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Archive for the ‘Asset Protection’ Category

DISCLAIMER

Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is retained and expressly retained in writing to do so.

Copyright © 2009 by David J. Willis. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, http://www.LoneStarLandLaw.com

This is a summary of the how the Texas Property Code, the Texas Business Organizations Code, and the Texas Constitution make it possible for individuals and business to shield income and assets (particularly equity in real property). The combination of individual protections and excellent LLC laws makes Texas the best state in the United States for achieving asset protection – bar none.

Asset Protection in the Real World

Bulletproof asset protection is not achievable in the real world – even in Texas – in spite of claims made by internet and seminar “gurus” who have never spent time in a real court of law in front of a real judge. Regardless of how hidden or well-placed your assets are, U.S. courts always have a contempt remedy available to them if you do not reveal or produce them when ordered to do so. Technical arguments about trusts and corporations set up in exotic island nations will not prevent an American judge from holding you in contempt – and that could mean a fine or even jail.

Therefore, asset protection is really about deterrence. You should not be disappointed to learn this. Deterrence has real value considering the number of frivolous and contingency-fee lawsuits that are filed each year in the U.S. If you can make it unacceptably expensive and time-consuming for a plaintiff and his attorney to discover and reach assets and income, then the asset protection plan has done its job. Every dollar of cost that imposed on a potential plaintiff or his percentage attorney makes your assets incrementally more secure and makes it less likely that you will have to endure the living nightmare of a lawsuit.

Preventive Measures

It is vital that an asset protection plan be implemented before trouble arises. Otherwise its usefulness may be limited by rules against “fraudulent transfers” that reach back up to 2 years (these rules apply in many foreign jurisdictions as well). Fraudulent transfers are generally indicated by so-called “badges of fraud,” including:

(1) transfers to a family member;
(2) whether or not suit was threatened before it was filed;
(3) whether the transfer was of substantially all of the person’s assets;
(4) whether assets have been removed, undisclosed, or concealed;
(5) whether there was equivalent consideration for the transfer; and
(6) whether or not, after the transfer, the transferor became insolvent as a result (eg., made his cash disappear).

Asset protection strategies are of limited effectiveness in the case of such fraudulent transfers. Therefore, the investor should be proactive and not reactive in asset protection planning. Consider asset protection to be a form of insurance that one takes out prior to a catastrophic event.

The Role of Insurance

It is often asked if obtaining liability insurance alone is sufficient. The answer is a resounding “No.” All legal experts recommend a sensible mix of insurance and asset protection. The principal reason is that insurance companies are in the business of collecting premiums and denying claims – thus every effort will be made by the company to exclude coverage in your case (particularly if the plaintiff alleges fraud, which is never covered). Also, even if the company concedes coverage, extravagant claims made in lawsuits nowdays may (and often do) exceed available coverage. Moreover, the existence of a sizable policy and umbrella may in and of itself encourage a lawsuit because it will be perceived by the plaintiff’s attorney as a tempting target!

Elements of Basic Asset Protection

(1) creation of an LLC to hold title to properties and establish liability barrier;
(2) anonymity (creation of trust and/or DBA for the title-holding LLC);
(3) separation of management or operating functions into a separate shell LLC;
(4) attorney-client privilege (use of attorney as registered agent or trustee);
(5) review and re-arrangement of personal holdings to insure falling within constitutional and property code protections for individuals.

Creation of an LLC

Texas has excellent LLC laws and is recommended for simplicity of operation. Other popular options include Nevada and Delaware, but forming one of these companies requires designation of a registered agent in that state (who serves for a fee) and expensive filing fees to register your “foreign company” in Texas.

An LLC provides a true liability barrier (so long as the company is maintained by minimal record-keeping, payment of taxes, etc.) along with limited anonymity. Anonymity is limited because information on the organizer, the initial member(s), and the registered agent of an LLC is contained in the Certificate of Formation that is filed with the Secretary of State. It is therefore public record. One can achieve maximum anonymity by having your attorney act as organizer, initial member, and registered agent – and then, afterward, privately transfer the membership interest to you. This way, your name does not become part of the official records at the Texas Secretary of State’s office or at the Texas Comptroller’s office.

It is critical that your attorney draft the LLC’s company agreement so that it discourages creditors from ever attempting to seize your membership interest or the membership interest of a fellow member. A membership interest in an LLC is not a protected asset under the homestead laws (see below) – so provisions should be included in the company agreement to the effect that any creditor succeeding to a membership interest by means of collection or execution on a judgment will not be able to vote that interest; not be able to serve as a manager or officer; not be able to direct that assets of the company be sold; and not be able to alter or reduce the company’s ability to do business. A good asset protection lawyer will know how to do this correctly. The object is to make your membership interest (or the membership interest of any of your partners) worthless to a creditor, so that the creditor passes it by in any attempt at collection. Remember: asset protection is about deterrence.
LLC’s are typically capitalized by a combination of equity (monetary contribution) and debt (loans to the company). Your attorney should help you sort this out.

Our fees (subject to change) are $650 plus costs ($325 filing fee, $80 for the corporate book, $10 shipping), which include pre-formation strategies, extensive documentation, and follow-up legal advice. Optional add-on fees are $250 annually for the attorney to serve as registered agent; and $450 (one time) if the attorney acts as organizer and initial member so that your name does not appear in public records.

Operation of Your LLC

One of the first things you will want to do is transfer the property you wish to protect into the company. In the case of real estate, this is done by means of a general or special warranty deed. Are due-on-sale clauses a problem? Not usually. See our companion article, Due-on-Sale Clauses in Texas.

Tenants and creditors should be instructed that they are doing business with the LLC and making payments to the LLC. There is an old rule of thumb that people tend to sue the person or entity they write checks to . . . so ideally, your personal name, address, or social security number should never appear anywhere on any paperwork or documents executed with third parties.

Once a company is formed, it must be maintained. There are minimum formalities that must be observed in order to order to preserve the LLC’s liability barrier. These include issuing membership shares; holding annual meetings; obtaining a TIN number and filing tax returns; having a company bank account; and the like. Failure to do this sort of routine maintenance is a common mistake. It can be fatal to your asset protection plan.

Use of LegalZoom-Style Internet Services to Form Your LLC

NO serious businessman or investor would do this. Such services allegedly provide “self-help legal services at your specific direction.” What nonsense. Here is what such services do not provide:

NO comprehensive advice on how to structure your business and investments so as to achieve maximum asset protection

NO attorney to serve as organizer, initial member, and/or registered agent in order to maximize your anonymity

NO sophisticated company agreement that deters creditors from taking control of your company

NO advice on how to move property into the LLC after it is formed

NO advice on how to set up and arrange the LLC’s finances, including setting up LLC accounts, injecting capital, and/or loaning money to the LLC

NO advice on how to maintain the LLC liability barrier to prevent a plaintiff from “piercing the corporate veil”

NO free follow-up questions after the LLC is formed

Additionally, the documents provided by such services are barely above the level of junk. This office spends a fair percentage of its time cleaning up the inadequacies in companies formed this way.

Offshore Entities

An additional option is to create an offshore entity (eg., a Panama or Cayman Islands LLC) which will own the Texas LLC. This structure is entirely legal and provides superior asset protection. It also allows flexibility in holding some of your assets in currencies other than the ever-weakening dollar. (Note: use of an offshore entity for asset protection purposes is not designed to achieve tax reduction or avoidance, which is illegal. All U.S. citizens must pay income tax on earned income.)

Role of a Land Trust

Once the LLC is established, it can choose to transfer its properties to a land trust which indicates nothing of record about real underlying ownership. This strategy is effective only if there actually exists a written trust agreement to support the transaction.

Land trusts also provide the capability of closing into a subprime buyer without lender approval and (for brokers) the opportunity to earn a commission. This is possible because beneficial interests in a trust are personal and not real property, and therefore the transaction is not subject to Sec. 5.069 of the Texas Property Code, which now makes conventional lease-options generally unworkable unless written for a term of less than 6 months or the property is paid for.

Note that land trusts do not defeat “due on sale” clauses although they may make a lender’s exercise of such a clause less likely.

A land trust is most effective when used in conjunction with an LLC. This is necessary because a trust alone is not a liability barrier and therefore provides no asset protection. A trust provides anonymity only. The belief that intervivos trusts protect assets is widespread but unfortunately false.

Management or Operating Companies

The investor should consider setting up a management or operating company that is unaffiliated with the asset-holding LLC and which will serve as the front line of defense against tenants, creditors, and plaintiff’s attorneys. This entity should also be an LLC that is basically a shell or a pass-through for funds. It should own no substantial amount of real or personal property – just its office furniture and equipment – and this should be the company that hires and pays employees. Third parties should all do all business with the management company and should never even be made aware of true underlying ownership or the location of real assets.

In addition to its management duties, the role of the management LLC is to serve as a target that is deliberately put out there to draw fire away from the owners and their assets. If anyone obtains a judgment against the management company, it will likely be uncollectible.

Attorney-Client Privilege

Use of an attorney as registered agent for the LLC or as trustee of a land trust adds yet additional layers of protection – first, anonymity, and second, the attorney-client privilege. In the case of a trust, the attorney serves is named as trustee but then appoints the Investor’s LLC as managing agent and attorney-in-fact to conduct day-to-day operations. A drawback to this technique are the fees and costs that must be paid annually to the attorney to compensate him for the risk involved in acting as the investor’s lightening rod.

Family Limited Partnerships

What about family limited partnerships (FLP’s)? As for anonymity, Texas limited partnerships (like LLC’s) must be filed with the state and pertinent ownership information is revealed. An in-state registered agent must be designated to receive service of process if the partnership is sued. Liability protection is best achieved if the limited partner is a corporation or LLC. Nonetheless, an FLP is not the best ownership vehicle for so-called “risky assets” such as investment real estate. They are more suitable for cash, stocks, and bonds. Also, the FLP concept of a “friendly lien” on the homestead is not workable in Texas. FLP’s are not a panacea, at least in Texas, but have some utility as part of an overall asset protection plan. FLP’s are not included among the more basic options for purposes of this article.

Limited Partnerships with an LLC General Partner

These vehicles are more complex and expensive, usually used in larger commercial transactions, and are beyond the scope of these comments.

Texas Homestead Protections for Individuals

Texas Homestead protections for individuals are contained in Art. XVI, Sec. 50 of the Texas Constitution and in Chapters 41 and 42 of the Texas Property Code. These protections apply to both income and assets, and they have long made Texas a haven for debtors. If a lawsuit is anticipated, or if a judgment creditor is expected to attempt collection, then it is wise to review and maximize these protections.

Sec. 28 of the Constitution prohibits garnishment of wages, which protects the income of a person who receives a salary or wages. As to assets, the homestead of a family or single adult is protected from forced sale for purposes of paying debts and judgments except in cases of purchase money, ad valorem taxes, owelty of partition (divorce), home improvement loans, home equity loans, and reverse mortgages. No matter how much the home is worth, an ordinary judgment creditor cannot force its sale. An attempt by such a creditor to place or enforce a lien against the homestead can be defeated using the procedure in Texas Property Code Sec. 53.160. See our companion article, Removal of Wrongful or Invalid Liens.

The Property Code further provides in Sec. 41.001(5)(c) that “The homestead claimant’s proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.” This expressly permits homestead protections to be rolled over from one homestead to the next, notwithstanding the preference on the part of title companies to collect judgments upon sale of the homestead. Taylor v. Mosty Bros. Nursery, Inc., 777 S.W.2d 568, 570 (Tex.App. – San Antonio 1989, no writ).

The Texas Property Code goes into more detail, specifically listing the amount and types of other exempt property, including a vehicle for each licensed driver in the household; home furnishings; and the debtor’s IRA or 401(k). In keeping with Texas’ frontier spirit, you can even keep two horses if you wish.

The Texas Constitution and the Property Code provide an excellent opportunity for individuals (not corporations, LLC’s, or partnerships) to engage in asset protection. Essentially, this means converting non-exempt assets (cash, for instance, or investment real estate) into exempt assets. As an example, one might consider paying off the homestead or the vehicles. The conversion process can be tricky. It is best accomplished with the guidance of an attorney knowledgeable in this field.

Texas homestead laws are liberally construed by the courts. “Indeed, a court must uphold and enforce the Texas homestead laws even though in so doing the court might unwittingly assist a dishonest debtor in wrongfully defeating his creditor.” Painewebber, Inc. V. Murray, 260 B.R. 815, 822 (E.D.Tex.2001).

Although there is a conceptual overlap, the homestead protection laws should not be confused with the homestead tax exemption as reflected on the rolls of an appraisal district, which is designed to lower ad valorem taxes on homeowner-occupied property.

A question often asked when incorporating is, “where do I incorporate?” There are many promoters of various jurisdictions, such as Delaware and Nevada and even offshore.

Nevada and Delaware have favorable corporate laws which limited the liability of Directors. As you may know, corporate directors are often sued for breach of fiduciary duty. Since the law applied in the case of a lawsuit involving the internal workings of a corporation is the state of formation, DE and NV offer maximum protection from director liability. Nevada is a particularly favorable jurisdiction because it has no personal or corporate state income tax. Shareholder privacy is protected in NV because there are no state corporate income tax returns filed and no information sharing with the IRS.

In most cases, the benefits described above will not apply to your decision to incorporate, since you will be doing in business in your own state. If your corporation does business in your own state, it must register as a “foreign” corporation with your Secretary of State. This involves paying an annual fee in both the state of incorporation and your home state. In some states, such as Texas, the filing fee for a foreign entity is substantially higher than a domestic corporation.

In addition, income earned in your home state is taxable and the corporation must file a tax return. You cannot earn income in a foreign state with a Nevada corporation and expect to avoid paying income tax there. And, once you file a tax return there, this will require revealing the identity of the shareholders.

The only remaining benefit will be limited director liability, which is little consequence if your corporation is made up of you, yourself and you. Thus, in most cases, your best choice for incorporating your small business is your home state.

So why do radio advertisements push Nevada and Delaware corporations as the place for everyone to incorporate?

Take a wild guess!

Trusts have been used for hundreds of years for tax savings and estate planning, but few people realize the enormous potential for using trusts for privacy. In this information age where records of your assets can be accessed via computer, fax and even telephone, you have to take active steps to protect your privacy.

What is a Trust?

A trust is a private contractual arrangement between several parties for holding, managing and investing assets. The parties to the trust are the grantor (the person creating the trust, also known the “settlor”or “trustor”), the trustee (the person or entity holding title to the assets) and the beneficiaries (for whose benefit the trust is established). A trust created for one’s benefit is called a “self-settled” trust, i.e., one in which the creator and beneficiary are the same person.

A trust created during the life of the grantor is called an “intervivos” or “living” trust. An intervivos trust can be either revocable (taken back or modified by the grantor) or irrevocable (once created cannot be revoked). A “living trust,” while technically any trust created during the life of the grantor is a buzzword in the estate planning industry used to describe a revocable, intervivos trust.

Benefits of a “Living Trust”

The typical living trust is created by an individual for his own benefit. He also names himself as trustee, i.e., “The John Doe Family Living Trust.” Upon his death, a successor trustee is named to hold and manage the trust property (typically his spouse, sibling or a bank trust department). Although he is the beneficiary during his life, the trust will name his family as alternate beneficiary upon his death (known as a “testamentary disposition”).

One of the main reasons why living trusts are used is to avoid probate. Upon your demise, the assets remaining in your estate are distributed according to the instructions of a Will, or, if there is no Will, according to the rules set forth by state law. The Probate court is involved throughout the process, adding time, cost and aggravation. The Will is now public record, for all the world to see. If you own assets in multiple states, an “ancillary” proceeding must be commenced in each state.

If most of your assets are owned in trust, these assets are not subject to probate, nor are they on display for the world to see. The trustee, according to the instructions of the trust agreement, either distributes the assets outright to your heirs (the alternate beneficiaries), or holds them in trust until they reach a certain age. Your trust can hold assets (such as real estate) in multiple states without the need for ancillary probate.

The Land Trust

You wouldn’t walk around with a financial statement taped to your forehead would you? So why would you have your most valuable assets exposed to public scrutiny? Owning real estate in your own name is like walking around with a giant “kick me” sign taped to your back. In every county in the United States, copies of deeds to real estate are recorded in the public records. Anyone can go down to the courthouse or recorder’s office and look up the owner of any property in the county.

A land trust, a modified form of living trust, will hide your name from the public records. The land trust (also known as an “Illinois Land Trust,” “Title Holding Trust” and “Nominee Trust”) differs slightly from a regular living trust in that the trustee is a mere nominee. The beneficiaries have the right to direct the trustee as to the acquisition, management and disposition of trust property.

The main purpose for using land trusts is privacy of ownership. No one will know who owns the property but you, your attorney and the trustee. If the trustee resides in a different state than the property is located, it will be difficult, if not impossible, for anyone to discover the proverbial “man behind the curtain.” If a judgment is entered against you, the lien will not automatically attach to the property, since the title is not in your name.

The Personal Property Trust

A personal property trust, like a land trust, is a simple, revocable trust used to hold title to assets. Cars, boats, bank accounts, leases, mortgages, mobile homes, corporate stock – you name it – it can all be held in the name of a nominee. Anything that can be found on public record is a dead giveaway to potential creditors, contingency-fee attorneys and deadbeat litigants looking to steal your hard-earned fortune. Using a nominee trust to hold title to assets will help keep your financial matters private and discreet in the information age.

A trust, unlike a corporation, is not registered with the state. There are no public records of officers, directors and shareholders. There are no minutes of directors’ and shareholders’ meetings. The trustee keeps control of the trust records and the identity of the beneficiaries in his file cabinet. A trustee will not reveal this information without a court order.

Tax Consequences

Revocable, living trusts are “tax neutral,” that is, there is no tax consequence of transferring property into trust. According to sections 671- 678 of the Internal Revenue Code, the property is treated as still being owned by the grantor (the logic is that since the grantor can still revoke the trust, it still belongs to him for tax purposes). For example, if you owned you rental property in your name and reported on schedule “E” of your federal income tax return, a transfer into a revocable, living trust of which you are the beneficiary would not change your reporting. Compare this to transferring property into a corporation, which is a separate taxpayer, even if your own all of the stock of the corporation.

As you can see, trusts are simple, yet effective devices for holding title to assets and preserving your privacy.

Over 80 million lawsuits are filed every year in the United States. If you are in business, you should be thinking about the risks involved. The following are some of the most common pitfalls that lead to liability and lawsuits for small business owners and how to avoid them.

Pitfall #1: Doing Business as a Sole Proprietor

Most people who go into business do so as a “sole proprietor.” This means that they are doing business as an individual or a “d.b.a.” (doing business as). This scenario offers absolutely no asset protection, not to mention poor tax benefits. If the business is sued, all of the personal assets of the individual are at risk. For less than $100 in most states, you can form a corporation to do your business or trade. If properly maintained, a corporation will shield your personal assets if the business is sued or goes bankrupt.

Pitfall #2: Doing Business as a General Partnership

Doing business with a partner is even worse than doing business as a sole proprietor. A “partnership” is formed when two or more people decide to do business together for profit. It does not require a formal partnership agreement or the filing of any official documents, although it is often done that way. A partnership can be created even if the parties did not intend it!

Here is the problem with a general partnership: if your partner does something foolish, you are liable. That right! If you allow your partner to commit the partnership to a contract, the partnership and its partners can be held liable for that debt. If your partner is negligent or incurs a debt on behalf of the partnership, you are on the hook – even if your partner files bankruptcy!

If you intend to business with partners, consider a corporation or other limited liability entity. It is just as easy to set up for two people as it is for one.

Pitfall #3: Using a Corporation Improperly

A corporation is good, but only if you use it properly. Many people pay an attorney up to $1,000 to setup a corporation, then they take the corporation’s minute book and stick it in the closet. A corporation will not shield you from personal liability if you do not follow corporate formalities! Even worse, if the IRS audits you, they can set aside the corporation and hold you personally liable for the taxes!

At least once a year, have your attorney and/or tax advisor review your corporate records and practices.

Pitfall #4: Personal Guarantees

In some situations, such as a bank loan or line of credit, it is inevitable that you must sign personally. However, it is not necessary to give a personal guarantee in every situation, simply because they request it. Often, vendors of your business will request that you sign a personal guarantee of a corporate liability. If they are not extending you credit, you should simply refuse. For example, if a landlord requests a personal guarantee on a lease, offer a larger security deposit instead. Or, you can negotiate so that after two years of prompt payment, your personal guarantee is not necessary.

If you choose to sign personally on an obligation, do not make the mistake of allowing your spouse to co-sign with you. Unless your spouse is involved in your business, there is no reason for a vendor or bank to require your spouse’s personal guarantee.

Pitfall #5: Failure to Maintain Adequate Insurance

Don’t be cheap. Insurance will protect you in most circumstances. If you keep the minimum insurance, increase the liability limits. You can usually double your liability insurance for a relatively small amount. Keep in mind that if your insurance is not adequate to cover the claim, the injured party can go after your personal or unincorporated business assets for the difference.

Insurance also gives you an attorney in an event you are sued, even if the claim is settled before trial. The duty of an insurer to defend (pay for your lawyer) is much broader than its duty to indemnify (pay for claims against you). Even if the lawsuit is completely bogus, the insurance company will provide you with a lawyer, saving you thousands of dollars.

Pitfall #6: Sexual Harassment in the Workplace

Sexual harassment is another hot issue for the 90′s. If you own a company with employees, be aware of what goes on. Even if you don’t personally engage in any conduct which is harassing in nature, you can be sued if your company permits a “hostile” environment. Make certain you have written company policies that are given to all of your employees that specifically state that sexual harassment will not be tolerated.

Set up an internal complaint and investigation procedure within your company. Immediately investigate and resolve any issues within your company, especially those that involve people of the opposite sex. Be especially aware of these events if you have a company picnic or office party.

Pitfall #7: Using “Independent” Contractors

If you regularly pay “contract” employees, you may be treading thin ice. If your “independent contractor” commits a negligent act and a third party is injured, you can be held liable. The problem with this area of law is that it does not matter whether you thought the individual was an independent contractor or an employee. The law presumes an individual to be an employee by balancing some of the following factors:

* Did the individual work your hours or his?

* Did he use your tools or does he have his own?

* Does he do work for other people, or just for you?

* Did you personally supervise the work?

* Did you pay him daily, weekly or upon completion?

* Was there a written contract?

These are only some of the factors, but you can get a general idea of what factors are relevant. If the court considers the individual to be your employee, you are responsible for his actions.

Pitfall #8: Failure to “Get it in Writing”

Always leave a paper trail. Whenever you speak with someone at a company, the IRS or any governmental organization, get it in writing. If they won’t give it to you in writing, send them a “self-serving” follow-up letter summarizing your conversation. Their failure to object to its contents may be deemed an admission of what the letter states. Keep a copy in your file in case to have to prove the oral conversation in court.

Remember, it’s not what happens, it’s what you can prove in court (also known as the “O.J. Rule”)! The written word is your most powerful weapon in Court – use it.

Pitfall #9: Opening Your Mouth too Wide

If you are involved in what could potentially be a lawsuit, think before you act. Do not write offensive letters to your adversary stating your legal positions. Successful litigation involves some element of surprise. State firmly, but vaguely, that you intend to pursue your legal remedies . . . that’s all!

Pitfall #10: Owning All of Your Assets in One Business Entity

Don’t place all of your eggs in one basket. While a corporation or limited liability company may shield your personal assets from business liabilities, it will not shield the business’s own assets. If your business entity has a substantial amount of debt-free equipment or real estate, consider spreading out the risk. Create one or more corporations or limited partnerships to hold title to the assets, then have your business lease the assets back.

John D. Rockefeller once said, “Own nothing, but control everything.” The more assets your business owns, the more likely it will be sued.

When I present seminars on the topic of “Asset Protection,” a common question I hear is “now that I am incorporated, should I cancel my insurance?” To the other extreme, a common remark made by ignorant tax professionals and attorneys is, “don’t bother with corporations, just buy a lot of insurance.” Both of these approaches are dangerous.

Insurance should never be overlooked as a means of protection. Insurance will cover many claims of a “tortious” nature (slip & fall, negligence, etc). The fact that you have insurance to cover these types of claims will help if your corporation is undercapitalized. If you do not have insurance and someone who is injured sues your “shell” corporation, then a court may think you were not “playing fair.” This is particularly important if your business is engaged in activities that are dangerous or hazardous to the public.

Insurance will not typically cover breach of contract claims, but courts are less likely to set aside a corporation for these types of debts. However, claims such as sexual harassment, employment discrimination, wrongful termination and fraud are almost never covered by insurance.

Another benefit of insurance is that the duty of an insurance company to “defend” (pay for your legal defense) is much broader than its duty to “indemnify” (pay for a judgment against you). Legal fees alone can be painful, especially for frivolous lawsuits, even if you win in court. They rarely award the defending party legal fees and the plaintiff’s lawyer is often working on a contingent-fee basis, so that the plaintiff himself has nothing to lose by suing your company (have you ever heard the expression, “never get into a fight with an ugly person because he has nothing to lose?”).

The following is a brief summary of available insurance for your protection:

General Business Liability Insurance

This type of insurance can be reasonable and will cover a wide range of lawsuits from personal injury claims to copyright violations. Obviously, the higher the deductible, the cheaper the insurance. It may be worthwhile to keep an insurance policy with a large deductible and high limits to substitute for having to keep excess capital in your corporation.

Malpractice Insurance

Lawyers, doctors, engineers, architects, real estate brokers and other professional can obtain malpractice or “errors & omissions” insurance. This insurance covers goof ups that you and your employees make in dealing with clients. This insurance can be very expensive, depending upon the kind of business which you are involved. In addition, the coverage is weak because the policies are often “claims made”; that is, it only covers claims made in the year the policy is in effect. Regular liability insurance will cover you if you are sued years later for events that occurred during the policy period. In many states, the statute of limitations for malpractice is six years, so a lawsuit years later will not be covered if you do not maintain continuous coverage.

Director Liability Insurance

Director liability can be so precarious that many people refuse to serve on the board of any corporation without director liability insurance. This insurance is expensive and may not be necessary for a small corporation.

Umbrella Liability Insurance

An umbrella policy is one that kicks in after all other underlying coverage is exhausted. For example, if you have a general liability policy with $100,000 and a judgment is rendered against your corporation for $500,000, the umbrella policy kicks in the extra $400,000. Umbrella insurance does not cover other claims that are otherwise not insured (e.g., breach of contract claim). Most insurance companies require that you maintain all of your insurance with their company before they will issue an umbrella policy. Umbrella policies are quite reasonable, and can cover your business for up to several million dollars.

Extended Homeowner’s Insurance

A typical homeowner’s policy will cover basic liability claims against you regarding the property. It will not cover general liability claims unrelated to your property. For example, if you injure another while riding your jetski on a nearby lake, this claim will not be covered unless your homeowner’s policy has a special endorsement. Review your policies with your insurance agent as to coverage issues and policy limits. If cost is an issue, increase your deductible. A lower deductible on a policy is general more expensive than a higher coverage limit for liability.

As of April 1, 1997, all fifty states have adopted the Limited Liability Company or “LLC.” The LLC is relatively new to the U.S., and most states have adopted LLC laws only within the past few years. Essentially, the LLC is a cross between a corporation and a partnership, with all of the bells and whistles of both.

The IRS Has Cleared the Way

Most conservative attorneys and CPAs (including myself) shied away from LLCs because it was not clear how the IRS would classify such an entity. However, the new IRS rulings make it clear that an LLC will be treated as a partnership, so long as it has at least two members. A single-member LLC will be “disregarded” for tax purposes. This means a single member LLC is still valid under state law (and thus affords lawsuit protection), but no additional tax reporting is necessary at the federal level.

Lawsuit Protection

The LLC, like a corporation, provides “lawsuit protection” for its owners. The owners (called “members”) of an LLC are not personally liable for debts or liabilities of the company. Thus, an LLC which holds real estate will protect its owners from personal liability for lawsuits. In addition, a foreclosure against the company will not create personal liability for the members (unless, of course, the members signed personally on the loan).

Favorable Tax Treatment

Like a partnership, the LLC provides “pass-through” tax treatment. This means that the company is not taxed on its profits; all profits of the company “pass-through” to its members. A regular corporation (called a “C” corporation) is taxed at the corporate level. The shareholders are taxed again on the income they receive from the company.

Asset Protection

For many years, the “Family” Limited Partnership was the preferred vehicle for estate planning and creditor protection. The popularity of the FLP was that a creditor could not take partnership property or attach a partner’s interest. This limited remedy would force a creditor to settle with a partner for pennies on the dollar.

The problem with limited partnerships for holding real estate is that the general partner has personal liability. This problem was often solved by using a general partner which is a corporation. This, of course, creates added expense and paperwork. An LLC afford its members the same creditor protection as a limited partnership, but no member has personal liability.

Another interesting feature of an LLC is that the IRS does not consider a single member LLC to exist for tax purposes. Thus, the single member still has lawsuit protection in state court, but the member continues to report his rental income and expenses on schedule “e” of his personal income tax return.

An example of this simple, yet effective protection is shown below:

In this scenario, Larry Landlord does not need to file separate tax returns for each of his three LLCs. However, if a tenant in his apartment building is injured, he will not be personally liable, nor will he risk losing his other rentals in a lawsuit.

As you can see, the LLC can provide excellent protection for landlords, with little paperwork hassle.

Estate Planning Features

The LLC can provide a vehicle for passing wealth to younger family members without having to re-title the real estate. Once real estate is transferred into an LLC, the members’ interest is converted to personal property, which is represented by their LLC “shares.” These shares can be transferred incrementally to children as tax-free gifts ($10,000 worth per year). The process for transferring LLC shares is very simple compared to filing a new deed each year. The parents can still retain control of the property during their lifetime by acting as “managers” for the company.

As you can see from this brief discussion, LLCs can play an important role in your overall asset protection, estate planning and tax strategies.

The pros and cons of forming limited liability entities such as Limited Partnerships, Family Limited Partnerships and Limited Liability Companies is a much discussed topic these days. It is this latter device, the much misunderstood “LLC,” which is the newest, though less notorious, least used, and arguably the most straightforward and valuable of them all.

Limited Liability Company (LLC): A membership business entity that provides the protection of a corporation, but which is more like a partnership arrangement in many ways. LLC “members (versus ‘share-holders’ or ‘partners’)” participate in the day-to-day management of the company without incurring personal liability. All taxing agencies (state and federal) tend to “look through” the LLC to its member/s as the responsible parties in terms of accounting for, and payment of, income tax. Profits and losses relative to passive activities within the company flow to the members who remain free of individual self-employment tax. Since there is no plethora of case law concerning the LLC at this time, it is, of course, advisable to seek out good professional legal and accounting advice before considering its use.

Although it is only within the past few years that the Limited Liability Company has been accepted and recognized throughout the U.S., all fifty states have now adopted and recognize the LLC as an acceptable, viable and valuable business entity (since 1997). It should be noted, however, that some states (e.g., New York which imposes a $2,000 surcharge for the establishment of an LLC), by imposing large – if not onerous – tax penalties on LLC’s, can make its use somewhat impractical relative to the cost savings of, say, a Subchapter S Corporation (also an income tax ‘pass-through’ entity, see IRC §1361).

While on the surface the S-Corporation and the LLC may seem similar, there are some significant distinctions: 1) The S-Corporation is limited to 75 shareholders, whereas the LLC has no limit to the number of members it can have; 2) All the shareholders of an S-Corporation must be persons, who are U.S. citizens or permanent resident aliens, whereas LLC members can be business entities (corporations, partnerships, trusts, etc.) or individuals…even non-resident aliens; 3) S-Corporations are permitted to issue only one class of stock, while an LLC can issue several different classes of stock in the form of membership certificates (capital, common, preferred, etc.) and priorities of ownership, and 4) Even though treated preferentially by the IRS, the S Corporation is treated for income tax purposes on a state level the same as would be any other Corporation.

Perhaps the simplest way to look at the Limited Liability Company structure might be to view it as basically a fusion or hybrid of the corporate structure and the partnership arrangement: but with all of the essential features, benefits and advantages of both…though minus the disadvantages of each. For example: in terms of taxation, the corporate structure allows for double taxation of its owners (i.e., income tax is imposed on the Corporation as well as personally on any owner salaries or withdrawals): and in terms of asset protection, the General Partnership structure allows for a creditors charging orders against individual partners.

The LLC, on the other hand, effectively avoids both of these negatives. As well, like the corporation, the LLC also provides “lawsuit protection” for its members (analogous to stockholders in a corporation) who are not personally responsible for the liabilities or the indebtedness of the company. An LLC that holds real estate, for example, effectively protects its member-owners from personal lawsuits and creditor claims or judgments against the LLC. In addition, unless they were to have personally guaranteed the indebtedness, a foreclosure upon a Limited Liability Company does not create personal liability for its members.

Even today, in some quarters one might still find some negativity or misunderstanding by legal and accounting professionals regarding the viability and dependability of the LLC due to its newness. With its earliest advent in the U.S., many, if not most, financial planners remained long unconvinced (and some still do) as to how an LLC might fare under scrutiny by the IRS, or how it might hold up in court. Prior to 1997 the common use of the LLC as an asset shielding vehicle or business entity was uncommon, to say the least.

Recent IRS rulings are now clear in their treatment of the LLC as a “partnership” for income tax purposes…so long as there are at least two members. A single-member LLC will however, be “disregarded (looked-through)” for income tax purposes: with the full tax liability falling to the member as if no business entity existed. This characterization of the single member LLC does not, however, mean that it would not be held completely valid relative to asset protection under state legislation (i.e., treated essentially as a sole proprietorship). The overall effect of the single member LLC is that asset protection (against liability claims) need not incur additional federal income tax reporting requirements, system documentation and record keeping or major set up expense.

As is commonly known, a regular corporation (e.g., a “C” corporation) is taxed first at the corporate level, then the stockholders (owners) are taxed again on the owner withdrawals. The LLC, on the other hand, by providing “pass-through” tax treatment, as would, say, a general partnership, averts such “double taxation.” In other words, the LLC as an operating entity is not taxed on its own profits; but instead on the income taken from it by its members (i.e., income accounting responsibility and income taxation is “passed-through” to the individual member/s).

Regarding creditor claims, do note that even though a judgment creditor’s claim may be imposed upon an LLC, such claim may not be imposed individual upon its member/s (i.e., even with regard to single member LLC…see U.S. Uniform Partnership Act §28 relative to restrictions concerning charging orders per se). What this then means is that the personal assets of an LLC’s member/s would not be reachable by a judgment creditor without a valid claim against, and the dissolution of, the entity: which dissolution would, of course, not be allowed unless somehow all the members were to have conspired and acted in concert to create the cause for the claim.

Before the advent of the Limited Liability Company, the “Family” Limited Partnership was considered a superlative instrument for estate planning and protection. However, the chief reason for forming an “FLP” versus a General Partnership was to avoid creditor claims against assets held in the partnership, by avoiding charging orders against the limited partners. That is to say that under a Family Limited Partnership, a judgment creditor could not attach a limited partner’s interest, and the general partner’s exposure would thereby be limited only to its percentage of the total value of the assets so held. The problem with the FLP for holding real estate, however, was (is) that the general partner still has personal liability to the extent of his percentage of ownership. An answer, of course would be to name a corporation as the “general partner.” Interestingly enough, though, the LLC actually affords its members the same creditor protection as would such a limited partnership, but wholly without personal liability of any of its members: and without the added legal work, time and expense of creating, administering and maintaining the corporation and all of its reporting requirements.

Note that even though the IRS does not consider the single member LLC to exist…the structure none-the-less continues to afford maximum protection against creditor claims and lawsuits: even though the owner member continues to report its income and expenses as an individual (e.g., a Form 1040, with a Schedule C for the business and Schedule “E” for rental income).

While on the surface the LLC seems to be a fairly uncomplicated and innocuous device for doing business and for holding assets, it still has many other relatively unexplored facets. One of which is that of holding real estate assets and protecting them from judgment creditors, bankruptcy actions and actions in marital dispute. For example, all of one’s real estate holdings can be placed into an individual LLC; or each separate property or parcel can be held by a separate LLC, with a different investor or beneficiary “partner” in each one. In using the LLC for holding real estate in this manner, separate tax returns for each entity need not be filed…and of even greater interest, a tenant’s injury on the premises will not create a personal liability for the member/members. Only the LLC can be sued. Therefore, by holding properties in this manner, other properties remain apart from involvement in the claims of creditors arising out of a lawsuit against a particular LLC.

The LLC also provides a truly serviceable vehicle for shielding or passing wealth to family members without having to re-title the real estate. Once real estate is transferred into an LLC, the members’ interest is converted to, and its ownership characterized thereafter as, Personalty (i.e., personal property) Vs. Realty (real estate), which “shares of ownership” can then be transferred, all or in part, as tax-free gifts (in blocks up to $10,000 per-year to each recipient). Again, note that the procedure for transferring LLC shares is far less complicated (quite simple in-fact) as compared, say, to altering, preparing and filing new transfer documentation (e.g., Grant Deed, Warranty Deed, Bargain and Sale Deed, etc.) and the requisite Preliminary Change of Ownership documentation. Moreover, when the gift is to a child, the LLC allows the parent to easily retain full control of the asset throughout its lifetime by continuing to act as “Managing Member” for the LLC.

In short…the benefits afforded by the Limited Liability Company are long overdue, but apparently here to stay, with confidence within the financial community growing stronger everyday. And a major welcome benefit of the LLC is that one can be set up for as little as $199.00 (go to www.mycorporation.com).

Protecting your assets should be a critical part of your investment program. Years ago, we had several reasons not to worry too much about it. Here were some of my excuses:

1.) The old “can’t get blood out of a turnip.” If you don’t have any assets, there’s not much for them to get. When getting started, I usually didn’t have much cash and not much equity. Not much there means not much for them to get. It felt safe.

2.) Insurance was labeled as the first line of defense in the asset protection arena. Buying good insurance and a lot of it was considered an acceptable way to “buy” protection.

As a real estate investor, it’s easy to focus on the “deal” and the “numbers” involving the performance of our properties. Capture another deal and you’ll feel great and share the details over dinner and with your friendly competition. Put a few of these in your pipeline and before you know it, you’re one of those folks with something others might want to go after. Simply allowing yourself to be known as a “landlord” or real estate investor implies you have a lot of assets, deep pockets, and plenty of cash.

Before you know it, you might have become a bigger target than you could’ve ever imagined, all from the result of your work, effort, and continued education and knowledge. Protecting your assets becomes a number 2 quadrant activity of “not urgent, but important.” We all just procrastinate. There’s not much excitement in figuring out how to protect your self. It’s not as much fun as doing a deal, cashing a big check, or collecting payments every month. It’s b-o-r-i-n-g and usually involves having conversations with boring professionals who have their meter running charging you to talk with them. Ouch! Developing an asset protection plan is about as much fun as going to the doctor or dentist.

Let’s try it using the KISS method.

First of all, let’s try a simple comparison. Let’s use a good sharp fast sports car. This sports car has the best and biggest 12 cylinder engine with the most horsepower. It’s powerful. It can go from 0-60mph in 3 seconds. This sports car has the best and smoothest transmission. It’s just a well-built and very fast and sharp car. Sounds good so far, right? What if you put 4 different size tires on this car because they’re cheaper or somebody told you to do it this way? Wouldn’t this affect the performance? What if you failed to keep the proper air pressure in all four of your different size tires? What if you never changed the oil, air filter, anti-freeze? What if the car called for high octane fuel and filled the tank with diesel fuel or kerosene because it’s cheaper?

I don’t know much about cars and really don’t plan on learning anytime soon; however, I hope you can see how your high performance sports car could be turned into junk in short order without proper preventative maintenance. The same applies to protecting your assets. When gathering information to learn about something, learn from somebody who has been there and done that. Would you want to learn how to be a millionaire from a guy who speaks well and works at a temp service making 20k annually? Would you go to a veterinarian for brain surgery because they’re your buddy and will do it cheaper?

It urks me to see investors start off wrong with bad information from a trusted friend who happens to be a professional. Be careful. Yes, I’m picking on attorneys and CPA’s because this happened to me too. These “friends” meant well and really truly were trying to help; however, they were not experts in the real estate investing arena. Protecting your assets involves several factors. Just like the sports car, there are many parts to make this work properly. Proper tires, fuel, driver and other parts all combined properly = good sports car. There is no one button to push fixes everything. It just doesn’t happen so easily.

For starters, many folks say “I don’t want to own anything. If I don’t anything, I have no liability.” boloney! The only way to remove all personal liability on your part is to get off the planet. You could own absolutely nothing and if you’re driving your neighbor’s car to the grocery and run over the little old lady pushing the buggy in the parking lot, guess who’ll get sued? The owner of the car and the driver…you! So, bite your lip. You can never remove all liability. This kind of exposure will be called the “back door.” When you get sued from the “back door,” and they win, they get insurance money first. Then they’ll get the things you own or have an interest in to satisfy a judgment. It’s just plain ugly.

Protecting Your Assets Involves 3 Concerns

1.) Liability
2.) Tax Strategies
3.) Estate Planning

These three concerns each have unique and effective strategies for each benefit; however, as shown in the drawing above, they overlap each other. They don’t always compliment one another. This drives us absolutely bananas. When discussing protecting your assets with your CPA, they will almost always defer some questions to your attorney and vice versa. The point is, if you structure everything for the simplest and best tax strategies, it’ll probably violate and may not be the best for asset protection and/or estate planning. If you get a super aggressive estate plan put together to make things easier for your heirs, I’ll bet you’ve made things worse for your tax situation right now. (I did).

After a lot of research, expense, and growing pains here’s the simplest plan. Take title to property using a land trust. A land trust simply hides the beneficial interest from the public record. It does not exist for tax purposes. It should not cost you a penny extra in closing costs.

Use “Single Member, Manager Managed LLC” (limited liability company) for ownership of investment property. If set up properly, these entities do not exist for tax purposes. They exist only for liability purposes. Treat them like a business for liability concerns including a bank account for each LLC, but everything gets combined and reported on your personal tax return as if they didn’t exist.

As a rule of thumb, multi-member LLCs aren’t good. They cause you to file another tax return. More tax returns equal more expenses for you. The same benefit of the multi-member LLC can be achieved using a land trust with a 50% beneficial interest for each single member LLC to replace a multi-member LLC with two members. With a 3 member Multi-member LLC, simply have each beneficial interest of 33%. The Single Member, Manager Managed LLC gives you the best of both worlds. Used properly, it gives you the benefit of the old limited partnerships without the added expense of another tax return.

In-House Property Management Company

Depending on the number of properties and your activity, you may consider a LLC to be your own property management company. This entity can be used to wholesale property and will be your “dealer” entity for tax purposes. Caution: The management fee paid to your own management company will be earned income and not passive. Earned income pays more income tax. This entity should not own assets. It’s your out front entity with all the exposure, risks, and owns nothing.

Insurance

Have a policy for each property. The old-timer’s strategy of a good asset protection plan is to simply have good insurance, and a bunch of it. Good insurance might not be the best protection and is not the cure all today. Today, insurance companies are bailing out and backing off all kinds of coverage. They’re dumping mold and mildew, lead based paint, acts of terrorism, war, and radon. Investors and homeowners are getting policies canceled because of certain species of dogs, trampolines, and even macaroni and cheese in a pot on the back porch. The list is getting longer and longer. Insurance is something you gotta have, but you better not use. If you file a claim you’ll get on the nasty list and your rates will go up if not canceled first. Save insurance for tragedies such as major fires, tornadoes, hail damage. Do not use insurance for vandalism, thefts, and bad cooking.

Deductible

Increase your deductible to $1,000 or $1500. If you file a claim, your rates will go up or you’ll get cancelled. There is one type of insurance coverage that does not gig you personally. Weather related tragedies such as hail, tornadoes, hurricanes, etc. are labeled “catastrophic” by the insurance companies and are not a reflection on your risk as an insured. If you go overboard on your deductible to lower premiums, and raise your deductible to $5,000 or more, you’ll miss the boat on hail damage and other catastrophic weather incidents.

Liability Coverage

Pay attention to your liability coverage. All the attorneys on TV are looking to help somebody sue somebody. Good insurance with good liability coverage and an umbrella policy as a back up plan are good front line defenses for you in the liability department. As an investor, your liability coverage should be a minimum of $1,000,000 or more.

Loss Of Rents

This highly promoted coverage is okay in the beginning with a just a few units. It’s great if you have a multi-family building with 4 units or more in ONE building. For example, a building with 18 units would be a good candidate for Loss of Rents coverage. A fire or major casualty loss could cause the whole building to be vacant overnight…. This coverage would be a great lifesaver here. On single-family homes as rentals, you need to do the math. When you have 20 units or more, look at the added cost of the loss of rents coverage for each and multiply it by the number of single-family homes. The benefit to the insured is usually up to 6 months of rents paid. You’ll get to a point where the added cost to your premium exceeds your 6-month rent benefit. When this happens or gets close, whack it. I learned this from my insurance agent. Don’t confuse with multi-family.

Umbrella Policy

Also called “excess liability” coverage. This can be an ugly monster if not understood. Remember, insurance agents usually work on commissions. They want to sell, sell, sell. Umbrella Policies got their name by the way the policy operates. An umbrella policy does not cover everything and all of your loose ends. It covers what is only under the unbrella. If you have a policy with insurance company A, and you have an umbrella policy with Company B, odds are your umbrella won’t cover or stand behind company A’s coverage, especially if you fail to tell them about the Company A policy.

Agent / Company

Having one competent agent for your insurance concerns can be a huge benefit for you. Sure, they can go belly up, lose your business, and you can switch companies; but you’re less likely to hiccup, hit a pothole, or forget something like those umbrellas. It will eliminate the need for two or more umbrella policies and the added stress of making sure all of your properties and activities are included under the two or more umbrellas.

Imagine for a moment you have two or more insurance agents and companies. Insurance Agent A, B, and C. Each agent has policies covering some of your properties. Each has an umbrella for their policies. You are an aggressive real estate investor and you buy and hold with tenants, and buy and sell some to feed the machine. What a mess! Odds are you will get gigged on extra premiums and you must always remind your agent A, B, C to add / delete properties on regular insurance and each umbrella. Now, suppose you have one agent with Company A. Easier for me, easier for them. You can structure your umbrella to cover all policies with Agent A. No need to worry here. If you choose not to use an umbrella policy, you better load up real good on the front policy. I suggest again, a minimum of $ 1,000,000.

Separate Policies

You can argue this one all day long. It’s absolutely easier, safer, and more efficient to have a separate policy on each property. Do not get a commercial policy adding more units, buildings, and etc. all on one policy. This makes it easier for the agent and horrible for you. It actually reduces your coverage!

Benefits

•Each property stands on its own policy and it’s own deductible.

•Each property with its own policy covers you better.

•Provides you with greater privacy protection. Lenders receive only proof of insurance for the one property listed. If you have a hard money lender or a seller financed property requiring proof of paid insurance, they receive only the policy for the property. If you use the agent friendly commercial policy, they will receive a list of everything you own.

•Allows you better control, especially on jumped loans. (subject to)

•Lawsuit Time: not if it happens, but when. When it does happen, one of the first things the attorney asks for and will receive without your consent is a copy of the insurance policy. Once again, the dirtbag attorney may receive a list of all your properties.

•Houses and garages may be listed as individual buildings. It can be cumbersome keeping track of building 36 and 37 in relation to addresses, especially if you sold some of them.

•Better Coverage: with each property having its own policy, each has a deductible and a liability limit. The liability limit usually has 2 numbers. The first is the limit of each occurrence. The second is the total aggregate for the policy. In simple terms, if you get sued they may pay up to the first limit for each occurrence. If it happens again during the same year, they may pay again providing it does not exceed the second number. With the commercial policy listing all of your properties, you still have a first number and a second number, all on one policy. So if you get sued, they may pay up to the first number for the first occurrence. If it happens again during the same year, it could totally wipe out your liability coverage on all of your other properties.

•Payment of Premiums: with individual policies, premiums are usually paid a year in advance. You’ll have staggered premiums due throughout the year for better budgeting. A commercial policy zaps you one time annually and properties added and deleted throughout the year have pro-rated premiums based on your effective date. It’s a mess if you’re busy.

Jumped Loans – (Subject To)

Investors have been told “add your name to the existing homeowner’s policy.” Dangerous! We’re real estate investors, not homeowners! Remember, agents make their money by selling, and earning commissions. How many homeowners’ policies have liability coverage of $1,000,000? The policies I’ve seen have jewelry, boats, minimum liability coverage, and all kinds of garbage you don’t need. plus, it usually costs more.

If you’ve jumped or bought subject to on a property with a delinquent loan, odds are they’re in a “forced insurance” plan at the direction of the lender. Super expensive, their forced insurance is usually 3 times the cost of good insurance with absolutely no liability coverage. None. Why in the world would you want to continue this policy and add your name as additional insured? Crazy and Dangerous!

Again, use your agent and get your own individual policy for the property adding the seller(s) names to your policy as “additional insured” to satisfy the lender. Don’t try to argue and say something like, they have good insurance and it’s being paid from escrowed funds. As investors, we’re tightwads, but the purpose of insurance is for tragedies. So what, the worst-case scenario is you may pay for two policies the first year you bought the property. After you get everything squared away with the lender and correspondence coming to you about the loan, if insurance is paid from escrowed funds, cancel the existing policy purchased from the sellers and replace with your policy. They’ll do it most of the time as long as the borrower(s) name(s) are on the insurance policy.

This simplified version of protecting your assets should not cause more expense from additional tax returns. Protecting your assets doesn’t address any issues regarding estate planning; but, make yourself aware of how each of the 3 concerns overlap and violate each other if each is done properly. So there is no one simple plan to fix everything. Just like the fine tuned sports car, protecting your assets involves several pieces and parts all working together properly.

If you have been reading my articles, you are probably familiar with the concept of creating and using land trusts for privacy and protection of your real estate. However, what about your ownership of notes, mortgages, deeds of trust, leases and options that may appear on public record? What about cars, boats, mobile homes and other items that are registered and recorded in public places? Good news . . . there is a special trust just for that purpose!

The “Personal Property Trust” agreement is basically the same as a land trust in that the trustee is essentially a nominee title-holder acting at your direction. Like the land trust, the paper trust is a revocable, living trust. The same rules for tax reporting apply – there is no gift tax or income tax consequence of placing title to your paper in the paper trust. You still retain full control of your trustee, so no fiduciary tax return is required.

Like the land trust, the primary purpose of using the personal property trust is to keep your name off the public records. Let’s examine a few documents that are generally recorded and how we can use them with the personal property trust:

Purchase Option

A purchase option is often recorded in the public records to give notice to the world that you have first crack at the property. Again, using a trust as the named “optionee” will protect your anonymity. Furthermore, it may be an excellent tool for confusing potential creditors; you record options a gainst your property in favor of the name of a trust. To theoutside world, your property looks less valuable, because, after all, who would purchase a property subject to the recorded options (nobody but you has to know that your are the beneficiary of the trust and thus the “true” option holder!).

Mortgage or Deed of Trust

One of the most practical uses of a trust is for holding a mortgage or deed of trust. A mortgage is an asset, like any other, that can be found by searching the public records. Using separate trusts for each mortgage will help you keep a low profile. As in the above example, you could record mortgages against your properties in the name of a trust to make your property appear encumbered. Make certain that there is at least some consideration for the mortgage or you may be found guilty of filing a fraudulent document.

Auto or Mobile Home

Essentially any asset that is recorded in public records can he held in the name of a nominee-type trust. Department of Motor Vehicle records are often public information and will let everyone know where you live. Holding your car or mobile title in the name of a trust with a post office box or business address will help protect your privacy.

LLC Interest

The names of the members of a limited liability company are public record for everyone to see. Consider forming your LLC using a personal property trust as the member (you being the beneficiary of the trust).

Trust “Stacking”

You can combine a personal property trust with a land trust for greater privacy. Since the beneficial interest in a land trust is personal property, it can be held in the name of a personal property trust. Thus, you could form a self-settled personal property trust of which you would be the grantor and beneficiary. The personal property trust would then create a self-settled land trust of which it would be the grantor and beneficiary. This “stacking” of trusts might be appropriate in states which require the public disclosure of the grantor (HI, MS and AZ) or in situations which an uncooperative lender or title company insists on such disclosure in writing.