All Forum Posts by: Scott Smith

@Bill G. Thanks for the insight Bill. I would be very interested in having some sort of series of informational videos or educational system built for investors to help get them up to speed on these issues quickly. Lawyers are expensive, and basically we are just people who have spent significant amounts of time, training, and education into a very specific field. I think anyone can do what I do. There is no magic to it. I agree with you is a way for people to become educated about real estate, taxes, insurance, litigation risk, and the like so that they have a complete picture of the business. If you know of anyone specializing in producing those types of materials please let me know, I would be very interested in working with them to save investors money over the long haul of their career by proper up front education. 

Sure Seth. I'm working on getting up a solid website with all of my credentialing, and I appreciate the feedback about that.

@Bill G. I'm always happy to hear that people have not gotten sued over the course of their career. This likely means that you are very diligent in monitoring the statements you make, the contracts your enter into, etc. that could get you involved in a lawsuit. I would also venture that you have gotten some good advice and education early on in your real estate investment career. Would you mind posting a link or further informing me on what educational services I can point my clients to so that they can have your same level of diligence and care? 

Just to reiterate a couple of points about insurance...

The idea of insurance keeps coming up time and time again, so let me give my two cents about it. We could estimate on the low end that insurance for fire and flood is 1% per year and we all tolerate this cost because of the catastrophic loss a fire or flood would cause. I'm only an expert when it comes to New York and Texas law, and for my clients a one time 1% cost to set up legal entities is necessary since Texas has passed statutes which entice claims that are very lucrative to Plaintiffs and also happen to be exempt from the insurance policies coverage. Losing one of these lawsuits is catastrophic to their wealth because the damages easily with attorney fees easily make it above the $50,000 mark, and foreclosures of property continue until the judgment is satisfied. I try to make this clear in all my posts and talks that you need to know the law of your state to know the risks that you face in your business. For example, Texas has homestead laws which protect your personal house, car, horse, etc. from any judgment. If that's all you own in Texas, then you obviously don't need an LLC or any asset protection.

You might be thinking that the insurance company would always get called into the suit when you get sued. This is not the case in Texas or anywhere that allows treble damages (3x multiplier+) for intentional fraud claims. In Texas, these claims are based upon the DTPA and to get the higher damages you must plead that it was an intentional act. Intentional acts are exempt from insurance. In the mind of a plaintiff's attorney, if their are sufficient assets to cover the cost of the suit, they would rather fight you and your pocket book than the deep pockets and very experienced attorneys of the insurance company. 

So some people think that they are honest and above board and that will protect them from a lawsuit based upon fraud, but they are wrong. My clients are all honest people, and they still get sued for fraud. The fraud can be based on anything you say or do which lead someone to act or fail to act thereby causing them damages. Since we can't drill into the head of a defendant to find out if they really intended to deceive the Plaintiff, a jury is used to examine the circumstances and make the determination. It does not matter whether in your mind you really intended to state a falsehood or not, merely that what you said turned out to be incorrect is sufficient. if the other party is damaged and it appears you did the wrongdoing, do you believe a jury is going to appropriately ponder the legal nuance between negligence or intentional fraud? One example is what I gave in the podcast regarding a client of mine was sued for a single statement made in a single email that the "plumbing under the house was replaced" . There was a misunderstanding regarding the representation from one party to the other, and viola you have a fraud lawsuit. 

It doesn't mean anything to me personally if anyone chooses to use an attorney for their legal, a CPA for their taxes, or insurance for their property. My goal is to merely educate and let people decide what their tolerance for risk is. Of course if you can get away without paying for entities to protect from legal liability, and you never get audited by the IRS, and your house doesn't burn down, you are better off not paying for services that protect you from that. 

At the end of the day, I believe we all make better decisions when we understand the risks and can appropriately weigh those risks against the costs according to our personal risk tolerance.

Hello all,

First off, I willingly accept your rebuke and chastisement for not being prepared for the overwhelming (and unexpected) response from the podcast. I have had an opportunity to catch up and I'm ready for you. If I have not gotten back to you yet, please reach out again. As a courtesy, and somewhat of an apology, if you previously reached out to me and I have not contacted you back, I will give you a 30 minute consultation (which I normally charge $100) as a complimentary service. During that consultation you can ask me any questions you like...about your business. I'm taking you on the honor system about the complimentary consultation and prior contact.

My background is in high stakes Plaintiff litigation against insurance companies such as United Healthcare, so my point of view in asset protection is grounded in the practicalities of the litigation war. Our goal is get a plaintiff and their attorney to drop suit before it is even filed. We do this by creating a system of legal entities and trusts spread among different states that are isolated from each other for liability purposes and that obscure actual ownership of the asset. We want them to believe their probability of success multiplied by the extent of the recovery does not justify the expense of the lawsuit. (the formula that plaintiff's attorney's use to determine whether to take a case on contingency is "probability of success" X "recovery" > attorney fees). Why multistate use of companies? It's yet another tool which makes it difficult for the plaintiff to discover the extent of your assets and increases the costs of litigation by potentially having to fight a separate suit in another state. Imagine the costs of having to fight multiple wars at once...their attorney bills start to look like the US national debt. This system of protection exhaust both their will to fight as well as their resources. A client will likely not want to pay out of pocket if the odds of recovery are slight, and an attorney on contingency will likely refuse the case or encourage a quick settlement. I have defended the system I am proposing and I have personal experience in representing a client where it has stifled a $75,000 lawsuit before it was ever filed. Remember the costs of just getting through discovery in any decent litigation is at least $10,000 in just attorney fees and its significantly less than that to set up the proper protections. But remember that this is your BEST CASE scenario (paying your attorney and having the case dropped), I won't go into the worst case scenarios unless someone asks me to because I'm not a fear monger and I don't believe in it.

Some people have claimed you may not need asset protection, and I have similar thinking clients who don't have fire insurance. Instead they decide to self insure. That decision about self insuring against fire, floods, and lawsuits is up to you. Asset Protection is litigation insurance. You may get lucky and never have a flood or house fire; you may get lucky and never get sued. Ask someone you know who has been sued in any serious capacity and they will tell likely tell you it was horrible in how it impacted their life for months or even years. I can tell you I've seen people visibly age in mere months of being in a lawsuit. Again, not trying to be a fear monger but whatever you think your probability of getting sued is, the emotional cost means energy your aren't using to make money which is real dollars lost in your business. A solid and well thought out asset protection plan lets your sleep easy (well easier anyway) through the storm.

Regarding whether LLC's are easily disregarded, there are a couple of points here. First, a properly structured LLC that is maintained correctly is tough for anyone to get around in Texas. Second, not all attorney's are made equal when it comes to attacking these structures and most of my Plaintiff attorney colleagues do not share the impression that they are easily set aside in Texas. Third, properly separating your operating company from your asset holding company greatly increases your protections in real terms against a plaintiff's recovery. Fourth, you will want to know the effect of a charging order against the LLC in the state which holds your property (Texas and Nevada are great for asset holding companies as the charging orders are fairly weak).

Asset Protection is not a one size fits all, and the various instruments are on a sliding scale of protection and their associated costs. If you want damn near bullet proof asset protection you can get a Delaware Statutory Trust, but those cost $7,000+. They also have no maintenance costs besides the payment to the Delaware trustee (unlike the LLC which has yearly maintenance and franchise taxes). If you think that an LLC is easily swept away, then you can feel secure in the DST. The legislation was intended to create THE safest and most anonymous entity. With the maintenance savings and high protections, many investors (especially those in CA) have chosen to go this route...in fact in the last week I have set up 5 of these entities for CA investors. If you're from California and looking to save money on your taxes and maintenance you're going to be blown away about how many problems the DST can solve for you.

Again, my apologies for not getting back to you and please take me up on my offer for the free 30 minute consultation (normally I charge $100 to get me on the phone). Looking forward to hearing from you. I promise you that I will respond to your email or call by the next business day from here on out.

P.s. If you have specific points you want me to weigh in on please indicate that to me as a "mention". My time is very pressed at the moment attempting to help as many clients as I can that have gone years without protection but are now feeling the urgency, so I appreciate your patience. Thank you. 

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Multistate structures for holding property is much more secure. If you operate the management company in Atlanta, have another state (Texas) be the actual owner of the property. This makes it incredibly expensive for a plaintiff against you because they have to do a multistate litigation.

We should be thinking about Land Trusts for ease of conveyance and to be able to obscure the actual owner of the property from the public record. The trusts should have the LLC as the beneficiary which is the recommended combo. To get even better protection, you can use a Texas Series LLC which allows you to effectively hold all your properties in their own LLC, but you only have one tax filing. Why Texas? Because it is exceptionally hard to deal with litigation over multiple states which means high costs to the plaintiff.

If you're relying on insurance, be sure that it covers intentional acts include Fraud, violations of the Deceptive Trade Practices Act (in Texas), etc. If they do not (which is very likely from policies I have reviewed), then insurance alone is insufficient.

I have recently written a BP blog post on using the trust/LLC combo. I will be addressing asset protection in an upcoming BP podcast.

Maximum protection in real estate should be looked at as bricks that build a wall. The more bricks you stack, the higher it is to climb, but the more expensive it is to build. 

At a minimum I recommend 3 LLC's. One for the operating company, one to hold or be the beneficiary of your rentals, and one to hold or be the beneficiary for your flips. The reason for separating your buy and holds as well as flips has to do with tax treatment for the IRS. If you have them all together in one company, IRS can decide to tax you at the higher rate.

The biggest error people make is not following through with all the proper paperwork for the LLC which technically makes it so that it no longer protects your ASSets.

I'm an attorney in New York and Texas, so I can't give you legal advice on this topic to your situation. But, state statutes likely govern the creation of a trust instrument. Having a properly structured trust document provides anonymity as well as asset protection. I recently wrote a blog post describing these issues in depth.

As an attorney that works in this field, I often will help out investors on the cheap with these kinds of issues because it helps me build a relationship and it takes very little time to change around my form as long as no custom language is needed.

THIS IS NOT LEGAL ADVICE. YOU ARE NOT MY CLIENT WITHOUT HAVING A SIGNED REPRESENTATION AGREEMENT. 

If you check out my BP blog I wrote an article about how you might use the Trust instruments in place of or in conjunction with an LLC. I'm also going to be interviewed by Brandon for an upcoming BP podcast that will cover this subject.

I draft custom made trust agreements for my clients, and I recommend that you hire an attorney that is familiar with the statutes that regulate trust creation in your state. If they don't have to redraft the language, and only have to replace names in the document, you can likely get out of their office without too much bleeding.

A key point about irrevocable trusts is that you no longer own the property, the trust owns the property. Apart from anonymity, this is a significant barrier for someone attempting to foreclose on it with a judgment.

I'm admitted to practice in Texas and New York, so I can't speak to California specifics. Under Texas law, the trust will fail if the beneficiary is also the trustee under the doctrine of merger. Also, to have a business organization be a trustee, often times states require special certification. 

If you have someone you can trust (or an attorney friend), that is usually the cheapest/quickest way to resolve the trustee issue.

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