months of free rent while the litigation rages on.  As well, terms can be changed on a whim relative to buy-out provisions, repairs, equity credits (rent credits), etc.: all requiring extensive, expensive, legal action to rectify.

Contract for Deed: The CFD is essentially a “Lay Away Plan.”  The property’s legal title is relinquished to the vendee (buyer) only after all debt has been paid off: i.e., there is no legal ownership of the property until it’s completely paid for.  And the Problems are…?  The CFD is a direct violation of a lender’s due-on-sale clause: there is no means for eviction: the vendee (resident/buyer) holds a “equitable” interest in the property, allowing only for foreclosure, ejectment and quite title in the event of a breach of contract in lieu of eviction.  Further, any parties’ creditor liens, lawsuits, judgments, marital dispute litigation and tax liens attach to the property… and the death of any party throws the property into probate.

The “Wrap": In a “Wrap-Around Loan” a home seller creates a mortgage loan that is equal to or greater than the current loans on the property.  Then from the buyer’s single monthly payment to the home seller the underlying junior loan payments are made (usually leaving a positive cash flow for the home seller).  So what’s wrong with that?  Well a Wrap violates the lenders’ due-on-sake clause; there is no means for eviction in the event of default: the resident/buyer holds an “equitable” interest, necessitating foreclosure ejectment and quiet title actions in lieu of eviction: any parties’ creditor liens, judgments and tax liens attach to the property and the death of any party throws the entire property into probate.

The Equity Share: A shared-ownership of real estate, wherein two or more parties hold title as tenants-in-common.  Typically, one of the parties makes the down payment while the other lives in the property and makes the monthly payments.  So?  And the problem is…?  An ES clearly violates the mortgage lender’s due-on-sale clause; there is no means for eviction of an errant tenant/buyer in the face of default the resident/buyer clearly holds “Equity” thereby forcing judicial foreclosure, abetment and quiet title action in the event of a breach of contract (versus eviction).  Any party’s liens, lawsuits, judgments, marital dissolution litigation and tax liens attach to the property into probate…quite possibly negatively affecting the surviving party.

The “subject-to”: This is an assumption of mortgage payments subject to a loan’s existing terms.  And the problem…?  “Subject-To” is basically a generic term that can be applied to any of the above: and like the above, a Subject-To violates the lender’s due-on-sale clause obstructs (tops) one’s right of eviction of and errant tenant/buyer it conveys equity it jeopardizes title; it invites disastrous disagreement and litigation between parties.  And …any party’s business, personal and legal actions attach to the property: thereby seriously negatively affecting the interests of the other party(ies).

A Land Trust Transfer System has virtually none of the downsides, but all of the benefits and protections of Home Seller-Assisted-Financing.  A home seller’s property is vested with a 3rd party trustee.  Income tax benefits can then be conveyed to a tenant.  No party can act independently of the other.  No party can jeopardize title (accidentally or on purpose).  The property is shielded from public view, and is well insulated from lawsuits, creditor judgments, tax liens; bankruptcy, marital dispute and probate on behalf of either (any) party to the arrangement.  Simple eviction rights are preserved (“More on the Due-on-sale Clause” to follow).  Problems?  As is common with Any Financing method, a Three Party Land Trust tenant/buyer could default in its payment or management obligation under the agreement, thereby requiring disposition by simple eviction action, or imposition of penalties and/or sanctions.  The property could lose value over the term of the agreement, necessitating a future sale at a loss or an extension of the agreement.

The Land trust (often referred to as the “Illinois Land Trust”) is accepted in form, substance and enforceability, throughout the U.S. (including Michigan). This all too-often overlooked trust form is slowly but surely becoming recognized as arguably the best possible means of real property asset protection relative to legal threats to one’s “ownership” and /or transfer of real estate.

The land trust is considered unique in that a property’s legal and equitable titles are vested in the trustee, rather than in the owner of record.  The land trust’s beneficiaries remain fully in control of the property and the actions of the trustee.  As a result of this beneficiary-directed third-party trusteeship, any property so held is effectively hidden from public view, and shielded from legal actions by lawyers and creditors.

As a matter of fact, when there are multiple (unrelated ) beneficiaries in the trust, the property and its title become virtually impervious to tax liens, creditor judgments, lawsuits and charging orders.  In short, the message is that creditor including the IRS simply cannot reach a property in a co- beneficiary land trust.

Our land trust-based transfer system, is designed to replace the need for all the risky, and often even illicit, home seller - carry financing schemes that abound today.  The Three Party Land Trust System is a meticulous, straight forward process of documentation that incorporated, along with the land trust: 1) an Assignment of Beneficiary Interest, 2) a Beneficiary Agreement (analogous to a partnership agreement) and 3) A Occupancy Agreement (i.e., a tenancy agreement whereby a co-beneficiary ‘lease’ from the trust versus holding a title interest in the property), and 4) a Power of attorney to the party handling the management of the property.

When combined, these documents effectively afford a would-be-buyer all the benefits of homeownership, including income tax deductions…without the necessity of transfer of title ownership.  The trust effectively protects the home “seller”, as well as the second and/or third beneficiary (investor and .or resident beneficiaries) from any untoward personal or legal action by or against the other parties.

A unique feature of the land trust is that it converts the settlor’s ownership of realty (real estate) to ownership of personalty (I.e., ownership of the trust, rather than of the property held by it).  Therefore, since personalty is not deemed subject to partition by judgment creditors, unrelated parties holding property in this manner needn’t fear the property ever becoming the subject of : a creditor judgment, lien or charging order,.  Neither would the property be the subject of a tax lien, any party’s bankruptcy, marital dissolution or probate… a most comforting felling when carrying a mortgage for someone else.

Overall, the Trust gives a relinquishing party – willing to keep its existing financing  in place – a quick easy and safe method of disposing of the property, while simultaneously providing the acquiring party/ies with virtually 100% of all the benefits of ownership.  The acquiring party’s benefits include full mortgage interest and property tax deduction, and all the other benefits of real estate ownership.  And, too, a trust buyer needn’t qualify for a new loan or make a standard “down Payment,” since all qualification rules and parameters are solely at the discretion of the relinquishing party (“the home seller”).

In as much as a property vested in a Michigan land trust has not been “sold,” but instead merely (from any inquiring party’s point of view) vested in an inter vivos (living ) trust and lease to a successor beneficiary of the same trust… there is no overt violation of the lender’s due-on-sale.  As well, the trust very effectively provides any would-be home “seller” an excellent means of avoiding immediate capital gains taxation, and/or the unpleasantness of home seller - carry schemes; an untimely or under-market sale; a short-sale (offer and-compromise); foreclosure; or… being forced to deal with tenants toilets and trash (maintenance costs) and negative cash flow.  Also a state’s withholding tax can be avoided if the trustee is a corporation (e.g., re, the sale of a personal residence).