Asset Protection in Real Life: How My Client’s Strategy Avoided a Lawsuit

by | BiggerPockets.com

This article does not constitute legal advice. We recommend you seek the counsel of an attorney familiar with your specific situation and market to ensure you make the best decisions within your real estate business.

Regular readers will know that I specialize in asset protection, and I have written extensively about the subject. You can read all about my favorite tools, like the series LLC, anonymous trusts, and much more here on Bigger Pockets and elsewhere online. But these concepts can seem intimidating and abstract without some real-world examples of how powerful they are in action.

Today, I’m going to tell you a success story about a real client of mine. Though I’ve changed her name to protect her confidentiality, this is a true story. She followed my advice to the letter and created a rock-solid asset protection plan. By making use of the recommended tools, she was able to save herself from a lengthy, messy, and beyond expensive lawsuit.

The Best Asset Protection Starts With Being Informed

It’s my hope that you’ll be able to use some of this information to begin building yourself an asset protection strategy, if you haven’t already done so. The first step in this process is making sure you have all the information you need.

Related: Landlords: The 6 Best Ways to Minimize Your Chances of a Lawsuit

Now mind you, not all information is created equal. I love YouTube as much as the next guy, but part of the problem with having all of the awesome technology most of us take for granted is the fact that there are self-proclaimed “experts” on nearly every subject. Usually, these people pass themselves off as gurus, but have little education, no credentials, and minimal if any real-world experience to be deserving of expert status. This is just the reality of having wonderful tools like the internet: some people are going to learn just enough information to be dangerous. And sadly, those who know the least often know it the loudest. This is the case with all sorts of subjects, and asset protection and real estate investments are no exception.

You may have even gotten some bad advice from well-meaning “experts,” or even professionals with legitimate credentials who simply don’t specialize in this area. In the case of asset protection, bad advice can be expensive. Many a YouTube guru or financial planner who isn’t thoroughly informed will tell you that insurance is all you need to protect yourself. This couldn’t be further from the truth.

Insurance certainly has its uses, but it won’t protect you from most lawsuits. To understand how proper asset protection does protect you from lawsuits, let’s take a look at the anatomy of this particular case.

Anatomy of a Lawsuit: They Aren’t All About Fraud

When most people think of lawsuits, they think of them as a natural consequence of deceptive or fraudulent behavior. However, my practice has shown me that almost all of them begin as simple misunderstandings. I’ll let my client Sally Cohen’s case serve as an example.  Sally is such a nice lady that she gave me permission to talk about her case to help other investors, and I’ve changed her name to protect her privacy. Anyway, Sally had just purchased herself a town-home on the cheap and was beginning to renovate it. Because she was planning to later rent or sell the town-home, she installed some new plumbing in the bathroom and a couple of other areas in hopes of increasing the property’s value.

Related: 7 Tips to Keep Landlords Free From Costly Tenant Lawsuits

When the time came for her to sell the property, Sally told her buyer about the upgrades she had made. When he was touring the home, they were standing in the bathroom and the buyer asked which plumbing she had replaced, her answer was simple: “All of it.” Satisfied with that answer, the buyer went ahead and purchased the home from Sally.

A few months clicked by, and suddenly, a leak sprung up in the bathroom. The damage was bad, and ultimately ran up a bill in the thousands. The buyer, understandably upset, was livid. He threatened to sue, because he had interpreted “all of it” to mean literally all of the plumbing in the entire house.

Nobody was intending to be fraudulent. It was simply a misunderstanding based on language.  And because the buyer interpreted Sally’s action as fraud, there isn’t an insurance policy in the world that would have covered these damages.

dear-new-landlords

How Sally’s Asset Protection Plan Saved Her

This lawsuit had the potential to go very sideways, but fortunately, Sally Cohen is a rather smart lady. She had worked successfully as a real estate agent for seven years before getting the courage to purchase her first investment property: a townhouse in downtown Austin, Texas. Thanks to her experience in real estate, she knew the importance of asset protection for safeguarding her investment. So before she even bought the townhouse, she consulted with me about setting up an asset protection plan.

Her plan involved placing the town-home in an LLC, which protected her personally from a liability nightmare. She used the series LLC structure, which meant that the home itself was in its own individual LLC. She owned two other properties, each of which had its own series. While the total value of these assets is rather high, the use of this structure protected her unrelated assets.

The other cog in her plan was an anonymous trust, which functioned as the owner of her parent company LLC. With these pieces working together, the opposing attorney quickly lost interest in the initial lawsuit. Why? Because there was very little to gain. As for the new owner, he would have spent more pursuing litigation then he could have ever hoped to win.

If you are a real estate investor, take notes from Sally. Set up your asset protection plan before you rent or sell property, and you too will be protected from potentially devastating lawsuits.

What do you think of this story?

Weigh in below!

About Author

Scott Smith

Scott Smith helps clients nationally and internationally from his office in Austin, Texas. With over 5 years experience in the litigation, Scott works on proactively building defense in anticipation of future lawsuits for real estate investors. Scott is one of the few attorneys in the nation that structures companies for maximum protection with minimum taxes.

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40 Comments

  1. Angelou Masters

    I see the series LLC can be an excellent way to protect yourself from lawsuits or reduce your liability. But is it also true that once you own more than a couple of properties especially rentals it can get quite expensive because of the $800 filing fee per year for each LLC and the cost for your accountant or CPA to file income tax for each? I’m sure that if any of us were sued we wouldn’t care about the $800 filing fees but some investors on BP own dozens of rentals and/or do dozens of flips per year. Your thoughts?
    Thx

    • Scott Smith

      Hi Angela,

      This is a common concern but the good news is that the Series LLC has a one-Time filing fee—you do NOT need to pay the filing fee to create a child Series.

      Sally used a Texas Series LLC, which can be used by investors in any state. She paid a one-time filing fee of $300, but can create as many series as she likes at no additional cost. We made her first one and handled the property transfers, which most legal professionals do charge for. But she also doesnt have to pay taxes on the Texas SLLC. The only requirement is filing “no taxes due” with the state Comptroller annually. Some investors pay for this service to be taken care of for them; others do it themselves.

      So setting up the entity is the only time you pay a filing fee—at least in Texas. Other states may have different fees, but this is one reason I love the TX SLLC. Delaware is also a great choice.

      You mentioned $800–does that mean you are in California?

        • Scott Smith

          Angelou,

          I’d actually recommend the Delaware Statutory Trust for a California resident. California has specific and far-reaching legal requirements for real estate investors, and even more red tape for out-of-state entities. The DST confers many of the same benefits as the Series LLC. In many ways, the DST helped set the stage for the birth of the Series LLC.

          And I’m happy to help. Thanks for your thoughtful comments.

    • Scott Smith

      Hi Isaac,

      Texas is my personal favorite for reasons I mentioned in the comment above.

      You can use an agent trust, but anonymous land trusts confer the benefit of additional anonymity. The point of using an anonymous trust is to conceal ownership of the Series LLc structure (individual anonymous land trusts may also secure the assets within the child Series). Most states require the members and managers of the SLLC to be listed on the public record. The benefit of ownership with an agent trust is that when someone searches the record, they see the name of the trust and nothing more.

      Anonymity makes you even more difficult to sue. An opposing lawyer who sees this type of ownership will usually give up. Why? We like easy paydays. If there aren’t any juicy assets to seize upon judgment, that lawyer can only get paid if the client fits the whole bill. Since this structure is so difficult to pierce, it effectively stops the lawsuit before it even starts. Does that make sense?

      You can look forward to my upcoming article on my top picks for which states to form your SLLC in. It will spell out the specific benefits for Texas, Nevada, and Delaware. In the meantime feel free to check out my previous article on using trusts to disguise company ownership. If you click my name at the top of the page, it will take you to my previous BP articles. Thanks for the comment and I hope that helps!

  2. Ashley Pimsner

    It would be informative if you mentioned why opposing attorney did not pursue case and also further explain the benefits of what I assume is a land trust which assigns beneficial interest to serial LLC.

    What is risk of serial LLC and what is necessary for owner to perform so you don’t risk opposing attorney piercing the corporate vale?

    How is trust anonymous through use of a registered agent?

    Details are important to BP community so we can educate ourselves and protect our investments.

    This is a great article that could allow us to dive deeper into the benefits of asset protection and your services.

    Thanks for a stimulating discussion.

    • Scott Smith

      Hi Ashley, thank you for your kind comment and thoughtful questions. I’ll take them in order and stay on me if I miss anything.

      The other lawyers might not love me answering your first question, but I aim to please. Here’s the inside scoop: the first thing a lawyer does when a client comes in with a case is check out the defendant (Sally in this case—but it
      Could easily be you given 90% of us investors are sued in a 20 year career). Anyone can run a public records search to see who owns the property. If it’s in your name, you’re getting sued—because that asset is tied to you and therefore easy to seize in the event of a judgment. It’s hardly a state secret that attorneys love money, and look forward to payday. Most RE suits aren’t paid out of pocket by the plaintiff. Judgment and seizure of assets is where the big payday comes from. I worked in litigation before transitioning into asset protection, and can tell you this is one of the first thing any attorney checks.

      But an opposing lawyer who sees that an SLLC owns the property will usually give up. Why? We like easy paydays. If there aren’t any juicy assets to seize upon judgment, that lawyer can only get paid if the client foots the whole bill. Since this structure is so difficult to pierce, it effectively stops the lawsuit before it even starts. Traditional LLCs Do not compartmentalize assets and have many established methods for being pierced. Properly structured series LLCs Isolate each asset, and preserve the client’s anonymity. The structure can be beefed up further with anonymous trusts, and some moves we make when filing the entity as well as the investor separating their business operations from the series LLC. Ideally we want the series LLC to simply hold assets and never conduct business with the public. All of these combined make it very hard to relate you the investor to the property attached to the incident. The structure can be beefed up further with anonymous trusts, and some moves we make when filing the entity as well as the investor separating their business operations from the series LLC. Ideally we want the series LLC to simply hold assets and never conduct business with the public. All of these combined make it very hard to relate you the investor to the property attached to the incident. Essentially We are just making it very difficult to sue you and win. Attorneys also love winning. If you take away both money and winning, there really isn’t much motivation left to pursue the lawsuit. Most lawyers will move onto lower hanging fruit.

      Does that make sense to you?

    • Scott Smith

      Hi Ashley, thank you for your kind comment and thoughtful questions. I’ll take them in order and stay on me if I miss anything.

      The other lawyers might nuot love me answering your first question, but I aim to please. Here’s the inside scoop: the first thing a lawyer does when a client comes in with a case is check out the defendant (Sally in this case—but it
      Could easily be you given 90% of us investors are sued in a 20 year career). Anyone can run a public records search to see who owns the property. If it’s in your name, you’re getting sued—because that asset is tied to you and therefore easy to seize in the event of a judgment. It’s hardly a state secret that attorneys love money, and look forward to payday. Most RE suits aren’t paid out of pocket by the plaintiff. Judgment and seizure of assets is where the big payday comes from. I worked in litigation before transitioning into asset protection, and can tell you this is one of the first thing any attorney checks.

      But an opposing lawyer who sees that an SLLC is the owner is unlikely to even file a suit. Assets to seize upon judgment are how lawyers who sue investors get paid (mostly). That other attorney is only going to get paid if the client is spiteful and wealthy enough to pay for all of the legal fees associated with the suit. Lawsuits are long and expensive, and very few landlord-tenant plaintiffs will pay simply to satisfy spite. Making assets difficult to seize By using and effectively structured SLLC Not only would make it harder to win the case, but harder to get paid. As to your other question, traditional LLCs do not compartmentalize assets and have many established methods for being pierced. Properly structured series LLCs Isolate each asset, and preserve the client’s anonymity as well as masking relationships between properties. The structure can be beefed up further with anonymous trusts, and some moves we make when filing the entity as well as the investor separating their business operations from the series LLC. Ideally we want the series LLC to simply hold assets and never conduct business with the public. All of these combined make it very hard to relate you the investor to the property attached to the incident. The structure can be beefed up further with anonymous trusts, and some moves we make when filing the entity as well as the investor separating their business operations from the series LLC. Ideally we want the series LLC to simply hold assets and never conduct business with the public. All of these combined make it very hard to relate you the investor to the property attached to the incident. Essentially We are just making it very difficult to sue you and win. Attorneys also love winning. If you take away both money and winning, there really isn’t much motivation left to pursue the lawsuit. Most lawyers will move onto lower hanging fruit.

      Does that make sense to you?

    • Scott Smith

      Also, the registered agent requirement does not need to compromise your anonymity. In Sally’s case my firm served as her registered agent, which meant she was protected by attorney-client privilege. You can pay registered agent or use an attorney. I have discussed these options in yet another article for bigger pockets called “All About Registered Agents for Your out-of-state LLC.”

      Feel free to check that out by clicking my author page above. It was a few articles back but elaborates on ways to meet this requirement.

    • Scott Smith

      If I’m understanding your question correctly yes you generally do want to pay an attorney to set up your series LLC. This is because you want to be sure you’re using the entity correctly and that it is formed in a way that preserves your anonymity and fully protects your assets and other interests. Does that answer your question?

      • Annabelle Lopez

        Hi:
        I have a Texas series LLC that was created about 3-4 years ago. However, just recently I’m going through revisions because I had never transfer the deed of my properties to individual series. I’m in the process of transferring my 3 rental houses from my name to individual series. I also own 2 commercial real estate (offices) and I was told by a lawyer that it’s better if these were not in the series LLC but in their own LLC because it’s better not to mix rental properties with commercial properties. What do you think about that?
        Also, I was going to work on creating a managing LLC to do business with my renters and keep the series LLC as the holder company but that wouldn’t give me anonymity. Would a trust work better? I’m a doctor and I would benefit from my tenants not linking me to the properties
        Thanks

        • Scott Smith

          As a general rule, it’s best to keep one asset per series. I also think it’s a good idea to listen to your lawyer about your personal situation. If this lawyer knew you and your circumstances, their advice would be worth considering. However if this was someone who was *a* lawyer but not *your* lawyer, take with a grain of salt.

          My personal opinion is that it’s a great idea to use a Traditional LLC as a shell company, while your Series LLC functions ONLY as an asset-holding company. Investors should not risk doing business with their asset-holding companies. You also will have special concerns as a physician when it comes to asset protection, and you’re definitely on the right track by using the TX SLLC. But that SLLC is only effective for protecting the assets within it. I’m not sure how you’re currently holding the properties you intend to transfer, but it sounds like they may be vulnerable. So that issue and forming a shell company would be some things to discuss with your attorney. Your lawyer should be able to give you an informed opinion if you give him or her as full of a picture as you just gave me.

  3. Curt Smith

    What I fouind missing here is never rehab a flip house with non-licensed and insured contractors for the major systems: plumbing, electrical, hvac. The plumbers E&O insurance should have kicked in to cover what might have been the plumbers mistake. At the least the plumber would have been thrust out in front of that suit!!!!

    Not sure why the author and investor here did not mention licenced and insured tradesmen JUST for this issue!!!! Less of an issue in rental rehabs,,, but in flips this is the perfect example of why you need to pull permits, get the work inspected by the county/municipality and use insured trades..

    I found this story fairly lame. Be clear about what work you did, and permits and inspection backs you up. Nice protection plan though! 🙂

    • Scott Smith

      Hi Curt! Yes, space limited my ability to comment on that piece (and I was focusing on the legal side of the story), but you raise some excellent points about doing your due diligence. There is no substitute for thorough due diligence.

      I can’t always mention the details because of space restrictions, and I also cannot give out too much information that could risk identifying my client. Thank you for your feedback and contributions. I absolutely agree that not only should you be clear, but document the hell out of each of these steps. Great points!

  4. Brandon Koser

    I established an LLC-S in Indiana through an attorney recently. I put the one property I own outright in its own series. My other properties still have mortgages. Is it possible to transfer them to their own series without triggering the “due on sale” clauses? The attorney is the registered agent for the master and the master is the series owner. How do you feel about Indiana series for asset protection?

  5. Nick Thielen

    I question why the plaintiff’s lawyer didn’t sue your client personally considering it was her own personal statement that triggered the allegations of fraud.

    In general, it seems an LLC can help you avoid personal liability for the negligence of your employees or contractors, but why would someone expect it to shield them from their own acts of negligence (or fraud)?

    • Scott Smith

      Hey Nick,

      That’s correct. The LLC does inherently separate the property from you personally. It’s not a defense against outright, deceptive fraud though. You have to do your part for an LLC or any other entity formed for asset protection to work effectively.

      Most lawsuits I see don’t involve outright deception. The reality is many of us get sued over simple mistakes and that LLCs can minimize the liabilities that could come with any piece of property.

    • Scott Smith

      Three words: The Delaware Statutory Trust. It functions very similarly to the Series LLC for Cali residents and avoids that burdensome franchise tax, if structured properly.

      You can place your personal residence in an LLC, but whether it’s a good idea may depend on the status of your homestead exemption, whether you own your home outright, the value of your home, and other personal factors.

  6. Glenn F.

    Thanks for the article.
    However, people need to be careful thinking you can hide and be anonymous and you’re shielded from lawsuits hiding behind entities. This plaintiff’s lawyer must have been just looking for low hanging fruit and gave up. It’s a simple as convincing a judge that there was potential fraud or misrepresentations and a few subpoenas later and your whole LLC structure and members are exposed. You can easily name the owner in a lawsuit and bypass the LLC’s. Judges have also done what is called “piercing the corporate veil” also bypassing them if they feel you are just using entities to hide.
    Basically, entities can be used to add an additional layer to your asset protection plan, but don’t rely on them solely. Also have GL, E&O, & umbrella policies.

      • Scott Smith

        Isaac, it depends on your situation and I respectfully disagree. One thing to consider is that many investors set up there entity appropriately but don’t use it appropriately. An asset holding company that’s not preserving anonymity or taking the risk of doing direct business with the public WILL be vulnerable. The problem isn’t with the structure, it’s with the failure to separate assets and operations. Again, as I’ve said elsewhere, investors have to do their part.

        As for overseas, yes there are protections that can be accomplished this way but as I wrote in my article today–you can’t outrun the taxman. If you choose to use overseas elements for asset protection, make sure you’re on Uncle Sam’s good side:
        https://www.biggerpockets.com/renewsblog/moving-money-out-of-the-country/

        That was published today and you might find it interesting. Note that it’s written with the assumption that the investor is a U.S. citizen. Where overseas do you think investors should be taking advantage of? I’m interested in hearing what informs your perspective.

    • Scott Smith

      I don’t see this often if the entity is structured correctly or used in conjunction with an anonymous trust. And yes, you do want insurance.

      You’re absolutely correct that real estate investors must still do their part. The structure isn’t a substitute for good faith or due diligence. It strengthens protection for an investor who is already operating above-the-board. It’s not meant as a defense for outright, intentional deceptive fraud. There are legal strategies that make piercing the veil more difficult. A Series LLC is more complex to pierce than a traditional llc with multiple properties, for instance. A corporate structure and network of trusts is even more powerful.

      I can’t speak to Mr. Manafort’s situation because I’m not his lawyer, but it seems his conduct was more problematic than his corporate structure. The corporate structures must be set up properly and investors have to do their own part, which starts with just doing good business. Your integrity alone won’t defend you from a lawsuit but it certainly is a critical piece of this equation.

    • Scott Smith

      Hey Jim!

      21 states currently offer Series LLCs, though some are better than others for investors. I have an article coming out on my top picks which are, in order: Texas, Delaware, and Nevada. SLLCs are regulated at the state level. I find entities formed in these states have more operational benefits. Delaware has some judicial benefits on the legal side of things, and all are regarded as “pro business” states. The SLLC may be a good solution for you. Whether you form it in your home state of Tennessee or elsewhere is up to you and your attorney, but you can certainly bring his or her attention to that. I have many clients who use out-of-state entities for more benefits than an in-state entity would allow. So you wouldn’t be the first investor to do that.

  7. Kat Malkowski

    Am I able to set up a series LLC in ANY state of my choice. regardless of where I personally reside or where my properties are located (even if they’re in multiple states)? If so, would most local attorneys be familiar with each state’s individual laws or would you be better served finding an attorney in the state in which you set up your LLC?

    • Scott Smith

      Hey Kat–
      You sure can! Many of my investor-clients operate in multiple states. Often someone from say, Virginia, may manage properties using a TX Series LLC. Whether your local attorney will be familiar with state laws and the Series LLC is going to come down to their level of experience with the structure. I would recommend, above all else, finding someone who forms them routinely. There are benefits to having the lawyer in the state where you intend to form the entity. Namely, that lawyer will be hip to the state’s laws and regulations on the structure. Further, someone who forms these entities regularly will know how to advise you for protecting your assets appropriately.

      And just so you know, your lawyer doesn’t necessarily need to live in the state. To use myself as an example, I’m licensed to practice in multiple states, live in Texas, but form TX and Delaware Series LLCs (among other entities) often. I can’t really speak for other attorneys or how common this is, but you do ideally want someone who has handled it before. Most real estate attorneys will be familiar with Traditional LLCs, but since the Series LLC is a newer structure, there are fewer of us regularly forming them for clients. Those who do it often tend to know them well.

  8. Scott Smith

    Hey Jim!

    21 states currently offer Series LLCs, though some are better than others for investors. I have an article coming out on my top picks which are, in order: Texas, Delaware, and Nevada. SLLCs are regulated at the state level. I find entities formed in these states have more operational benefits. Delaware has some judicial benefits on the legal side of things, and all are regarded as “pro business” states. The SLLC may be a good solution for you. Whether you form it in your home state of Tennessee or elsewhere is up to you and your attorney, but you can certainly bring his or her attention to that. I have many clients who use out-of-state entities for more benefits than an in-state entity would allow. So you wouldn’t be the first investor to do that.

  9. Jerry W.

    Sorry Scott but throwing the bullshit flag here. First off Sally made the false statement so Sally can be sued personally. No number of LLCs or blind trusts changes her personal liability. When she is sued, they simply depose her or do an Interrogatory to learn what her personal ownership tie is to the property and she is legally required to disclose or face at a minimum contempt of court or at most a felony for perjury if she lied. Any attorney caught helping her lie would likely lose his license if found out. Since Sally was personally showing the place she is either clearly the owner or a real estate agent. If an agent they would know the there is likely malpractice insurance and of course her broker to go after. If she is her own broker then there is a deep pocket to go after. I don’t see any real protection here. Now if she is sitting at home and some agent misrepresents her then I could see some protection. There are multiple disclosure statements given to the Buyer. Who signed them? Sally of course because her registered agent wouldn’t know the answers. Who else would be comfortable signing a contract document other than the owner who did the work? Am I missing something? I see no protection from a reasonably competent attorney finding out Sally is the owner. Even if they have no idea she is the owner the obvious question is how did you know the plumbing had been replaced? Her answer I did it or I hired it done. Any other answer is perjury. When you do the work personally all the blind trusts and LLCs lose nearly all protection at least as to anonymity but like as to everything.

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