I want to thank you for the information provided on your website. As a litigation lawyer, I have referred to this information more than once.
Brownsville Attorney Barry R. Benton
Thank you for the immediate response on a Saturday. I didn't think I would hear from you till Monday. Excellent customer service!
Client Jeff H.
I always check your website and it is very inspiring. Not to mention that you are a great attorney.
Investor Client Francisco P.
I frequently refer to your website and book when I get stuck on real estate matters. The information is extremely helpful.
San Antonio Attorney Lisa Galvan
I give your book an A+. You are a rock star in our legal community!
Woodlands Attorney David Borger
David, you are the man. The future of law is with you!
I was referred to Mr. Willis by a title company. Though his office uses email as the primary form of communication, his replies are surprisingly quick. Documents are produced very quickly as well, often within the day. Mr. Willis's level of detail and professionalism is top notch.
Client T. Scott
I have to say, these are the most detailed, best written real estate documents that I have seen so far. You really mean what you say on your website.
San Antonio Broker and Investor Rolando Flores
I was recently sued and showed my litigation attorney the asset protection structure that you built for us two years ago. “Perfect!” he said. Thank you, David.
Client Peter W.
What a great resource! I liked your book so much I purchased the Kindle version to have on my phone. I’ve recommended it to my investor and Realtor clients.
Dallas Attorney John Andrews
Months after setting up my LLC David Willis continued to answer questions and provide guidance, usually within a matter of hours. I would strongly recommend LoneStarLandLaw to any investor seeking a trusted business partner.
Client Robert H
I must say your articles always impress me. I like your style. I don't make it to Houston often, but next time I do, I owe you lunch.
Dallas Attorney Matthew Aycock
I was delighted to find your concise and well-written article on adverse possession. As a professional educator for 25 years, I appreciate the style and manner with which you approach public education. Thank you!
Client Hank M., Phd.
I would be happy to provide a testimonial although it looks like you have a long list of them already. Can't thank you enough. I'll definitely use your services in the future.
Client Ben P.
Your book is a terrific resource!
El Paso Attorney Kathleen Crook
Your book is a very easy and informative read. I will gladly and confidently refer clients to you.
Houston Attorney Kevin J. Smith
It is a rarity and a great pleasure to do business with someone who is so thorough, accurate and prompt.
Clients Rod and Michelle F.
Thank you very much for all your help! You have provided a very valuable service to me and I highly appreciate it. I will recommend you to everybody should someone ask me for an recommendation for a real estate attorney.
Client Sanjay P.
David Willis is the consummate real estate lawyer, and possesses uncanny skill at structuring deals.
Houston Attorney Carol Guess
J. Thomas Black, Houston Attorney
I would never have expected David to reply to my email on a weekend but he did. He is a very diligent, dedicated, and knowledgeable attorney. The website is so informative - it offers easy-to-understand explanations to real estate and asset protection questions.
Client Chris V.
I've been so impressed with your website and your expertise. I would endorse you anytime.
Dallas Attorney Charlie Kim
As I acquired more investment properties – I now own about 50 rental houses – I became more concerned with asset protection. David Willis was able to create a simple two-company structure that recently withstood a court challenge. Having my real estate assets securely protected certainly adds to my peace of mind.
Client Bryan P.
Working with LoneStarLandLaw online
was fast and efficient. I received high-quality, sophisticated legal documents - along with the advice I needed - without having to spend hours in a lawyer’s office.
Client John T.
David J. Willis is a clever lawyer who
came up with a great plan to protect my rental property from lawsuits. I feel much more secure now. He is available by email whenever I have questions.
Client Marion W.
As a corporate attorney who does real estate I can say with confidence that David Willis is the real estate law leader in Texas.
Dallas Attorney Kevin Vela
I live in London but was buying a small
apartment complex in Texas. Mr. Willis handled the whole transaction for me, as both my lawyer and real estate broker. It was a relief to put the transaction in the hands of someone who knows what he’s doing.
Client Phillip K.
My portfolio contains a mixture of rent houses and owner-financed properties. I rely on David Willis for evictions, foreclosures, deeds, leases, options, and the like. This is a guy who knows the system and gets the job done.
Client Darrell P.
As an attorney I am familiar with David Willis' expertise in real estate. I highly recommend his book. If David wrote it, you can depend on it!
Woodlands Attorney Paul Spielvogel
Not long ago my LLC was sued over a contract - and I was sued along with it, personally. David Willis was eventually able to get my name removed from the suit. He also filed a counterclaim for a frivolous lawsuit. He is an aggressive lawyer to have on your side.
Client James S.
DAVID J. WILLIS ATTORNEY
Copyright © 2016. All rights reserved worldwide.
Asset Protection in Texas
by David J. Willis, J.D., LL.M.
Keys to Asset Protection
advance, preemptive planning before lawsuits and creditor action
creating a legal barrier to personal liability with the appropriate entity
separating assets (properties) from activities (contracts, leases, etc.)
maximizing anonymity in the public records
utilizing homestead and income protections afforded by the Texas Constitution and Property Code
asset spreading and compartmentalization (series LLC)
equity stripping–maximizing one’s (apparent) debt in the public records
generally exhausting an opponent’s resolve and resources
shell management LLC to do business with the public, tenants, vendors, etc.
holding company for assets (TX or NV series LLC) that stays in the background
anonymity LLC formation
anonymous land trusts
assumed name certificates (DBAs)–state and county
attorney-client privilege (use of attorney as registered agent)
living trust for the homestead to achieve probate avoidance
Texas has an established history of being a haven for debtors. For over a hundred years there has been a saying "So-and-so has gone to Texas." Sometimes this meant the person had physically relocated to Texas; just as often it implied that he had left town to beat his creditors. This grand, if ethically sketchy, tradition continues. The Texas Constitution, the Business Organizations Code, and the Property Code make it possible for individuals and businesses to establish fortress-like operating structures and shield substantial income and assets from execution upon a judgment. Together, these Texas laws make the Lone Star State a nearly ideal venue for asset protection.
Homestead Protections for Individuals in Texas
Texas offers unique protections for residents that should be integrated into any asset protection plan. These "homestead protections" are contained principally in the Texas Constitution article XVI, section 50 and in Texas Property Code chapters 41 and 42. They apply to both income and assets. In other states, execution on a judgment can strip you of your possessions and put you on the street, but that is usually not true in Texas. 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 well in advance of litigation. It is even wiser to formulate an asset protection strategy long before adverse events occur.
The homestead is the crown jewel of exemptions. It is protected from forced sale for purposes of paying debts and judgments except in cases of purchase money, taxes (both ad valorem and federal tax liens against both spouses), owelty of partition (divorce), home improvement loans, home equity loans, reverse mortgages, liens pre-dating the establishment of homestead, refinance loans, or the conversion or refinance of a lien on a mobile home that is attached to the homestead. Other liens are void. No matter how much the home is worth, an ordinary judgment creditor cannot force its sale in the absence of fraud. See In re McCombs, 659 F.3d 503, 507 (5th Cir. 2011). Texas homestead laws are liberally construed by the courts. London v. London, 342 S.W.3d 768, 776 (Tex. App.–Houston [14th Dist.] 2011, no pet.). Furthermore, an attempt by a creditor to place or enforce a lien against the homestead can be defeated using the procedure in Property Code section 53.160. See Part VI, ch. 35: Lien Removal.
It is also possible to move safely from one homestead to another. Property Code section 41.001(5)(c) states: "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 equity to be rolled over. Taylor v. Mosty Bros. Nursery, Inc., 777 S.W.2d 568, 570 (Tex. App.–San Antonio 1989, no writ). However, beware of the propensity of title companies to collect judgments upon sale of the homestead in disregard of section 41.001(5)(c). Some title companies have a reflex reaction requiring that all judgments on Schedule C of the title commitment be paid or released. If that occurs, and if the property is homestead, then the seller should aggressively assert section 41.001(5)(c). If the title company continues to insist that the judgment be paid, then the remedy may be to change title companies.
The homestead must be rooted in real estate. A yacht, for instance, is not homestead but moveable chattel. Norris v. Thompson, 215 S.W.3d 851 (Tex. 2007).
Section 28 of the Texas Constitution prohibits garnishment of wages, which protects the income of a person who receives a salary or wages. A creditor cannot touch either one, at least not while they are on their way to the debtor.
Considerable personal property is also exempt from execution. Property Code sections 42.001 et seq. specifically list the amount and types of exempt personal 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.
Also exempted are certain savings plans "to the extent that the plan, contract, annuity, or account is exempt from federal income tax, or to the extent federal income on the person’s interest deferred until actual payment of benefits to the person" under the Internal Revenue Code (Property Code section 42.0021); college tuition funds (including IRS section 529 funds and accounts established under Subchapter F (Education Code ch. 54,) which are exempted under section 42.0022; and the cash value of annuities and life insurance policies exempted under section 1108.001 of the Insurance Code–at least to the extent those items are exempt from garnishment, attachment, execution, or other seizure under Chapter 42 generally.
The Cash Problem
Cash is the most vulnerable of all assets, even in Texas. What should a debtor do with it when pursued by creditors? Options are to (carefully) convert it to homestead-exempt assets such as the home or vehicles; use it for reasonable expenses (e.g., retaining an attorney, paying the IRS, paying a child’s tuition, etc.); and progressively and incrementally withdraw it from the bank over time. The conversion process can be tricky, particularly if a lawsuit is already pending. If challenged, a debtor must be able to credibly assert the "ordinary course of business" defense of Property Code section 42.004. In other words, such transactions should be accomplished in the orderly course of business or personal life for purposes that can be justified independent of threatened or pending litigation.
Homestead Exemptions and Registered Entities
Only individuals (not corporations, LLCs, or partnerships) may take advantage of homestead protections. This is one reason it is suggested that investors draw a red line between investments assets and the homestead.
In Texas, stock in a corporation is nonexempt personal property (Tex. Bus. Orgs. Code § 21.801) that can be subject to levy (Tex. R. Civ. P. 641; Tex. Bus. & Com. Code § 8.112), garnishment (Tex. R. Civ. P. 669), or turnover (Tex. Civ. Prac. & Rem. Code § 31.002). However, partnership and LLC interests are subject only to a charging order, which means that if distributions occur, and only if they occur, then the creditor may attach them. See Tex. Bus. Orgs. Code § 101.112 (LLCs), § 152.308 (partnerships).
Going Beyond Statutory Homestead Protections: Forming an LLC
Clearly, if one owns one’s home debt-free or has investment property or cash balances, statutory homestead protections are not sufficient. The next level of protection is achieved by forming an LLC which accomplishes two critical goals: it creates a liability shield for protection of member-owners and, in the case of a series LLC, it creates individual compartments or series which insulate each series from the liabilities associated with other series and the company at large. Visualize a firewall between Series A, Series B, etc. The benefits? Simplicity and economy. An investor no longer needs a multiplicity of entities to safely do business.
The Two-Company Structure
A sound asset protection structure involves two LLCs, one to hold title to assets (a holding company) and the other to manage them and engage in business generally (a management company). The holding company should be a series LLC while the management company may be either a traditional or series LLC. We prefer Texas and Nevada as states of formation.
The holding company should be a series company, which has multiple compartments or series which are insulated from one another. For example, if there is a lawsuit affecting an asset in series A, then series B, C, and so on are not affected. The holding company stays quietly in the background, avoiding contractual or transactional privity with anyone. No one, especially tenants, should even know that it exists. The holding company’s name should not even be similar to the name of the management company–and, of course, neither name should provide a clue to the identity of the investor/owner.
In contrast to the holding company, the management company is active. It collects rents, signs leases, deals with contractors and vendors, employs personnel, leases office furniture and vehicles, and otherwise engages with the public. It is a separate, stand-alone entity with no real assets, an intentional target for litigation. If sued, the remedy is to walk away, form a new management company, and continue business as usual. If the result is a judgment against the old management company (a shell to begin with) the loss to the investor is minimized.
The conceptual key to this structure is that it separates assets from activities. Activities are what generate potential liability and lawsuits. Why keep your assets in the same entity that is most likely to get sued?
Additionally, using the two-company structure does your attorney a favor, since if the holding company is also sued he or she may successfully argue that it should not be a defendant at all. Why? Because the holding company did no business with anyone, had no privity with anyone, and therefore there is no legitimate basis for a cause of action against it.
The investor should instruct tenants, creditors, vendors, and the public generally that they are doing business with the LLC’s chosen DBA. That’s right, the DBA. Is there any reason even to tell them the name of the LLC? Not usually. If an investor is utilizing a two-company strategy, then the DBA used should be that of the management company. It is the public face of the investor’s business. Invoices, payments, and the like should all be sent to the DBA and never addressed to the investor individually. When a W-9 is required, it should contain the LLC’s tax identification number. The investor’s personal name should not appear except perhaps in the capacity of an authorized representative who signs on behalf of the entity. Why? Because when a personal name appears, a plaintiffs’ attorney sees a potential additional defendant.
For a diagram of the two-company structure, go the website and the Asset Protection drop down menu. Click on "Diagram of Two-Company Structure."
Another advanced approach is available for clients with diverse commercial interests – investors who own rental properties but also own a construction company or a restaurant or an apartment complex. The goal is to integrate these various enterprises into a single, layered structure with multiple firewalls.
The heart of the structure is the hub company—a series LLC formed either in Texas or Nevada, which is in turn owned by an anonymity trust with a post office box (For a discussion of anonymity trusts, see below). The attorney acts as organizer and, for Texas LLCs, as registered agent. For Nevada hub companies, we have an established registered agent (owner of a free-standing UPS store) on West Sahara Avenue in Las Vegas. A POB can be rented there and shown as a "suite" for purposes of reflecting the hub company’s official office address.
Series A of the hub company owns another series company (usually a Texas series LLC). Series A of the hub company is the sole member and manager of this subsidiary, listing either a Texas postal box or our R/A’s address in Las Vegas as registered address. This second series entity is thus a wholly owned subsidiary of (and managed by) series A of the hub company. Again, the attorney acts as organizer to maintain anonymity.
The subsidiary series LLC is where individual rental properties are held. For example, series A of the sub may own 123 Oak Street; series B 458 Elm Street; and so on.
Now back to the hub company. Recall that it is a series entity, and that series A is now occupied by a subsidiary that owns rental properties. What about the other series of the hub company? The answer is that these are open and available for the investor’s other business interests. Example: series B of the hub company might be sole member and manager of a traditional Texas LLC that owns a construction company. Why a traditional LLC in this case? Because a construction company is a substantial enterprise warranting its own "SPE" or single-purpose entity. Additional variations are limited only by the investor"s imagination.
For a diagram of this structure, go the website and the Asset Protection drop down menu. Click on "Diagram of Hub-Sub Structure."
Drafting LLC Documents
We have a separate article on this subject. To sum up its premise: all LLC documents–beginning with Certificate of Formation (Texas) or Articles of Organization (Nevada) and continuing with the company agreement, the first meeting of members, and the reset–should be drafted with an eye toward asset protection. Every company document should be prepared with the expectation that it will be intensely scrutinized by both an opposing attorney and a judge.
Part of asset protection is deterrence. Filed documents should include provisions that discourage creditors from suing the company in the first place. For instance, the COF should contain more than the statutory minimum wording; it should go into detail concerning matters such as series separation and insulation. It should also declare two classes of membership interest–Class A for "regular" members and Class B for creditors who acquire an interest or influence (one way or another) in the company. Owners of Class B are second-class citizens. Class B is unable to vote, may not serve as manager, may not direct that assets be encumbered or sold, and may not alter or impair the company’s ability to do business. What sensible plaintiffs’ attorney would want to spend time and money suing a company when a victory would consist of acquiring ownership or influence over Class B? He or she certainly would not do so on a contingent fee arrangement. A substantial retainer would likely be required of the plaintiff. And that brings us back to one of the core strategies of asset protection, to wit, exhausting an opponent’s resolve and resources.
Transferring Assets to an LLC
An essential asset protection measure is to transfer investment property out of one’s personal name and into an LLC–or, if a two-company structure is used, into individual series of the holding company. For real estate, this is done by means of a general or special warranty deed. If the asset is a business or other nonrealty, then a bill of sale is generally used. Other assets may call for an assignment of interest. Executed originals should be kept in the LLC’s company book.
Are due-on-sale clauses a problem in the transfer of real estate? Almost never, in spite of what lenders and Internet alarmists say. Lenders have their plates full with monetary defaults and generally do not accelerate a performing loan, especially if a property is being transferred to the borrower’s personal company.
There are minimum actions and formalities that should be prudently observed in order to enhance preservation of the LLC’s liability barrier–which, after all, is the principal reason one forms an LLC in the first place. These include well-drafted organizational minutes and a company agreement; issuance of membership certificates; minutes of annual meetings; obtaining an EIN and filing tax returns; having a company bank account; and other actions to validate the independent nature of the entity. Failure to do this sort of routine maintenance can make a company vulnerable to "piercing the veil" allegations. Such allegations are so common as to be virtually automatic in today’s litigious environment. Even if they ultimately fail (as they should in most Texas cases), it is time-consuming and expensive to dispose of them. So why offer the opposition an opening on these issues in the first place? We know in advance that a creditor/plaintiff will ask to see the contents of the company book during the discovery process. It is a given. When produced, the documentation should be flawless.
Presuit Asset Protection Strategies
Asset protection strategies fall into two groups: strategies implemented in advance of collection action or suit by a creditor/plaintiff; and strategies that are feasible afterward. It is preferable to plan ahead and be prepared, since the range of pre-suit alternatives is far greater. After suit is filed, depending on the circumstances, options are reduced by laws relating to fraudulent transfers–moving assets around to defeat legitimate claims of creditors. Creditors and courts are on the lookout for these. For details, look at chapter 24 of the Business Organizations Code, entitled the "Uniform Fraudulent Transfer Act." The purpose of UFTA is to prevent debtors from placing assets beyond the reach of creditors. See also Mladenka v. Mladenka, 130 S.W.3d 397 (Tex. App.–Houston [14th Dist.] 2004, no pet.).
After suit is filed, the actions of a defendant may be challenged under Property Code section 42.004, which states that an exemption is lost if nonexempt assets are used to buy or pay down indebtedness on exempt assets "with the intent to defraud, delay, or hinder" a creditor. The defense? The transfer was made in the ordinary course of business as permitted by Property Code section 42.004(c). Competent planning should make effective use of this defense relatively easy.
Once litigation is commenced, obvious attempts to maneuver and manipulate assets will likely be detected, at least if the creditor/plaintiff is on the ball. The court may be asked to set aside or unwind an allegedly fraudulent transaction. Such transfers are generally indicated by "badges of fraud" including the following stand-out items: transfers to a family member; whether or not suit was threatened before it was filed; whether the transfer was of substantially all of the person’s assets; whether assets have been removed, undisclosed, or concealed; whether there was equivalent consideration for the transfer; and whether or not, after the transfer, the transferor became insolvent as a result (i.e., made his cash or other assets disappear all at once).
Fraudulent transfer rules allow courts to reach back up to two years. Waiting until one has no recourse remaining other than to engage in an obviously fraudulent transfer is simply poor AP.
In postsuit strategy, it is important to move assets in such a way that they fall within the ordinary course of business (or, as we expand upon the concept, the "ordinary course of life and business"). One needs to be able to convincingly claim that a certain action would have been taken anyway, for good reasons that have nothing to do with avoiding a creditor’s claims. After all, life does not end merely because a lawsuit has been filed. People continue to engage in commerce, buy houses and vehicles, move residences, make new investments, and otherwise go about the business of living and supporting their dependents.
The Discovery Process
How do creditor/plaintiffs find out when you move your assets around? Principally, by using the discovery process (interrogatories, requests for production of documents, and depositions–all under oath) to inquire into a debtor/defendant’s transactions. The scope of this process can be wide indeed, reaching back several years. Failure to fully respond is grounds for contempt, although "fully respond" should never be interpreted as supplying more information than is absolutely necessary. Creditor/plaintiffs may do research on a defendant, particularly if the debt is substantial, but most have only the information that a debtor voluntarily gives them in pre- and postjudgment discovery. Contrary to popular fiction, where the computer whiz hits a few keys and then summarizes a person’s entire life and finances, the Internet has yet to reach the point where it reveals everything about everyone.
The most pernicious discovery occurs postjudgment, since creditor/plaintiffs can then go beyond the facts of the case and compel disclosure of sources of income as well as the location and value of assets, even assets that are legally exempt and cannot be touched. This can be a headache because the creditor/plaintiff may nonetheless attempt to go after such exempt assets, forcing a debtor/defendant to seek court protection. One can see why it is important that the defending attorney make a creditor/plaintiff fight vigorously for every bit of information provided in responses to discovery.
AP Level 1: Basic Asset Protection for Investors (the Texas Series LLC)
(1) form a series LLC to own and manage investment properties and businesses in separate series, establishing insulation and multiple liability barriers;
AP Level 2: Two-Company Structure (the "Texas Two Step")
(2) file an assumed name certificate (DBA) for this company and utilize the DBA in business dealings, contracts, leases, etc.;
(3) establish a checking account for the company under its DBA and have checks, letterhead, cards, etc. printed that way and phone numbers listed that way;
(4) transfer properties held in personal names into individual series of the holding company (Series A, Series B, etc.) using deeds that cite series protections;
(5) separate homestead and other creditor-exempt items from investments and businesses, then reduce debt on these items in order to maximize protections afforded by the Property Code and Texas Constitution; and
(6) form a living trust for the homestead to avoid probate, transfer the home into it, and then execute a pour-over will to transfer other assets to the trust upon death.
(1) establish a Texas series LLC or Nevada series LLC to own and hold–but not manage„investment properties and businesses (a holding company, which has no privity with anyone);
AP Level 3: Texas-Nevada Combination (the "Two-State Solution")
(2) form a separate, stand-alone Texas LLC (no cross ownership) to act as a shell management company to acquire properties and then after closing transfer them to the holding company; meanwhile the management company signs leases and contracts and deals with tenants, vendors, contractors, and the public; income passes through to the holding company as consulting fees and returns to the management company, if needed, as management fees;
(3) file assumed name certificates (DBAs) for both the holding company and for the management company and utilize these names in all dealings;
(4) establish checking accounts for each company under their respective DBAs and have checks, letterhead, cards, etc. printed that way, and phone numbers listed that way;
(5) transfer properties held in personal names into individual series of the holding company (Series A, Series B, etc.) using deeds that cite series protections;
(6) separate homestead and other creditor-exempt items from investments and businesses, then reduce debt on these items in order to maximize protections afforded by the Property Code and Texas Constitution;
(7) form a living trust for the homestead to avoid probate, transfer the home into it, and then execute a pour-over will to transfer other assets to the trust upon death.
(1) establish a Nevada series LLC to own and hold, but not manage, investment properties and businesses (a holding company) achieving a measure of physical and legal distance plus anonymity from Texas plaintiffs;
AP Level 4: Texas-Nevada Combination (“Hub-Sub”) for Multiple Enterprises
(2) form a separate stand-alone Texas LLC (no cross ownership) to act as a shell management company (no significant assets) to acquire properties and then after closing transfer them to the holding company; meanwhile the management company signs leases and contracts and deals with tenants, vendors, contractors, and the public; income passes through to the holding company as consulting fees and returns to the management company, if needed, as management fees;
(3) file assumed name certificates (DBA’s) for both the holding company and for the management company and utilize these names in all dealings;
(4) establish checking accounts for each company under their respective DBA’s and have checks, letterhead, cards, etc. printed that way, and phone numbers listed that way;
(5) transfer properties held in personal names into individual series of the Nevada holding company (Series A, Series B, etc.) using deeds that cite series protections;
(6) separate homestead and other creditor-exempt items from investments and businesses, then reduce debt on these items in order to maximize protections afforded by the Property Code and Texas Constitution;
(7) form a living trust for the homestead to avoid probate, transfer the home into it, and then execute a pour-over will to transfer other assets to the trust upon death.
(1) Establish a Nevada series LLC (the hub company);
Role of Trusts in Asset Protection
(2) form a Texas LLC (series or traditional) for one enterprise, designating Series A of the Nevada company as sole member and manager;
(3) form another Texas LLC (series or traditional) for a second enterprise, designating Series B of the Nevada company as sole member and manager; and so on,
(4) resulting in separate businesses insulated from one another and protected by a double liability firewall.
Trusts come in all shapes and sizes so do not be fooled–there is no standard form of a living trust, land trust, or anonymity trust that is good for all purposes in all states. Texas has its own trust laws and practices and any trust agreement used must be compliant to be effective. So long as it is drafted properly, a trust can be useful in providing:
(1) Anonymity (although as noted previously this may generate issues with title companies and require clean-up prior to sale);
(2) ease and privacy of transferability, since beneficial interests can be assigned without recording a deed or other instrument; and
(3) probate avoidance, since beneficiaries acquire their interests automatically without probate or court intervention.
Caution: A trust does not have a liability barrier as does an LLC, so trusts standing alone are insufficient for asset protection. Trusts are merely one tool in the investor’s toolbox.
Since both title companies and courts want to see a trust agreement before conceding that a trust actually exists, a written trust agreement must always be prepared.
Apart from investment land trusts, there are also living trusts (see the chapter on this subject) which are a valuable probate-avoidance device for the homestead. Anyone who has probated an estate is familiar with the procedural nightmare that can occur when dealing with attorneys and judges who will happily reduce your castle to rubble.
Anonymity and an LLC
Anonymity is a legitimate goal that is more important to some investors than others. Those for whom there is pending or threatened litigation would certainly fall into this category. Such an investor’s goal should be to achieve maximum anonymity combined with the liability barrier created by one or more LLCs. An anonymity strategy creates legal, practical, and psychological obstacles to a potential creditor/plaintiff.
An LLC provides a measure of anonymity depending on the amount of information that is disclosed in the Certificate of Formation (or Articles of Organization in the case of Nevada). The COF requires three names and addresses: the registered agent (physical address only), the initial manager (a post office box is acceptable), and the organizer (often the attorney).
Anonymity begins at LLC formation. Avoid using the home as the registered address. Disclosing it hardly enhances anonymity, nor does it prevent a constable from banging on your door at 5:30 a.m. to serve a lawsuit. The world is both a legally and physically dangerous place. We have even had a client whose home was bombed by an angry tenant. Tenants, vendors, contractors, and the public at large should never have an investor’s homestead address.
The COF requires a physical address, not a box, since the constable cannot serve a mailbox. Recently, the Secretary of State has become more aggressive in checking whether or not registered addresses are really mailbox stores. They occasionally even google the address. If they think it is a box, the COF will be rejected.
It is recommended that an investor should either use his or her office address or use an attorney as registered agent of the company (which also has the benefit of invoking the attorney-client privilege under certain circumstances). Otherwise, arrangements must be made for a registered agent at a real street address, which cannot contain PMB, POB, Box, a double suite number, or any other indication of a box.
Back to the COF, which requires the designation of an initial manager. This is usually where the owner’s name goes. However, a creative approach is to name an anonymity trust in this capacity, but this is an advanced technique to be used only with guidance from a specialized attorney. An additional benefit: one now has an anonymity trust, backed by a trust agreement, that is able to be utilized for other purposes beyond its role as member and manager of the LLC–including buying more property anonymously. This is an example of how the component parts of an asset protection structure can work together synergistically.
The Role of Insurance
Is liability insurance alone is sufficient for asset protection? The answer is a resounding no. Insurance is a passive measure. True asset protection requires one to be proactive. Asset protection experts unanimously recommend a sensible mix of insurance and active asset protection measures. The principal reason is that insurance can never be truly relied upon, since insurers are in the business of collecting premiums and denying claims. That is what they do. That is their business plan, which is why they are among the wealthiest corporations in America. Expect that every effort will be made by an insurer to exclude or avoid coverage in case of loss, particularly if a creditor/plaintiff alleges fraud, which is never covered. It may then become necessary to sue the insurance company.
Even if an insurer concedes coverage, extravagant claims made in lawsuits may (and often do) exceed available limits. Moreover, the existence of a sizable policy and umbrella may actually encourage a lawsuit because it will be perceived by the plaintiff’s attorney as a tempting target. Nonetheless, having adequate insurance is a necessary evil.
Bankruptcy is the nuclear option in asset protection, being broadly effective. Even so, rules against fraudulent transfers ("preferences" in the Bankruptcy Code) apply in this area as well, and more strictly. The bankruptcy court can reach back a year or more. Also, false information in a bankruptcy petition may be investigated by the FBI. And of course bankruptcy does not discharge income taxes (although the IRS may be more likely to work with you on a payment plan), child support obligations, student loans, and any items that a filing debtor fails to list on the petition.
The Bankruptcy Code allows a debtor to choose between the federal exemptions (i.e., list of exempt assets) or the state ones. In Texas it is more common to choose the state exemptions since they are so favorable.
By and large, filing bankruptcy is an admission that previous asset protection strategies have failed. The bankruptcy trustee and the court assume control of your life. It is a last resort.
One’s lifestyle should be consistent with maintaining an effective asset protection strategy. In addition to all the other suggestions relating to anonymity, creating a liability shield, maximizing protections under the homestead laws, and the like, one should:
(1) avoid conspicuous consumption–live a notch below your means (at least outwardly) so as to make a less appealing target for plaintiffs and their attorneys;
Other Asset Protection Devices
(2) avoid personally guaranteeing any business debt or cosigning on others’ notes;
(3) carry health and term life insurance on yourself as well as key man term life insurance on your business partners;
(4) avoid all forms of debt that do not result in an income stream, including nearly all consumer debt which, after the thrill of possessing a new item dissipates merely serves to keep you up at night;
(5) reduce all business arrangements–including those with family and friends (especially those with family and friends)–to a written agreement that contains an exit strategy, including buy-sell and dispute resolution provisions;
(6) diversify assets and investments, preferably within one or two LLC’s, at least one of which should be a series company; and
(7) put 5 to 10% of your assets into gold, cash, and other doomsday assets. The worst case scenario could actually happen. Some think it is happening already.
There are many other asset protection devices and entities that are beyond the scope of this discussion. Included among them are
Family Limited Partnerships. Texas FLPs (like LLCs) must be filed with the state and pertinent ownership information is revealed; also an in-state registered agent must be designated to receive service of process if the partnership is sued. So why not just form an LLC (especially a series LLC if assets are in real estate) and then move title to assets into a land trust? The result is arguably superior liability protection and anonymity. Another drawback of the FLP is its concept of a friendly lien on the homestead, not very workable in Texas.
Asset Protection in the Real World
Limited Partnerships with an LLC or Corporate General Partner. These vehicles are more complex and expensive and are usually employed in larger commercial transactions, which are beyond the scope of this article.
Total asset protection is probably not achievable, even in Texas, in spite of claims made by Internet and seminar gurus (and even some lawyers) who have never spent time in a real court of law in front of a real judge who has contempt power. Do you recall Einstein’s theory that a traveling spaceship may approach the speed of light but never actually reach it? Asset protection is like that. The goal is to get as close to an ideal AP situation as possible, by using the correct structure and by layering asset protection devices.
To summarize, asset protection is ultimately about preparation and advance planning that have the effect of establishing a sound structure, deterring lawsuits, and exhausting your opponent’s determination and resources. If you can make it difficult to find your assets and make it unacceptably expensive and time-consuming for a plaintiff’s attorney to reach them, then your asset protection plan has done its job.
Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. 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 expressly retained in writing to do so.
THIS DOCUMENT IS NOT INTENDED TO BE USED, NOR CAN IT BE RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES IMPOSED UNDER UNITED STATE FEDERAL TAX LAWS. THIS DOCUMENT DOES NOT CONSTITUTE DOES NOT CONSTITUTE A TAX OPINION OR OTHER ADVICE TO WHICH CIRCULAR 230 IS RELATED.
Copyright © 2016 by David J. Willis. All rights reserved worldwide. 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 website, http://www.LoneStarLandLaw.com.