Archive for April, 2012

Exactly what is a Living Trust and would it be of benefit to hold title to my rental properties?

April, 2012

Q1

Exactly what is a Living Trust and would one be of benefit to hold title to my rental properties?

A1

A Living Trust, usually called a Revocable Living Trust, is a Trust set up during the lifetime (and while having legal capacity) of the person implementing the Trust, who is called the Settlor (also called Grantor or Trustmaker). As the trust name implies, the terms of the Trust can be changed in any way desired, replaced by a new Trust, or revoked entirely during the lifetime of the Settlor.

A Trust involves Settlors, Trustees, and Beneficiaries. The Settlor is the person who sets up the trust. This is also the person who currently holds the assets that will be transferred to the Trust. The Trustees are the person or persons who carry out the wishes stated in the Trust. Beneficiaries are persons named to receive assets under terms of the Trust document. You would likely name yourself, your spouse, or both as the Settlor or Settlors. Usually, the initial Trustee is one or more of the Settlors and provision is made in the trust document for Successor Trustees, which can also be a Beneficiary.

The primary purpose of a Revocable Living Trust is to avoid Probate while ensuring that the Settlor’s assets are disposed of as he/she wished. Probate is a Court proceeding whereby liabilities of the deceased are paid and assets of the deceased are distributed as specified under a Will that was executed by the deceased during his lifetime. In the absence of a Trust or a Will, the Probate Court will proceed as specified in laws of the particular state, with distribution of assets as specified in those laws. Probate can be expensive – from a few thousand to tens or even hundreds of thousands of dollars because the services of an attorney, a Certified Public Accountant, and perhaps other professional are usually required. Also, Probate can take a long time, sometimes years. Finally, Probate records are open to the public, so there are no secrets from the “world” regarding financial information related to the deceased or to those who inherit from the estate.
If ownership of all assets is transferred to a Revocable Living Trust during the lifetime of the Maker, the assets will not be subject to probate. In practice, “all” assets really means those that require someone to execute documents for their transfers. Included are real property, registered vehicles, stocks & bonds, brokerage accounts, and bank accounts. Personal property for which the entire category is being left to a single individual, such as household furnishings, need not be listed in detail as long as there is unlikely to be any confusion. Statutes in most states provide means of transferring assets having relatively low values via legal procedures that do not necessarily require an attorney.
Although useful for avoiding probate, a revocable living trust is not an asset protection technique. Assets transferred to the trust during the Settlor’s lifetime will remain available to the maker’s creditors. It does make it more somewhat more difficult for creditors to access these assets since the creditor must petition a court for an order to enable the creditor to get to the assets held in the trust. Typically, a revocable trust evolves into an irrevocable trust upon the death of the maker.

Because a living trust does not provide protection against creditors, the living trust should obtain the same protection that most individual rental property owners should have – that is, by having the title to each property held by a separate Limited Liability Company. For a Trust, the LLCs are then held by the Trust.

All decisions related to estate planning and asset protection should be made following adequate research and/or consultation with legal and/or financial professionals.

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Q2

In the state of CT, if a tenant moves in, signs a lease agreeing to 1 yr lease term and pays a security deposit, then one week wants to vacate the premises, are they entitled to any of the security deposit or lease back in any way? Also, they have no good reason to vacate except that they don’t like a neighbor that does not lease from me.

A2

The short answer is that signers of lease agreements, both the landlord and the tenant, are bound by the agreement during its agreed term.

Absent any default by the landlord that might give the tenant the right to terminate the lease (e.g., failure to maintain the unit as legally required), the tenant is liable for paying the rent until the
end of the lease term or until a replacement tenant begins paying rent. If the tenant breaks his lease, he will usually be responsible for continuing to pay rent until a new tenant begins paying rent and for other costs. Many states specifically prohibit collection of rent from both the old and new tenant for the same period of time. Also, many states require that the landlord make
“reasonable effort” to re-lease the property.

In general, tenants cannot escape liability under their leases due to economic hardship, a job transfer, marital discord, or health issues. In many jurisdictions, even death does not terminate
a lease and the deceased’s estate remains liable for the lease.

While some county or city somewhere in the country may be an exception to the statements in this reply, the only country-wide exception applies to military personnel under specific
circumstances.

A tenant who breaks a lease is potentially liable for the rent for the rest of the lease term even though no longer living in the unit. He would almost certainly forfeit his security
deposit for application against unpaid rent and the costs of re-leasing the unit. Furthermore, he could be sued for the rent still due under the lease along with any alleged damages to the unit. And, if he didn’t defend himself in court, the landlord would likely obtain a default judgment for whatever amount was claimed in the complaint. This judgment would affect the tenant’s credit record and be collectable even if the tenant moved to another state, assuming the tenant doesn’t discharge the judgment in bankruptcy or the tenant is or becomes judgment proof due to some other reason. The tenant, in addition to owing rent for months that he didn’t even live in the unit, could have to pay the landlord’s attorney fees and court costs, as well as the other costs of re-leasing the unit.

A landlord can always voluntarily release a tenant from their lease obligations with a settlement negotiated between landlord and tenant. A negotiated settlement is usually of benefit to both the landlord and the tenant, as it avoids the unpleasantness of a broken lease and the potential costs of legal actions. Furthermore, there is never a certainty that a judgment can really be collected. Accordingly, in a normal rental market, the landlord may be ahead by collecting for a certain number of months rent and any damages and to find a new tenant as soon as possible. It is almost always advantageous for a tenant to negotiate a termination if the landlord is willing to be reasonable.

The negotiated settlement will usually mean that the departing tenant (1) pays a certain amount of rent in advance that the landlord considers adequate to cover the period until a new tenant moves in,
(2) pays for any damages, (3) pays for the cost of again preparing the unit for showing to prospective replacements (e.g., cleaning), and (4) pays the costs of re-marketing the property (e.g., advertising and/or leasing commissions).

If the tenant breaks the lease without such a settlement agreement, the tenant would usually be legally liable for the rent, as stated in the second paragraph and for the costs listed in items 2, 3, and 4
in the above paragraph. This usually provides an incentive for the tenant to agree to a reasonable settlement.

Any settlement should always be done with a detailed written agreement that includes all terms of the settlement, including that there will be a move-out inspection and that settlement amounts paid by the tenant will be in cash, bank check, or money order.
Since certain jurisdiction may have more restrictive laws than the state, I encourage you to also research the matter via other resources and/or to consult a competent landlord-tenant law
attorney, particularly if it becomes impossible to negotiate a settlement.

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Q3

Is there a particular format required for Denial of Application to Rent letter?
A3

The actual name of the document required under the federal Fair Credit Reporting Act (FCRA) is “Adverse Action Notice” and the notice is only required when the landlord uses
a “consumer report” as defined under FCRA.

An adverse action is any action by a landlord that is unfavorable to the interests of a rental applicant. It includes not only a landlord’s denial of a rental application but also a landlord’s action that imposes a burden not required of all tenants. Common adverse actions by landlords include:

  • Denying  an application
  • Requiring  a co-signer on the lease
  • Requiring a deposit that would not be required for another applicant
  • Requiring a larger deposit than might be required for another applicant raising the rent to a higher amount than for another applicant

The circumstances of a rejection determine what you must do by law to notify an applicant that his application has been rejected.  To be covered by the FCRA a report must be prepared by a credit reporting agency (CRA). The most common type of CRA is the credit bureau. Landlords using consumer reports for evaluation of rental applicants must follow the provisions of the Fair Credit Reporting Act (FCRA).

Whether verifying employment and previous landlord references is covered by the FCRA depends on who does the verification. A reference verified by the landlord’s employee is not covered by
the Act; a reference verified by an agency hired by the landlord to do the verification is covered.

The landlord must provide the notice if the adverse action in any way is based on a consumer report that played a factor in the landlord’s action, even though its action is based primarily on an applicant’s income or prior reputation as a tenant.  Although there is no set format for the notice, a notice of the adverse action provided to the consumer must include:

  • The  name, address and telephone of the CRA that supplied the consumer report including a toll-free telephone number for CRAs that maintain files nationwide,
  • A statement that the CRA that supplied the report did not make the decision to take the adverse action and cannot give the specific reasons for it,  and
  • A notice of the individual’s right to dispute the accuracy or completeness of any information the CRA furnished, and the consumer’s right to a free report from the CRA upon request within 60 days.

Although the law can be interpreted to allow oral adverse action reports, it is best to mail an adverse action letter to the rejected applicant using the USPS with a Certificate of Mailing to prove it was sent.

Landlords who fail to provide required disclosure notices potentially face legal consequences. The FCRA allows individuals to sue landlords for damages in federal court. In addition the Federal Trade Commission (FTC), other federal agencies and the states may sue landlords for non-compliance and get civil penalties. However, a landlord who inadvertently fails to provide a required notice in an isolated case has legal protections, so long as he can demonstrate “that at the time of the violation he maintained reasonable procedures to assure compliance” with the FCRA.

The above discussion relates only to federal law. As for many property management issues, landlords must also understand and abide by any more restrictive consumer credit laws that might exist in their particular states.