When do you form a corporation?

Question

Hello,  I'd be interested in any advice/opinions people have on forming a corporation (LLC or S) to protect assets.

I have 3 rental houses that I've aquired over the last couple of years.  I plan to jump into real estate investing full time later this year.

Right now these homes are all under my name (and my husband's).  I have insurance on all of them of course -- but I'm wondering if I should be looking into putting them under a corporation - so that if I got sued or something not all of my assets would be vulnerable.

I'm not sure ... just asking -- please tell me your opnions!!

Thank you

jennifer

Jennifer Hillberg · Answer

Oh, interesting!  Thank you for that information.  I've never even heard of that trust thing.  Does anyone else use that?

jennifer

N/A N/A · Answer

I'm not sure we're talking about the same kind of protection here. You seem to be trying to protect the trust/property itself. I'm more worried about the owner of the property getting sued for something that happens in relationship to that property (e.g., a tenant gets hurt and comes to sue the owner). If she remains a beneficiary, then the pathway to her (other) person assets remains open. It sounds to me like your plan is to protect her ownership of the property in case she gets sued for something unrelated to the house (e.g., a car wreck where someone gets hurt). Obviously, both are important. Depending upon your personal situation, your risks may be significantly greater in one area than another.

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All I'm saying here is that the US code isn't the law but an interpretation of the law.

TN-Apprentice I agree with you.

If you the other person who is seeing their attorney he/she can in fact dissolve the trust so yes if you remain the only beneficiary then you can run into some issue along the way.  However you can place a second, third, fourth, whatever beneficiary in the trust and as long as that other beneficiary is more than "arms length apart" then you should be safe but again a attorney might be able to dissolve the trust.  Now if we go on to the LLC, yes in fact if you transfer title to the LLC it does create a violation of the DOSC.  Now if you put a property into a Inter Vivos Land Trust and then assign your LLC as a beneficiary then your trust is basically a dry trust already and provides no protection.

I know I’m rambling a bit here but yes the best protection would be for an LLC to be a beneficiary and that would provide the best protection.  Beyond that the trustee, to provide even more protection should be a corporation (preferably by me a 3rd party non-profit corporation).  Even more protection would be an out of State Corporation.  Now I know that I’ve rambled a bit here but I agree that a Inter Vivos Land Trust is not bullet proof but it’ll deter most problems.

But by far talk with your attorney they should be able to provide you with an asset protection plan that is full proof and if they can’t find another.  I do have some information on asset protection form my attorney and they’ve created a really neat program.

Jennifer Hillberg · Answer

what if I formed a LLC and purchased future properties under that?  or would that just make an enormous hassle?

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I would like to point out that when I said a Land Trust I was specifically talking about an Inter Vivos Title Holdling land trust.  Also remember that cognitive rigity gets the best of us and the law (Garn-St Germain Act) states what you said but the it says remains A beneificiary not THE beneficiary so it does allow you not to violate the lenders DOSC

The last thing is remember that the Garn-St Germain Act is the LAW and you shouldn't confuse it with the US Code

The Garn St. Germain Act
When there is a mortgage loan secured by a lien on residential real property containing less than five dwelling units (1, 2, 3, or 4 max.) -- including a lien on the stock of a cooperative housing corporation (a “co-op”) -- no lender can enforce its due-on-sale clause due to any of the following prevalent circumstances:
(1) The creation of a lien (or other encumbrance subordinate to the lender's security instrument) that does not relate to a transfer of rights of occupancy in the property;
(2) The creation of a purchase money security interest for household appliances;
(3) A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) The granting of a leasehold interest of three years or less* not containing an option to purchase
(5) A transfer to a relative resulting from the death of a borrower;
(6) A transfer where the spouse or children of the borrower would become owners of the property;
(7) A transfer resulting from a decree of dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property
(8) A transfer of the borrower’s property into an inter vivos trust in which the borrower is and remains a beneficiary and which [trust agreement] does not relate to a transfer of rights of occupancy in the property; or
(9) Any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

---------------------------

And that is the LAW

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Whatever you do, do NOT transfer the title to a LLC, or Corporation, or another entity/person.  Why?  Because it does violate the lenders DOSC and they may, or may not, enforce their DOSC.  But regardless it does defiantly violate the DOSC.  Now when setting up an LLC do be aware that if it is penetrated they have access to everything in it.

The only way to avoid the DOSC and PROTECT the property is to place it into an Inter Vivos Land Trust.

The best possible advice I can give you is to talk with an attorney about asset protection.  I know of one here that provides complete asset protection, and their system is pretty neat.  If you’re interested in what they do let me know and I’ll email you their information.  At the very least you can take it to your own attorney and ask him/her about the program.

Travis

Jennifer Hillberg · Answer

Oh my gosh - I feel like I need a law degree to read all this!  :shock:   just kidding - this is super great information - I'm going to try and study up to really understand.

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While you're talking to your attorney, you might also ask if, as the sole owner of an LLC/Corp you will be able to represent the company in court for small things like evictions, etc. Our AG has apparently ruled that, since the LLC/corporation is its own legal entity, only a lawyer can represent it in court. It's just something else you might want to think about when you calculate the true costs of doing something like that.

I'm not sure that the land trust idea will violate the DOS clause any less than switching title to an LLC. The federal law that allows protection for the inter vivos trust exception specifically addresses the beneficiary of that trust ("a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property;") but I would definitely talk with an attorney and look at the specific clauses in the loan documents before I did anything.

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If you remain a beneficiary (rather than making an LLC the beneficiary) you've gained no protection from law suits. If you make the LLC the beneficiary, then you have violated the DOS. If you think that you can come up with some 99%/1% beneficiary solution, all I can say is good luck and make sure that you have discussed it with an attorney.

The St Germain Act was written for the sole purpose of protecting the lenders' right of enforcement of the DOS, and to make exceptions as narrow as possible. As far as what "is the LAW," different people may interpret it differently, which is something that keeps the courts quite busy. You may feel quite strongly about your interpretation, but I will leave you with the often-quoted words of Federal Judge Easterbrook: "Some people believe with great fervor preposterous things that just happen to coincide with their self-interest."