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Quick Claim Deed or Quit Claim Deed?

Quick Claim DeedQuick Claim Deed, or Quit Claim Deed, which one is it and how does it work? The term is not quick claim deed, but rather quit claim deed. When you use a “quit” claim deed you are “quitting” or leaving any interest you have in the deed. Quit claim deeds are sometimes used to transfer properties to different entities for asset protection purposes. This transfer, if it is not been done correctly, can trigger a problem with the due on sale clause of the mortgage. If you want true asset protection, the trick is to transfer the property correctly, so as not to flag the mortgage company.

Often when trying to get asset protection, people will quit claim (not quick claim) deed their property into several different land trusts. Unfortunately, this does not work. It doesn’t matter who the beneficiaries of the land trusts are, land trusts are standard revocable trusts and as such will not give any asset protection. Land trusts may provide a little anonymity. This is a very small advantage. Let’s face it. Your tenants, contractors, and creditors associated with your property know who you are. The only thing you are hiding is property from a general search for property ownership in the recorder’s office. The fact that you don’t show up as owning a bunch of properties might save you from a frivolous lawsuit, but most lawyers don’t check the county records before they file a suit, they have other more effective means of finding what you own.

The other option is to quit claim deed your properties into separate LLCs (Limited Liability Companies) or possibly separate S corporations, or even limited partnerships. The LLC is the best choice. There are a number of accounting advantages in the LLC and maintenance is much easier. Some states let you have “series” LLCs that will cut the cost, because you set up one LLC, and then it can establish separate legal divisions within it. This will save time and additional charges for forming several LLCs. If your property is in California or a state where the LLC cost is high, then just use one or two LLCs and divide the properties between them.

When you set up the LLC and quit claim deed, not quick claim deed, property into it, what happens to the mortgage? Most mortgages have “due on sale clauses.” The mortgage company will view moving the property to an LLC, corporation, or limited partnership as a “sale.” When the mortgage company discovers that you have transferred the property, they have the right to call the loan.

It is easy for the mortgage company to find out you have moved the property since the tax notices will not be in your name any longer. They will come in the LLC’s name. Also, the insurance coverage will have to be changed, and the mortgage company will see that change. It is important to be certain to change your insurance when you quit claim deed the property ownership to the LLC. You do not want to have a fire and figure out that the property is not covered because it isn’t your property any more.

Using a quit claim deed to move property to a living revocable trust is not a sale, by federal law. In the trust, you should be the grantor (the party who makes the trust), the trustee (the party who manages the trust) and the beneficiary (the party who gets the benefit of the trust). A trust that meets these criteria is called a “grantor trust.” Under Federal Law, no bank, mortgage guy, property tax guy, casualty insurance company or anyone else can call the loan due if you have a true grantor trust. (California and a few states require “notice” that you are using a grantor trust, otherwise they will assume otherwise, and they will try to up the property taxes on the transfer of ownership.)

Note that companies like LLCs, corporations, or limited partnerships, do not get the special treatment. Neither do land trusts, because in most cases you are not filling all three positions (grantor, trustee, and beneficiary), and it is therefore not a grantor trust. In all of these cases the mortgage company can call the loan once you use a quit claim deed.

You may think to buy a property directly in the name of an existing LLC. It might be a good idea, and allows you to get the title directly in the name of the LLC– if you are paying cash. If you need a loan, you are still going to be signing personally for the loan. That’s a given. You are right back to square one.

There is no question that the mortgage industry does not make asset protection easy, but there is usually a “work around” or a way to “bend the rules” and achieve the asset protection you want.

 

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