All Forum Posts by: Scott Smith

@Robert Carraway No, if all the income is distributed each year it is taxed at the personal level, not the Trust level.

@Jeff V. @Carl Fischer As an AP attorney I can tell you that Carl's strategy is sound. I would provide some slight tweaking in that I keep all my assets of the same tax type in a Series LLC to hold them compartmentalized one from another (I do this as a matter of process even though @Carl Fischer is right that performing notes have very low risk). I then would take anything that has liability associated with it (i.e. a non-performing note that is in foreclosure @Jeff V.) and compartmentalize that in a one-off LLC OR I could use an individual Series of my Series LLC.

From an attorney/investor perspective, I don't really care what you do as long as you compartmentalize your risks.

@Roberto Westerband the cheapest option is to establish an IRA owned Business Trust since the Business Trust avoids all of the on-going and compliance fees associated with an LLC. Since the Trust is owned by the IRA, it provides the same asset protection as your IRA account generally (lawsuits against you won't affect the IRA).

If you think the UBIT will be high, then you will need to put in place what is called a "domestic blocker". These aren't cheap though, so you will want to know the projected taxes before considering your legal options to avoid them

@Robert Carraway @Dan Krupa I'm an attorney, check out podcast #109 where I talk about DST's since I'll also be referencing them here.

The CA rule for franchise tax (if broadly interpreted) is that a CA resident is liable for CA franchise tax for any LLC operated anywhere. I think it's a low risk of them ever enforcing it if its an out of state LLC only doing business out of state, but still a risk.

The only way to completely avoid the risk for AP purposes for a CA resident is to use a Delaware Statutory Trust (DST). The DST is a Trust, not an LLC, so if operated correctly it is also taxed as a trust and not subject to franchise taxes. Business Trusts like the DST are not new. The only downside to the DST is the cost to set it up, but for a CA resident even the seemingly expensive is cheap to the comparison. If you live in CA in want to compartmentalize your assets and obtain anonymity, the DST is the only way to go.

@Alex M. its a common misconception that it is valid in 12 states. In reality, it is only allowed to be created in those 12 states but you could use it anywhere. A Series LLC is just an LLC with a twist in the statute that allows for this extra creation. The way that we see the laws playing out, it is as strong as and just as susceptible to the attacks of individual LLC's. The benefit is some cost savings but mainly simplification of the overall structure

@Cathie Kovacs thanks for the referral Cathie

@Simon Stahl @Todd Dexheimer The LLC is subject to the franchise tax, but you could use a DST in California and avoid the $800 per year franchise tax and get asset protection. The DST allows for Series Compartmentalization of the assets and can be held anonymously.

@Jon Holdman @Alex M. You can form an LLC and elect S corp tax treament after the fact (this gives you time to run the numbers both ways and see what makes the most sense). The S-corp requires a separate tax return, so the prep for that can defeat the purpose of the savings on self employment tax when the income is less than $55,000 (usually the sweet spot I see).

Asset Protection comes in all varieties but the best is the protections of an LLC in combination with land trusts. This provides the lawsuit protection with anonymity. People don't sue you if they think you own little.

What I recommend is forming a Series LLC in a state like Texas/Delaware and then using that LLC in any other state you wish (I'm sure you've heard that people do this all the time with Delaware LLC's). This allows you to have one tax return and one company in no matter how many states you have property located in. In essence, you will get an anonymous, infinitely expandable company at no additional costs (since the child series of the parent series LLC are free to create and require no registrations).

@Basit Siddiqi it's not well known but the CA resident should use a a DST structure for a Series structure that offers the Asset protection of an LLC. Since it is a Trust it avoids the franchise tax.

@Chris K. @Greg Scott @Account Closed

Insurance protects against different kinds of risk (e.x. negligence) than an LLC (e.x. breach of contract, fraud, gross negligence, etc.). Savvy investors look at legal structures as another form of insurance against those risks not protected by insurance, and they balance the costs associated against the equity protected. As a general rule, I wouldn't spend more than 3% as a one time cost to protect the equity...so more like flood insurance if I were to draw a parallel between the two.

For California residents, an LLC becomes expensive at $800/yr in franchise tax and still everything is in one "bucket" for litigation. For CA, I recommend using a DST since trusts are not subject to franchise tax and it allows for the asset protection and compartmentalization akin to a Series LLC. The downside is that it is expensive, $7000 - $10,000 as a one time cost from most providers who even know how to put it together which can be difficult to find.

With regards to none CA investors, you can use a Series LLC established through a State like Texas or Delaware to compartmentalize the ownership of the assets and then hold title to the property in land trusts in every other state. This avoids foreign registrations and provides anonymity in the ownership (Mr. Land Trust recommends this approach as well).