Separate Your Children Or Assume All Risk
Attorney · Wilsonville, OR · Member since 2017 · 504 posts · 411 votes
The fact is that not all LLCs are the same. Some are just better for asset protection then others. The best LLC structure is the Series LLC. Like any good parent, we want to protect our children. This is accomplished with the Series LLC by isolating each asset into individual series called "children series" for liability purposes inside a holding company, the parent Series LLC. And then we protect our children even more by hiding those children from being connected to the holding company with an anonymity land trust. This system (Series LLC with Anonymity Land Trust) allows you to stop a lawsuit before it is started, by taking away the chance of recovery. Though the Series LLC is one company, with one filing with the state, and one tax return, each child ‘series' is treated as if it were its own LLC for liability protection.
@Brian Bradley, I agree LLCs are a very important asset protection device. I am not as convinced that Trusts by any name that folks slap on them are of much benefit. If you own property and run it through a management company it is almost impossible to pierce it if you do any kind of proper protocol. I see no point in doing a trust where you are so well protected. Now if you are in fact a hands on investor as probably 98% of the folks on BP are using a "blind " trust is practically useless. You are the guy negotiating the purchase, you are the guy signing the closing papers, you are the guy hiring the contractor or even doing the work yourself. You are the guy interviewing the tenant, you are the guy they call if things need repaired, you are the guy negotiating the sale, you are the guy signing the deed, you are the guy writing the checks, etc. To think putting the property into a blind trust will "hide " your identity is absurd. I have had several lawsuits where folks who did wrong tried these little games and it only took a few interrogatories to sort it out and I can assure you it would not remain hidden in a deposition. I am aware of one guy who lied in a federal lawsuit I was involved in, he went to prison AND lost all of the assets. The claim about using a lien to take the equity out of a property is actually the second best way to get the corporate veil pierced in my experience, it is called under capitalization, and fraud. The money you pull out is very easy to trace in the banking world. While I also like the series LLC in theory, the book keeping can be a nightmare for those with a lot of rentals. I only have a little over 30 doors and maybe 5 entities and it is already getting to be a pain to keep them all separated. While Wyoming has the series LLC now we do not have an actual case on them yet. We do have some very strong case law on upholding the LLC shield however. There is actually a fair number of cases on real estate LLCs, although the first LLC in Wyoming was a partnership between two oil companies. I also love how the IRS removed many of the limitations on LLCs about 20 years ago so you no longer have to limit their life to no more than 30 years or meet the 5 bullet test to keep your LLC status. Now in Wyoming even the meeting requirements are pretty much done away with, but not corporations unless you are a limited corporation. I really like limited LLCs. I suspect they are really better than a plain LLC for protecting assets. Thanks for talking about LLcs, I think it is important for folks to have them, unfortunately many have to buy in their own name for the first few properties because of the better terms that personal loans get through things like Fannie May or Freddie Mac.
@Brian Bradley interesting. Where can I read more about this specifically? I understand the liability protection, but I am interested in learning more about the format you are talking about here.
Not all states recognize a series LLC. I'm not an attorney, but this is a relatively new entity structure, and my understanding is that there is not much case law yet.
That said, I wish we had Series LLC legislation here in PA. Seems perfect for the real estate investor.
Its about taking away one of the legs of a plaintiff attorney, damages/recovery. You do this by creating multiple layers of protection. (Series LLC, Land Trust) and making it hard and expensive to be able to find you and your assets.
Theoretically it is easy to explain a land trust and how it is used. A real estate land trust is just one of the many types of trusts. You are probably most familiar with an estate plan trust used for death, taxes and probate. A trust, be it your estate trust or land trust, is any agreement where one party holds property for another party's benefit. The owner of the property never gives up control of the assets, but the trustee becomes the owner of the property. The function of the land trust is to shield the asset owners. The anonymous land trust owns the Series LLC as well as serve as the Title Holding Trusts for your real estate assets.
The nuts and bolts of anything is in the details, which will involve a Lawyer and your CPA.
@Bryce Litwin It will get their. 17 states now have them, expecting 20-22 next year. But because PA does not have one does not mean you can't set one up in lets say TX, NV or DE. Generally, even if PA did have one, when you set up an asset protection system, you want to incorporate in the state with the best laws for you regarding charging orders and liability shields. Like any product, as you have more options, you start narrowing them down. That is why TX, NV and DE are most looked at. They have the best protection. AZ and WY are starting to compete also.
@Brian Bradley, I agree LLCs are a very important asset protection device. I am not as convinced that Trusts by any name that folks slap on them are of much benefit. If you own property and run it through a management company it is almost impossible to pierce it if you do any kind of proper protocol. I see no point in doing a trust where you are so well protected. Now if you are in fact a hands on investor as probably 98% of the folks on BP are using a "blind " trust is practically useless. You are the guy negotiating the purchase, you are the guy signing the closing papers, you are the guy hiring the contractor or even doing the work yourself. You are the guy interviewing the tenant, you are the guy they call if things need repaired, you are the guy negotiating the sale, you are the guy signing the deed, you are the guy writing the checks, etc. To think putting the property into a blind trust will "hide " your identity is absurd. I have had several lawsuits where folks who did wrong tried these little games and it only took a few interrogatories to sort it out and I can assure you it would not remain hidden in a deposition. I am aware of one guy who lied in a federal lawsuit I was involved in, he went to prison AND lost all of the assets. The claim about using a lien to take the equity out of a property is actually the second best way to get the corporate veil pierced in my experience, it is called under capitalization, and fraud. The money you pull out is very easy to trace in the banking world. While I also like the series LLC in theory, the book keeping can be a nightmare for those with a lot of rentals. I only have a little over 30 doors and maybe 5 entities and it is already getting to be a pain to keep them all separated. While Wyoming has the series LLC now we do not have an actual case on them yet. We do have some very strong case law on upholding the LLC shield however. There is actually a fair number of cases on real estate LLCs, although the first LLC in Wyoming was a partnership between two oil companies. I also love how the IRS removed many of the limitations on LLCs about 20 years ago so you no longer have to limit their life to no more than 30 years or meet the 5 bullet test to keep your LLC status. Now in Wyoming even the meeting requirements are pretty much done away with, but not corporations unless you are a limited corporation. I really like limited LLCs. I suspect they are really better than a plain LLC for protecting assets. Thanks for talking about LLcs, I think it is important for folks to have them, unfortunately many have to buy in their own name for the first few properties because of the better terms that personal loans get through things like Fannie May or Freddie Mac.
@Jerry W. thank you for contributing to the forum. I see you on a lot. I think that if anybody relies on just one system to preserve wealth and assets it is not going to fully work. The idea of asset protection is to create multiple layers of protection around your castle, and make it very hard and expensive for the other side to get to anything, and if they can get to it, the likely hood of collecting will be very little, especially compared to the expense they just spent to get to it. That is why you have (Insurance, Umbrella Insurance, some sort of incorporated structure (LLC, Series LLC, etc) and a trust.) The trust is really the secret weapon, and this is from a trial lawyer the had to deal with this. Now to just really solely on an estate plan trust that was not drafted for asset protection and not the purpose of wealth preservation, but rather than a purpose of avoiding taxes and probate, you are right. When assets are placed into a trust, they are separate from the settlor, therefore if the settlor is sued, only the individual's personal assets can be pursued. Even the trust assets that are being distributed to the beneficiary are off limits through protective provisions (legal language) in the trust deed. This means that the benefit of the trust assets are not up for grabs. To even try to get a specific asset in the trust assigned is very time consuming and expensive.
The added power of anonymous land trusts is that these Anonymous Trusts can own the LLC itself as well as serve as Title Holding Trusts for the real estate asset. The LLC typically must disclose the members of the LLC on the filing instruments called the Articles of Incorporation. However, the member listed on the filing can be an Anonymous Trust. Since the Anonymous Trust is a private document and it is not filed with the State, anybody researching the Owner or Beneficiary of the Trust will be unable to find that information in the public records. Additionally, anyone researching the owner of the real estate asset by searching the County Clerk records will only find the name of the Anonymous Land Trust. Since the Owner of Trust and the beneficiary is not registered with the state, they cannot find out that the Series LLC is the beneficiary of that Trust. If they wanted to fight this in court it would take again substantial amount of more time, billable ours, labor, manpower and money.
If the asset protection system focus on preservation by destroying the lawsuits legs of damages and recovery from the very beginning, it is a better strategy. Before a case is filed an attorney will always research whether there are assets which he can seize from the defendant in the case that he wins and do a cost to benefit analysis. If it appears that the defendant has very limited or no assets, or to even get to those assets it will go over his profits and or wont even break even, then in all but the cases but personal self-righteous vindication will the lawsuit be foregone.
@Brian Bradley, I am sorry but i absolutely disagree. you have failed to answer how 98% of the folks on BP manage to own and operate their LLC without having hundreds of easy to follow footprints to them. Who writes the checks to the mortgage company or the County treasurer every year to pay taxes? Who pays the utility bills? Who interviews the tenants? Anonymous is a joke unless you are super rich and just have an investment guy do everything. Those folks don't read BP. Those blind trusts don't provide a single bit of entity liability protection other than so called anonymity protection. If I have an injury on a property with any reasonable liability I can file a lawsuit for under $100 and in 3 months I can have the name of every owner. it is not really difficult. Try looking at every truly BIG name on BP, Brian Burke, Jay Henrich, DeRosa Group, Ben Leybovich, etc. NONE of these guys use blind trusts. You ever listen to all the hype about networking on here? Tell your neighbors you invest, tell your friends, go to REI group meetings tell everyone, etc. you cannot do that and remain anonymous. Try borrowing money from folks using 3 structures and a blind entity trust. No one their right mind would loan you money. Now try doing that with a bank. Major impossibility. A bank is going to require a personal guarantee. Bingo owner located. Now lets say you put your money or property into the trust, who is going to manage it? You going to pay someone to do that? Bang your liability is back in about half of the time if you manage it. Hmm do a spendthrift trust you so you cannot touch it and neither can your creditors, bang you can never manage that property again, and who will you trust all of your assets to? How much will it cost to have lawyers manage your portfolio at $200 an hour or more? Will they field calls on broken toilets? All of this sounds great on paper in real life it rarely works. The cost can be huge and the paperwork a nightmare. If you own say 3 houses making $200 each per month you could never afford this structure. You are buying a stretch limo to haul lumber when a 15 year old pickup will work even better, but the guy using the limo will go broke. It can be hard to make money in this business, and it can be hard to keep up on the paperwork. Add $5K or $10K or even $50K to the cost and it will break most new investors, and most of the time triple their paperwork. it would be simpler to just insure the property for double its value and use an LLC and run it properly. Maybe set up a management company at best. Who are these outside entities that will manage your rentals you don't leave your footprints all over them? Hell do the series LLC.
I am sorry I don't buy it. nor should 98% of the folks on BP. Yes it will help some folks, but most of those folks don't need real estate to get rich, they are already there.
@Brian Bradley, I want to make it clear I am not attacking your credibility or credentials, I am sure you are good at what you do. The problem is that the best fit for these kind of entities are the super rich who do not manage their own stuff and do not need financing. Most of the folks on this site are trying to save up money from their first job to buy a rental, or even own 20 or 30, but still are working a day job. Hands on investing and anonymity do not go well together.
@Jerry W. I did not think you were. As an actual lawyer I just know the strength of trusts by trial work and case law myself. And this is not for the super rich! Maybe in the past, or with other firms who want to bleed you. Some firms are now going to value based and or bundling to get a large market etc and adding value. At least that's how we brand our practice. This basic set up for us is just under 3k. Then obviously after a full evaluation etc their are different things we can offer clients and the more assets, wealth, risk, etc that they have then the price will start climbing. And this set up does go hands in hands with people who want to be hands on investing (and is really suited for them since they will have the higher risk of liability and learning curve) or hands off investors. It does not impede it in any way. It lets the investor focus on what they should be focused on, finding and closing deals, not liability and damages and fear. In our experience, we have over 2,000 existing clients. A lot of them were newbies with zero property saving money for their first place (a lot from BP), some with a few investments (1-4 small multi families now wanting to leverage and scale up), and then your big fish who want a 50k work up. It is client and situation specific. Anonymity is just one layer of the protection and most people want to remain private in their investments and life if possible.
@Brian Bradley, I would love to hear the details of how it works. Could you answer the questions I posed above?
@Jerry W. All those guys you listed, I know what they have, and their protection systems and all the numerous LLC and trust up to their eyeballs and self negotiated insurance plans, and have primary residence is asset protection friendly states and a full legal team, etc. Do you practice law? And do trials? no. Do you know how a law practice are run, and how cases are evaluated? NO. I was a plaintiff trial lawyer for a very long time. Rated top 100 High Risk Trial Lawyers in the nation, Super Lawyers Rising Star List. I spent a vey successful part of my life evaluating cases and then after you evaluate a case, if it its good, the next mandatory questions is, whats the awards, damages, where is it coming from and man hours. If the case did not cover its costs it did not get filed end of day. Its a business.
That is why you go after the damages in your protection system and why our system was crated by very successful trial lawyers.
You have asset holding companies that hold properties, and a shell operating company that does all the contracting. All contracts are not in personal names but in the names of the managing company, all agreements everything. You have property managers manage your properties who pay to the operating company (and PM should be in the analysis you give before even purchasing the property as most people invest in real estate for passive income flow) and contract to the operating company. If somebody wants to find you and sue you it will take a lot of time energy and money to even try to get something. Way more then a plaintiffs lawyer would be able to expel in resources and manpower for minimal payoff that wont cover the billable hours of you, paralegals, discovery, etc. You have a very different perspective of an asset protection system. Its outdated as if only the rich can afford and no firms have adapted.
Our firm for example just charges one value based fee for lets just say for an example a basic set up (Series LLC, Trust and operating company. 3k) Then they enroll in a family based plan of $44.00 an hour for the maintenance, transferring title, etc and talking to a lawyer, rather then the billable hour. Man, that is so much money. Only the rich can afford $3k and $44 a month. You are stuck in an older system of how firms work. Not all firms work off of an old outdated method. So do not stereotype the law field. And some firms market not to the uber rich, but the little guy, and then help them grow and systemize growth with them and treat them like family.
You seem to be stuck with a cost that we are not talking about and outdate billing methods that not every firm uses, and now just sound very angry. Maybe Asset protection is not for you. Thats fine. Its not for everybody. But for those little guys who work their butt off to get an investment property, learn to leverage it to another, and then realize they are now a target and don't want life's unexpected events to take everything from then, its a good thing a firm like mine and others exist that make these structures very reasonable and attainable to them. You don't need to speculate how every firm in the world charges crazy billable hours that only the rich guy can afford. Good thing my firm and others then exists to give the little guy the same product and freedom of mind of the rich at the cost price the little guy can afford. Must be nice being robin hood. I'll take it.
@Jerry W. you can IM me and we can set up a call and get int the details of your situation, the nuts and bolts of what a trust is, the strengths of trust, how the trust is set up with an LLC for added layers of protection, how that works with your operation company that has no assets in it so is a shell operating company, how insurance etc adds to the equation. Lots of ways to skin a cat, But it is an evaluation that needs to be had with a client over the phone to their situation. All your questions of costs and what a trust is, what anonymity are, how firms bill, how only rich can afford this etc have been already addressed above and in a reply to you. The details of how it works with a particular person then goes to a in person conversation. You can also connect with me via BP and I can send you a info document for potential clients that we send out. But the BP system does not let you send out attachments unless its to a connection.
"The fact is that not all LLCs are the same. Some are just better for asset protection then others. The best LLC structure is the Series LLC. Like any good parent, we want to protect our children. This is accomplished with the Series LLC by isolating each asset into individual series called "children series" for liability purposes inside a holding company, the parent Series LLC. And then we protect our children even more by hiding those children from being connected to the holding company with an anonymity land trust. This system (Series LLC with Anonymity Land Trust) allows you to stop a lawsuit before it is started, by taking away the chance of recovery. Though the Series LLC is one company, with one filing with the state, and one tax return, each child âseries' is treated as if it were its own LLC for liability protection."
---------------------------------
The LLCs have to be registered with the secretary of state. That will show your connection between the companies. If proper corporate form was not followed, the corporate veil can be pierced.
I'm with @Jerry W. You can run but you can't hide.
"@John D. How does that work with a conventional mortgage"
-------------------------------------
Simple, the LLC pledges title, you pledge to pay the mortgage. Somewhere along the line, you swear that you are the beneficial owner of the LLC. That information (beneficial ownership) may or may not be in the recorded mortgage, but you can bet your bottom dollar that the lawyers will find out in discovery against the LLC and the land trustee, and join you to the suit.
Once they join you to the suit, they will demand knowledge of your assets, and that includes assets in which you have a beneficial interest -- that's how they find out about any other LLCs. The whole thing is then rolled up with additional defendants added, and -- if proper corporate form hasn't been observed, or if all of the disparate entities were treated as one for other purposes (bank loans, etc) -- your personal liability goes through the roof.
Like someone else here said, you can run but you can't hide. You may make it too expensive for the other side to bother to get you, but that is doubtful. Too much of a paper trail.
"@Brian Bradley You get the mortgage in your personal name first...
-------------------------------
Thereby indelibly linking your identity to the land, making you a defendant in any suit. From there it is CHEAP short work to issue discovery and find out that you have a benficial interest in the LLC and/or land trust.
Sorry, son, but you ain't sayin' nothin' that even remotely helps individuals escape liability with that one.