All Forum Posts by: Luis Alvarez

@Justin Li I'm late to this one, but good on you for knowing to place an investment property out of your personal name and into a business entity.

The following is not to be taken as specific legal, tax, or financial advice applicable to you or your set of circumstances, but simply my opinion from years of experience in estate planning and asset protection.

I would begin with talking to the lender (you may end up refi'ing with) and explain what you are looking to set up and ask what their parameters are. Presuming you are referring to unseasoned an unseasoned LLC, the lender won't really take the LLC into account and the lending will be based on your personal financials. I would ask my lender if I can close in an LLC, but if not, when time to refi comes, I would transfer the property out of the LLC and into my personal name, then close the refi in my personal name. After the dust settles, have a Grant Deed executed to transfer ownership of the asset from your personal name to the LLC's name.

Due on Sale Clause

You will find many, many posts on here and in the internet in general that warn you not to do this because of the Due on Sale Clause found in mortgages which provide that a Lender can call the entire mortgage if a transfer is made out of the original borrowers' names. This is partly true, but the true intent of that language is to prevent undisclosed sales/transfers that would leave the Lender without an easy recourse in case the note is then not being paid. There are statutory exemptions for transfers that will NOT trigger the due on sale clause (E.G. death, marriage/divorce, estate planning/asset protection, and a few others). Bottom line: the purposes for which many real estate investors on BP would transfer ownership of an asset to a LLC, would likely fall under the exempted transfers, and as such, NOT trigger the Due on Sale Clause. Which makes the Due on Sale Clause (in most instances) an irrelevant issue to worry about.  Unfortunately, many folks out there, many of whom were real estate attorneys I've worked with in the past, were unaware of how the Due on Sale Clause truly works.  Feel free to chime if you'd like more clarification.

@Jenna Bamlet Replied to your message in case that helps :)

@Evan Howe To echo what others have said on here, the $800 annual LLC Franchise Tax Board fee is usually unavoidable. I am not providing specific tax advice, I would confirm with a CPA familiar with CA taxes. However, the link you've provided appears to address tax tiers related to payroll taxes you would pay the CA FTB if you reach certain points, the LLC fee is a separate issue, but because the FTB oversees the LLC fee, sometimes this gets confused with that.

This is not meant to be specific legal advice to you and your situation, just my opinion from years of estate planning and asset protection background:  

1) If there is an asset owned in OH, then to shelter that asset from inside and outside liability, a OH-registered LLC should own title to that property. Having the asset (located in OH) owned by a LLC (in OH) avails that asset to the laws and protections of OH state law. OH courts may or may not recognize outside LLCs in the same fashion, but this is a legal research question that should be conducted by someone who has experience researching on WestLaw or LexisNexis...Google research is not something I would rely on for my assets.

2) If you live in CA, you would want to register the OH LLC as a "foreign entity" in CA, and to echo what the others have mentioned, yes, you'll then have to pay the $800 annual FTB fee. But contrary to what many on BP would tell you, I personally don't think this is a crushing fee when you think about it providing you with a clean and narrow registration of the LLC in CA and thus, by extension, availing the manager of the LLC (presumably you) to the laws and protections of CA state law.

3) A quick distinction between the LLC v. Umbrella Policy debate: an LLC limits and protects assets owned by that LLC from liability exposure, while an Umbrella Policy simply pays for liability once it has already been incurred (and you, under your personal name, have been found liable of damages. Once again, an Umbrella Policy does not personally protect you from liability, it only pays for damages after the fact.  Additionally, a UP only kicks in after your underlying insurance policies have already been exhausted, and those underlying policies (e.g. "landlord insurance") will look at every possibility to not pay out (instances of gross or specific negligence, etc.)  And you should always have someone review the language in the policies and the UP policy (yes, the full 80-100 page documents) to make sure the exclusions are crystal-clear.  It's like I learned in law school, the legal industry is just reading "Terms and Conditions" for the rest of your life :)

Hi @Julian Drew, I would begin with talking to the lender you and your partner prequal with. Explain what you are looking to set up (in terms of split ownership) and ask what their parameters are. While you didn't mention it, I presume this will be a new LLC which will hold the yet-to-be-determined asset...if that's the case the new LLC will have no history, so presumably the lender won't really take the LLC into account and the lending will be based on you and your partner's personal financials. You can ask your lender if you can then close in the LLC, but if not, you and your partner will likely have to close in your personal names and after the dust settles, have a Grant Deed executed to transfer ownership of the asset from your personal names to the LLC's name.

Due on Sale Clause

You will find many, many posts on here and in the internet in general that warn you not to do this because of the Due on Sale Clause found in mortgages which provide that a Lender can call the entire mortgage if a transfer is made out of the original borrowers' names.  This is partly true, but the true intent of that language is to prevent undisclosed sales/transfers that would leave the Lender without an easy recourse in case the note is then not being paid.  There are statutory exemptions for transfers that will NOT trigger the due on sale clause (E.G. death, marriage/divorce, estate planning/asset protection, and a few others).  Bottom line: the purposes for which many real estate investors on BP would transfer ownership of an asset to a LLC, would likely fall under the exempted transfers, and as such, NOT trigger the Due on Sale Clause.  Which makes the Due on Sale Clause (in most instances) an irrelevant issue to worry about.  Feel free to chime if you'd like more clarification.

@Keilon Morton To Eliott's point, your client should confer with a CPA highly versed in real estate investing...ideally, the CPA is also a REI, that's the way that we've seen ensures they are vested in knowing all the nuanced caveats from the tax code (and keep up with tax case law) that will directly affect an investor's decision making.

While I have a JD, this is not intended to be specific legal advice, just my opinion from an estate planning, asset protection, trust/estate administration background.

That being said, I would always put a rental property into an LLC and would never have a rental property (of any kind) or a flip in my personal name.  Yes it is true, that an LLC will only limit your liability, but keyword there is limit. There is nothing that exists that will completely insulate your rental property from complete liability, because the minute it is rented, or in the case of a flip, you sell it, you are exposing yourself to liability.  And there's more exposure than a loose handrail.  From building code violations leading to extreme damages, or injury, or death, and mold, asbestos, hazardous chemicals/substances found on site, etc.   The list goes on, I'm not a tort attorney, but they would know what all they see connected to real estate investors.

Assuming your client transfers the property(ies) into an LLC and they are then the sole member/manager. If some cause of action were to arise, the exposed party to litigation would be the legal title owner (in this case the LLC) and, yes, attorneys would also name the principal or managing members in the lawsuit.  So then a person might think: "WHY EVEN DO THIS?"  This happens because all litigation attorneys understand that they must name any and all potential defendants in a lawsuit from the beginning otherwise after some period of time (varies by state), they may lose the ability to add defendants to the suit, and then they cannot seek recourse from the truly liable party. This is typically the civil procedure you'll see, but it can vary state to state.  And they do this because during the discovery process of litigation, it may be uncovered that the individual, and not the LLC, is actually liable.  So if they don't name anyone and everyone, they may lose out.  If an LLC is properly maintained, which really isn't all that difficult and any "business owner" should be more than capable of doing so, the liability remains within that LLC only, and does not affect other assets (whether owned in separate LLCs, or in a person's personal name).  An LLC provides protection from exterior liability and interior liability.

The presumption is that legal entities are excellent tools, as long as you follow the corporate maintenance and corporate formalities. This means having separate bank account, not commingling funds, have an Operating Agreement, have simple occasional "minutes" reflecting actions of the entity, etc. etc.  As mentioned, this is not a crazy amount of maintenance and the costs really are negligible and I see it as a cost of doing business and having peace of mind.

@Lauren Beech To Chris's point, (assuming the Operating Agreement allowed for it, which they typically would) you'd just want to have a simple one-pager agreement put together memorializing the buy-out, have everyone sign, and you may want to have it notarized. Everyone should get their own signed copy. 

@Amy Lieu One possibility is to set up a limited (family) partnership (Pship), the current LLC would act as the limited partner and could receive the chunk of the profits/losses but because that LLC (and by extension, its owners) is a Limited Partner, there is no action it could take or sign on behalf of the Pship. A side LLC, acting as the General Partner, could handle all the management and enter into contracts/agreements on behalf of the Pship. Additionally, if it makes sense and a CPA advises, the General Partner (LLC) could be treated as an S-Corp.

@Jenna Bamlet What are the provisions in your Operating Agreement? If absent an OA, is the LLC formed in NC? If that's the case, would want to look at statutes and how similar cases have been treated in NC. May want to seek guidance from a business litigation attorney.

@Patrick Kucera If I may provide my take (and this is not to be taken as specific legal advice, just my opinion):

Typically, for most folks putting rental properties directly in family trusts is not the way to go.  However, establishing a trust as a "bucket" to then add in assets to that trust and direct how and when you want those assets to flow out is the purpose of them.  You can add many different types of assets to a trust, including LLCs (or interests/shares to other entities) and those entities may own underlying assets of their own, including real estate.  (If you see where I'm going with that).

Additionally, transferring real property into an LLC (as long as the move is qualified) for purposes of estate planning and/or when the controlling owner interest does not change, would not trigger a due on sale clause. There are statutes and regulations which you can find out there that clearly spell out many various instances that exempt the due on sale clause being triggered--hopefully this myth can be busted over time on these forums and the internet.

I can always share an asset protection flowchart example.  

@Brandon Lashmet It sounds like you'll have the parent holding company own underlying entities, in that case, no, as long as it's done clean and you keep records of profits/revenues being distributed "up" to the parent holding co. this would not be comingling because the parent holding co. is simply a vested investor in the underlying companies that are kicking dividends/distributions.