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.
I would like to get @Scott Smith opinion on this. He's written in-depth blog articles (on BP) on LLCs and asset protection and knows his stuff.
@Karl B. @Matthew McNeil @Brian Bradley
You all appear to have explored just about every aspect of the Series LLC! I approach this first as a real estate investor, and then use my expertise as a litigation lawyer to reinforce my investment strategies. I serve nearly 2,000 clients, as well. While we use a lot of the same strategy between each client, I also need to emphasize that we build asset protection strategies around the client's needs - so structures do vary between client needs and states.
As Brian Bradley has mentioned before, it really comes down to making it as difficult as humanly possible to to tie the assets to you. I have generally explained this as different “pillars” of asset protection. As you add more pillars, your protection is growing - but you end up paying more for each “pillar.” Bare with me as I explain general concepts, I find it important to explain how I approach asset protection as a whole before getting lost in any one aspect of these strategies. I would break down my approach to asset protection with 5 pillars.
Two points I want to make about these pillars. Both of them are built on the same concept. The insurance industry is a business built around making a profit. The litigation industry is also built around making money - as well as upholding the law. Both industries are seeking the path of least resistance toward making their financial goals.
There are many arguments about there not being enough case law to support the Series LLC, but that is exactly why it is so strong. If someone had found a way to penetrate the Series LLC by now, they would be rich. While people can argue the lack of case law is a weakness of the Series LLC, that is a strength in my perspective as an attorney - it is a strong enough entity that people haven't been willing to challenge it when properly established.
I know I’ve avoided a lot of the specific issues raised through this thread, but if you still have concerns feel free to tag me and I can try address them one at a time. Brian Bradley established this thread to discuss the importance of the Series LLC, and it’s integral role in compartmentalizing your assets. Though I feel some of the posts may have gotten off topic, he covered the topic very well in his informational posts.
"John was just rude to be rude and not even provoked. You don't call somebody "son" as if lecturing somebody. That is just like saying "right boy". "
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I, too, am a lawyer with over thirty years experience. I mentioned before that discovery would have your client out. Discovery includes subpoens. In my bailiwick, even a $10k lawsuit would no be stopped, becaust court costs (e.g., subpoenas) get recouped.
There is no magic bullet for preventing liability. You presented a "magic bullet." For those of us who have practiced law for decades and understand its uses and limitations, that presents a "boy" attitude as far as I am concerned.
Your path throws up MINOR roadblocks, @Brian Bradley but that is all. And as has been posted before, the full structuring of your client's corporate liability evasion wil be on full display at closing argument the instant you say that your client really and deeply cared for the welfare of his tenants and no. your client had no incentive to cut corners.
Yes, "boy" is an insult. It is also an indication of where one's ignorance lies.
"@ Brian Bradley @John Clark and yet you are the one insulting and speculating. Great 30 years spent. You sound just angry and still don’t have reading comprehension since this is a system of many options... "
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No, Brian, YOU are the one who presented his system of asset protection as the be all and end all of suit liability. You are wrong. All of your whining to the contrary does not change anything. I m not speculating. I am telling you what many lawyers would do. And if you tried to use your asset protection argument in closing, as has previously been noted, in many states (if not all), your butt (and your client's) would have been bloodied on response/rebuttal.
This is where you say good night and good bye.
@John Clark just calling you out o all your BS and unprovoked anger and attacks. Grow up. But you are to old for that. Stay angry. Good luck. No whining. Just responding to attacks from a very angry rude person.
Yes, exactly, hiding.
From an actual investor's point of view, I'd caution folks that still require financing about the pitfalls of all this anonymity.
I only hold commercial assets inside LLCs, but all this asset protection will most likely hang you up with banks, and worse, title & hazard insurance if you do an after the fact deed transfer. Especially if you are doing this with mortgaged houses and double worse if your entity is vested differently than the beneficiary named on the title and hazard insurance policies.
Anyway, I've financed a couple commercial apt buildings with local banks in the past. The banks actually had more than 2 brain cells and were glad I was holding in an in-state LLC for liability protection and thrilled I did so day 1. (as opposed to transfering later, leaving a title chain trail, negating anonymity no matter what you do).
Step 1 of the banks asset underwriting/ due diligence was to pull up who the members/governors of the LLC were. Satisfied it was just my family, we moved on to step 2.
An anonymous land trust (here a land trust is a designation municipalities & govt use to protect land from development and would be useless) would have stopped my ability to utilize customary loans with the best terms and lowest costs, in any form.
There is a cost to complicated asset protection schemes. In the name of 'protection', you are without financing options. You are most likely having to purchase all cash and keep it leverage-free or utilize private money if you can even convince them you do own it and won't add/remove beneficiaries or trustees while the paperwork sits in a drawer somewhere.
Other financing options- Hard money? Nah, they wouldn't touch this and nobody would refinance you out anyway. Venture capital? They wouldn't either. The mob? Sure, for a week. Payday lender? LOL You get the idea.
Enjoy your unfinancable 'asset protection'.