LLC Planning and Due on Sale Issues
Asset protection plans which involve real estate include transferring title to real estate parcels to one or several newly created limited liability companies. When the real property being transferred to the LLC is subject to a mortgage these title transfers for asset protection purposes raise the issue of so-called "due on sale" clauses in the mortgage agreement. Clients are often afraid that their asset protection transfers to an LLC will cause their mortgage lender to accelerate the note and mortgage because the mortgage document states that the note is due in full any time title to the property is changed.
When an owner changes title to property to a new entity owned by the same owner where the owner remains liable on the note and there is not diminution in the value of the loan security, there is no additional risk or harm to the lender. In such cases, a due on sale clause amounts to an adhesion contract and arguably a restraint on trade. In any event, as a practical matter, lenders rarely, if ever, detect or enforce a due on sale provision where the borrower changes title to an entity he controls where there is no change in the underlying security.
The only way a lender could detect a change in property ownership to the client's own LLC would be if the lender saw the change on the property insurance policy or the real estate tax records. Again, practically, lender rarely would investigate these documents so long as the loan is performing. I have helped clients transfer properties they own individually to other entity names for many years, and I have never experienced a lender even questioning the transfer. I have never heard of any case where a performing loan was called because of a title change for estate planning or asset protection purposes. I believe it is neither illegal nor immoral to assist clients with these planning changes in title because they cause no harm to the lender. If anything, protecting the borrower from liability protects the client's assets that are the basis of his ability to repay loans. In sum, the risk of a conveyance to an LLC causing loan acceleration is very small.
Where the loan amount is large or where clients are conservative, most banks will grant permission in advance of a title transfer for planning purposes. The best plan is to buy investment property in the name of an LLC or partnership so subsequent title transfers are unnecessary.
You may want to take a look at Gebhardt Family Inv., L.L.C. v. Nations Title Ins. of N.Y., Inc., 132 Md. App. 457 (2000), where coverage with respect to title insurance was denied when the transferee was a family LLC and the title policy had been issued to the husband and wife when they acquired the property from a third party. The alleged title defect tied back to the transfer from the third party. It was held that the family LLC was not an insured party.
My brother and I inherited property in Destin, Fl (we hold the deed) and have formed an LLC in Georgia. We would like to transfer the property to the LLC in Georgia. How do we proceed? Does Florida require an attorney for this transaction? Thank you
My partner and I have an LLC in Santa Rosa County Florida. I am getting married in December and want to keep the LLC outside of the marital assets. In addition my partner and I want to know how to protect and plan for succession for our 4 children (2 each). Can you tell me where I should begin?