Did you start off as an LLC?

[MartinCPA]

My gosh.  The paperwork nightmare.  Seperate bank accounts for each LLC.  I'll keep my liability insurance maxxed out and keep my LLC rather than creating a ton more of them

You don't have to open a separate bank account for each LLC.  The management company can pay all of the LLC's expenses while on the books of the LLCs you can set-up a loans & exchange account. 

But most of my experience is with commercial real estate with values from $10M to $200M.  This may be over-kill for most instances; I don't know.   That is why I am here.  I am trying to learn. 

[BLL]

I admit, I don't have experience with residential real estate (not including larger apartment complexes) so I am trying to make sense of what you are saying to bear with me.  Are you Anti-LLC or you don't believe they are necessary for the newbie or small-in-scale real estate investor?

I don't recommend anything be used inappropriately and that is how newbies and small timers use LLCs. The investors don't have limited liability because their personal involvement in the business creates a liability that easily allows a creditor or plaintiff to bypass the LLC. These people do just about everything themselves and they will get sued personally based on their personal involvement. Any judgment will be against them personally without regard to the LLC. The LLC protects the other members who don't take an active role in the operation of the business. Why should an investor buy something that can't do the job? That is my main point.

At the level where you work, advanced planning is required and that could or could not include an LLC.

We have addressed the potential SMLLC problem by converting the SMLLCs to MMLLCs by transfering 1% of the LLC interest to an another entity.

Creditors and plaintiffs are wise to this ruse. Unless that 1% is providing something of value to the LLC, it is ruled a sham and subject to fraudulent transfer laws. Transferring assets to make it harder for creditors to collect is illegal.

By we, I hope you mean you are working with an attorney regarding setting up an LLC. Setting up an LLC is the practice of law and you open yourself to a charge of the unauthorized practice of law if there is no attorney involved. Also, you can be sued under civil fraud if a plaintiff or creditor learns the LLC was set up for asset protection purposes. You and your clients do not have attorney client privilege and your records regarding the client will be part of discovery.

But isn't this the case for any business structure (piercing the corporate veil)?

This is totally different. Piercing the veil occurs when the owners treat the business like an extension of themselves. I am talking about personal liability, i. e. you are personally responsible for your own actions. This method of attack ignores the entity completely and hits the defendant personally. Because the defendant acted on behalf of the entity, the entity is also responsible. In the end, there is judgment against the entity and the owners. The creditor collects the entity assets and the personal assets of the owner, regardless of how well the entity is operated and how well the formalities are observed.

[BLL]

Yes, Tingle is correct.  If you are going to put your properties in a LLC, you should set up a LLC for each property. Then set up a S-corp as the management company to manage each property.

This set up is also challenged as sham to defraud creditors and the challenge succeeds unless the defendant can show a legitimate business need for such a convoluted setup. A second attack method uses the structure against itself. Usually, the same group of people are the owners and managers. A judgment against the management company includes a judgment against a person as well. If that person has any membership interest in all of those LLCs, then all of them effectively shutdown. The creditor will get a charging order that prevents each LLC from buying or selling any major assets, loaning money to anyone, and letting any member remove money from the LLC. A receiver is appointed at a cost of as much as $600/hr until the judgment is paid. The debtor settles on the creditor's terms to stop the bleeding. There's no reason to pay the receiver when the creditor is getting paid too.

An even easier way to get the assets is to show the management company is a sham. It is common for this set up to severely under fund the management company thinking there is no lawsuit if there's no money. Under-capitalization is a badge of fraud and will take down the whole set up when proven in court. I have seen married couples put the collectible assets in one spouse's name and have the other run the business to mitigate the personal liability attack risk. A civil fraud claim can be used to sue the other spouse and create joint liability. I also know attorneys who will take an un-unsellable asset and use it to annoy debtors into submission. If a debtor has an undivided right to occupy a home, the attorney will ask for that right and let someone live in the home. How long will it take to settle when a stranger has the legal right to live in your home? They may not  be able to get blood from a stone, but they'll crush the stones or take them just to make a point.

Remember that creditors aren't stupid. They have their own seminars and conferences discussing ways to collect from what is taught in investor seminars for asset protection. Every idea for asset protection found on the Internet or in a guru course has a corresponding attack taught at a seminar for collections professionals. They tell each other what works and what doesn't.

If you want real protection, you need to find an attorney that specializes in this area and actually spends time in court. Creditors never learn about the techniques these people use because they aren't available to the public. In fact, they don't look like asset protection. They are elegant in their simplicity and hardly ever challenged; even then the creditors settle on terms favorable to the debtor. It is the operating agreements, corporate by laws, and trust documents that are complicated. However, they are well beyond the scope of most attorneys to draft properly. Protection at this level isn't cheap, but we are talking about a net worth of at least 5 million (more like 10M+) to justify the cost. That is way  beyond the level of most real estate investors, unfortunately. Liability insurance is sufficient for the typical investor. A guru or low cost provider won't tell you that because they can't make any money from it. It's much easier to sell a cookie-cutter LLC without explaining the risks. The client is already sold on the LLC. There's no need to confuse them with important details that could cancel the sale.

[MartinCPA]

Code:

By we, I hope you mean you are working with an attorney regarding setting up an LLC.

Yes, when I say "WE" I am talking about my accounting firm where there are a number of attorneys and CPAs employed who specialized in the Real Estate, LLCs, and asset protection.

you can be sued under civil fraud if a plaintiff or creditor learns the LLC was set up for asset protection purposes.

I have to disagree because the whole idea of of LLCs and corporate law is asset protection. The example I gave earlier regarding the using the management company (S-corp) to manage the LLCs is not a sham.  Also it is not something I learned from a "guru."  It is something that is practiced and has been tested for years.  My knowledge is not just based on education (I have a Master In Taxation) but on experience dealing with multi-million dollar real estate deals.  However, I think I am approaching this from the perspective of  the  "big-time" real estate investor, not the normal every-day real estate investor.  I understand what you are saying now - Don't just set-up and LLC and think you are protected. Before you do anything, do your homework and talk to a qualified attorney & CPA.  Correct?

BTW Merry Christmas to you and everyone on the forum

[BLL]

 I understand what you are saying now - Don't just set-up and LLC and think you are protected. Before you do anything, do your homework and talk to a qualified attorney & CPA.  Correct?

Yes. That is good advice for every part of your business regarding the law and taxes.

You operate at a level much higher than a typical investor and most of my comments on this board are targeted to them. Because this is a public board, I sometimes add extra comments for those reading the thread. LLCs have a place and I recommend people use them when appropriate, but I can think of only a few situations where LLCs make sense for a new real estate investor. My opinion changes dramatically when net worth is measured in millions instead of thousands.

Here's something you may find interesting. This attorney was convicted of fraud for executing a transfer that was deemed fraudulent. It speaks a little to my previous comments on civil fraud.
http://www.assetprotectionbook.com/forum/viewtopic.php?f=71&t=1224&goback=.gde_3694878_member_38453601

In this case, the trustee was able to take over the LLC. It speaks a little to my point that good protection needs more than just an LLC.
http://www.assetprotectionbook.com/forum/viewtopic.php?f=71&t=1225&goback=.gde_3694878_member_38457542

Even though these are bankruptcy cases, it's not very hard to force a debtor into involuntary bankruptcy to take advantage of these precedents. It's outrageous acts like these that create bad law and it make it easier for creditors to collect. These types of cases are part of the reason I don't recommend LLCs for the typical investor and don't recommend free forms and low cost providers. Most of the LLC law harmful for protection is the result of poor planning and a poor understanding of the issues involved. This is not a DIY activity.

Be very careful when transferring assets between entities and/or funding them. Here is the definition of fraudulent transfer used by many states. This is taken from the Uniform Fraudulent Transfer Act.

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the
debtor; or
(2) without receiving a reasonably equivalent value in exchange for the
transfer or obligation, and the debtor:

When real estate investors say asset protection they usually mean protection form lawsuits, which really means making a judgment harder to collect. Just about every LLC or trust transfer I have seen from real estate investors has the intent of "asset protection", item 1, and is done without consideration, item 2. It's very easy to prove intent when the defendant  is shown to have used a guru course with some absurd title like "Bulletproof Your Assets" or some other similar title or employed the services of a firm known for such work. I have also never seen the transfer done for value. It's always a quit claim or warranty deed without any consideration, which could mean intent doesn't need to be proven to win.

Here's an example of bad planning that used "Asset Protection" in the name of the trust. I can't speak as eloquently as my colleague and have quoted his message in in the ABA's estate planners message group. The same fraudulent transfer laws apply to LLCs, corporations, partnerships, etc.

This popped up on my Google reader today at
http://readingeagle.com/article.aspx?id=266172

"Stuart L. Mathias, Jane S. Mathias and Mathias Family Trust to Stuart
A. Mathias and Stuart L. Mathias & Jane S. Mathias Irrevocable Asset
Protection Trust, 91 Pricetown Road."

Do planners not think that gratuitously naming a trust an "Irrevocable
Asset Protection Trust" doesn't key creditors to what it is and what
they need to do to attack it, i.e., maybe throw the settlors into
involuntary bankruptcy and use the 10-year clawback?

Also, naming something an "Asset Protection Trust" for a fraudulent
transfer analysis or the clawback analysis is basically akin to giving
the judge an affidavit that says, "We created this trust for the
specific purpose of screwing our creditors", i.e., actual intent.

IMHO, this is much worse than titling a business entity a "family
limited partnership", which is a bad practice.

IF YOU ARE GOING TO NAME STUFF THAT HAS AN ASSET PROTECTION COMPONENT,
GIVE IT THE MOST NONDESCRIPT NAME POSSIBLE, i.e., in this case it
would have been much better to call it the "Sudbury Trust" or
something. Let a creditor try to figure out what, if anything, that
means or whether the trust is linked at all to the settlors.

Hey everybody, according to the public records Stuart and Jane Mathias
of 91 Pricetown Road are hiding their assets from creditors! It's now
on Google too, so that a creditor will pick it up in about 0.007
milliseconds.

Rant endeth.

Jay D. Adkisson
RISER ADKISSON LLP
100 Bayview Circle, Suite 210
Newport Beach, CA 92660
Direct: 949.200.7773
Fax: 877.698.0678
jay [at] risad.com



This is a good discussion. Merry Christmas to you as well!