This case involves a real estate developer who purchased two multifamily rental properties. The developer married two years later and his wife began managing the properties. The wife handled all tenant issues and also handled issues about maintenance and payment of bills. Two years later, the husband started experiencing financial trouble because he had defaulted on a $20.2 million construction loan which he had personally guaranteed for a new development. The husband later defaulted on his mortgage obligations and on the obligations for the two properties his wife managed. The husband then transferred title, by separate deeds, for $1.00 consideration, to the rental properties to two respective nominee trusts. The developer’s wife was named as the sole beneficiary of each trust. The developer’s wife continued to assist with the management of the two properties and the developer paid all the property expenses. A bank later obtained a $1,500,000 judgment against the developer and brought a reach and apply an action to obtain the wife’s interest in the two properties to satisfy her husband’s debts.
Question(s) For Expert Witness
1. Can a real estate developer use a real estate nominee trust held by his wife to avoid paying a judgment to a creditor?
Expert Witness Response
A real estate nominee trust is allowed by certain states as a way for someone to hold legal title to real estate. When this type of trust is used, the trustees can act only with the express authority of the beneficiary of the trust. There are some reasons that people prefer this type of real estate trust: (1) the beneficiary of a nominee trust can usually remain an anonymous owner of the trust and (2) transactions involving property transfers in nominee trusts do not have to be officially recorded in most counties. The main problem with using a real estate nominee trust is that the trust usually does not offer any protection from creditors. In most cases, when a real estate nominee trust is created by a husband transferring title to his wife, the law will hold that a “resulting trust” has occurred whereby the husband remains the beneficial owner of the properties subject to attachment by the husband’s bank. This is because the husband may not intend to transfer the rental properties to his wife ‘free and clear’. The husband in these cases usually intends to retain an interest in the properties and the transfer is done only to protect the properties from creditors. Since the husband’s true intent in this case was to reserve the beneficial interest in the properties for himself, his creditors were probably allowed to attach the properties and apply them against his debt.
About the author
Michael Morgenstern
Michael is Senior Vice President of Marketing at The Expert Institute. Michael oversees every aspect of The Expert Institute’s marketing strategy including SEO, PPC, marketing automation, email marketing, content development, analytics, and branding.
