"Out there" business structure idea. What do you

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"Out there" business structure idea. What do you

Amy Vasquez
AZ · Member since 2008 · 50 posts · 1 vote

I ran across an idea that might work. Its a little complicated and involves a lot of paperwork/time and might not be worth it from that standpoint alone. I'm still trying to figure it out a bit myself but here goes

1. Put each property in a Land Trust with your attorney as the trustee(so they can use atty/client privelege to not give out the info of who actually owns the trust. This hides your assets

2. Make each trust owned by a limited partnership. You are the limited partner so you can still get payouts and the general partner (who is liable for everything) is your LLC (see below)

3. Have a main LLC (one for each property? or one for each TYPE of property.... rentals, flippers ? not sure on that part) This LLC would be the general partner in the above limited partnerships. The LLCs ownership of the partnership would be 1%

Supposedly this
A. Hides your assets (with the LT)
B. Uses the partnership as a "go through"
C. Makes the LLC own only 1% of the partnership (and profits) so theres not much to go after. Then because you are in control of the LLC you control the payouts. The LLC also separates you from your assets.

May be more paperwork than its worth but....

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  • Jeff Takle
    Real Estate Consultant · Somerville, MA · Member since 2008 · 339 posts · 52 votes
    19y

    IMHO yes the paperwork hassle far outweighs the benefits. I assume the purpose of hiding who owns the properties is to limit your liability in a lawsuit. What you describe might work, but here are some thoughts:

    -attorney/client privelege isn't all-encompassing and only covers SOME of your conversations with an attorney, under SOME conditions. I did ask these questions of a lawyer and was surprised to find that it doesn't cover many circumstances. Also, I'm very leery of signing over anyone I don't know and trust personally, who I have a longstanding relationship with, when it comes to my major assets. Trusting a "new" attorney to be the trustee for everything you own could be risky.

    -You can get just as much liability coverage as you want for a MUCH cheaper price by purchasing an umbrella insurance policy for your properties. It's cheaper in dollar terms, requires almost no paperwork, no taxes (each of these entities you mention will have to file tax paperwork to stay "legal" and actually provide liability protection). If you're talking 100 units then maybe it's worth it to cover them under a sophisticated umbrella. But with 25 or fewer I would go with a quick insurance policy. There was a good article on this today in the Inman News @ http://www.inman.com/hstory.aspx?ID=59322

    There are a lot of folks out there that sell "how to hide your asset" seminars, books, and tools. I'm sure they work but the true cost in terms of time and money are high and well beyond what most property owners need. It can be fun to set up but be clear with yourself on why you want to set it up. If it's for fun and to learn how to do it, then make sure it's worth the $10,000 / year in LLC fees, and $10,000 / year in additional accountant fees for filing taxes on all these entities.

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  • N/A N/A
    Member since 2008 · 251 posts · 7 votes
    19y

    I'm with takleberry on the umbrella policy. As far as the "out there" business plan goes, it's pretty similar to some stuff that Robert Mintz wrote. He goes into quite a bit of detail of exactly how to do it, and I think he uses a Family Limited Partnership (FLP) instead of a land trust, but you can read all about because he's posted his stuff as two free pdf books:

    http://www.rjmintz.com/apptoc.htm
    http://www.rjmintz.com/wintoc.html

    It's a great read, and you'll be totally paranoid for about a month after reading it, but it never tells you just how incredibly expensive it can be to set all of these entities up.

    One thing I found interesting is that a lot of your liability protection really only comes if there is some reason other than asset protection for doing what you are doing. In the Mintz plan, most of what is recommended seems to be useful because it also has a significant estate planning role. I get the impression that things done for the sole purpose of asset protection are fairly vulnerable once you end up in court.

    I spent time discussing all of this with my estate attorney and I concluded that the umbrella policy was the best way to go for me. I guess it all depends upon your level of exposure, your total assets and the laws of your state. If you are even considering doing something like this, you would probably benefit greatly by buying some time from a good local attorney who specializes in these kinds of things.

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  • Amy Vasquez
    OP
    AZ · Member since 2008 · 50 posts · 1 vote
    19y

    Thanks for your replies!

    takleberry - Thanks, I didn't realize atty/client privelege was such a weak option. I could use someone else as trustee but it sure is a lot of paperwork.

    As far as the LLC, its only about $250 to set it up in my state and the only yearly requirement is a $35 statement of information form you have to do. (vs Californias $800 privelege of doing business tax... ahem.. I mean AMT) However, that WOULD require a LOT of extra paperwork and accounting fees. I may have been a bit overzealous in my thinking. :D

    I am just looking to protect my personal assets like my house in case a deal goes far, far south. Of course I do my research so the margin is well wide enough to avoid it but I like to be prepared for that what if.

    I am also trying to avoid being labeled a dealer by the IRS and am unclear on how to avoid that. I have only read that I should not have the homes in my name.

    BTW, I will be buying/rehabbing/selling quickly at retail SFRs with light fix up needed at first. What protection do you use in your RE business?
    I will look into that umbrella policy

    TN-Apprentice I definitely can't claim credit for this idea. I got it from several books I have read and thought it was worth looking into. I want to be sure I choose the best way to set up my company.

    I'm not at the point of estate planning yet but I suppose I should think of that too. You're right, I am just trying to protect what I currently have.

    I will have to discuss this with my attorney.... as soon as I find one LOL! And I'll ask you the same question as I asked takleberry...What protection do you use in your RE business?

    Thanks for your suggestions!

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  • N/A N/A
    Member since 2008 · 251 posts · 7 votes
    19y

    I use an umbrella policy through my insurance company, but I haven't had to deal with the dealer issue yet (though I have been inquiring about it: http://forums.biggerpockets.com/viewtopic.php?t=6073).

    While a simple LLC may (or may not) protect your non-LLC assets from a lawsuit related to one of your properties, I don't see how it will protect your ownership of the properties from any other lawsuit. Once you have acquired assets, you become a target for all kinds of lawsuits. From what I understand, the most common are related to automobile accidents (boy my neck hurts...). Make sure whatever plan you come up with doesn't leave you wide open that way -- a small accident that may or may not have been your fault and somebody else ends up owning your LLC. Mintz's stuff does offer that kind of protection, since it's geared more towards people who already have large assets and have multiple potential lawsuit exposures (physicians, business owners, etc.), but it gets incredibly complicated and expensive.

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