Asset Protection in Texas

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 businesses to shield income and assets (particularly equity in real property).

Individual Texans may claim the unique and extensive protections afforded by the Texas Constitution and the Property Code. These are always available and generally do not require any special action, although a certain amount of planning and re-arranging of assets may be advisable in order to convert non-exempt items into exempt items if one anticipates being sued.

The next level of protection is achieved by forming one or more Texas limited liability companies (LLC’s) which create a liability shield for the protection of member-owners. Additional tools include use of land trusts for anonymity; use of assumed name certificates or “DBA’s;” and use of an attorney as registered agent or trustee who has the power to invoke the attorney-client privilege. The goal should be to achieve maximum anonymity combined with a solid liability barrier, all of which provide legal and practical obstacles to a potential plaintiff. When properly implemented, an asset protection strategy will deter the filing and pursuit of lawsuits and also make it difficult to collect on a judgment.

Texas has an established history of protecting debtors. 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 strategies fall into two groups – strategies implemented in advance of collection action and suit and those that can be accomplished afterward. It is by far preferable to plan ahead and be prepared, since the range of pre-suit alternatives is much greater. After suit is filed, depending on the circumstances, options may be reduced to converting assets to homestead exempt items, moving into cash, and pre-paying certain key items.

The basic elements of pre-suit asset protection are:

•   creation of an LLC to hold title to properties and establish liability barrier;
•   anonymity (creation of trust and/or DBA for the title-holding LLC);
•   separation of management or operating functions into a separate shell LLC;
•   attorney-client privilege (use of attorney as registered agent or trustee);
•   review and rearrangement of personal holdings to insure falling within constitutional and Property
            Code protections for individuals.

Once litigation is commenced you lose the prerogative of private action, because the discovery process (including interrogatories and requests for production of documents) is available to creditors to inquire into your transactions. Failure to fully respond is grounds for contempt – although “fully respond” should never be interpreted as supplying any more information than is absolutely necessary. Generally speaking, creditors have only the information that you give them.

The most pernicious discovery occurs post-judgment, since at that time creditors can compel disclosure of sources of income and the location of assets – even assets that are legally exempt. This can be a headache since creditors may go after the exempt assets, forcing a debtor to seek protection from the court. It is important that your attorney understand how to make a creditor fight vigorously for every bit of information that is provided.

The usefulness of post-collection asset protection strategies are also 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 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 (eg., made his cash disappear).

Texas has excellent LLC laws and is recommended for simplicity of operation. Now that Texas offers a series LLC (in which assets and liabilities can be compartmentalized) the incentive for Texans to form a company in Delaware or Nevada is reduced if not eliminated. Also, forming an out-of-state company 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. It is suggested you read two companion articles on this site, LLC Formation in Texas and LLC Documents 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 attempting to seek control of your membership interest or the membership interest of a fellow member. Provisions should be included in the company agreement to the effect that any creditor succeeding to a membership interest by means of assignment, 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. It is not enough to rely on a membership interest being exempt from a so-called “charging order.” 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.

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.

Internet services allegedly provide “self-help legal services at your specific direction.” This is internet huckstering at its worst. All LLC’s are not created equal. At best internet services provide a “plain vanilla” company with no bells or whistles; there is no focused effort to maximize asset protection.

Here is what such services do not provide:

• NO comprehensive advice on how to structure your business and investments so as to achieve an overall
          asset protection plan


• 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 use the LLC in conjunction with a land trust


• 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 simplistic and barely above the level of junk. This office spends a fair percentage of its time cleaning up the inadequacies in companies formed this way.

A trust is most effective when used in conjunction with an LLC. This is so 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.

How do an LLC and trust work together? 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. Example: title to property is held in the name of “Main Street Trust.” An LLC is the primary beneficiary of the trust, but this fact is contained in the trust agreement, which is a private, unrecorded document. Anyone seeking to know who the principals are and what assets they may have has their work cut out for them.

Note that under Texas law one must actually create a written trust agreement for this strategy to work. Also, a title company will want to see a copy of the trust before transferring title out of the trust to a new buyer. Additionally, courts are likely to ignore the existence of an alleged trust that has no written agreement behind it.

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

As is the case with LLC’s, no discount internet service should ever be used to form so technial and important a device as a land trust. For one reason, there are many different kinds of trusts and they can be formed for purposes other than asset protection – for tax reasons, for example, or for probate avoidance – or even a customized combination of all of these. No “standard form” exists. Also, Texas has very particular trust laws. The Texas Trust Act is part of the Property Code. Consult a Texas attorney experienced in trusts if you want to be certain that your trust will be valid in Texas.

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.

More information is available in our companion article, Land Trusts in Texas. Trusts of this type should be distinguished from popular probate-avoidance trusts, which are addressed in our article Living Trusts in Texas.

A real estate 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.

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 an LLC, the attorney can organize the company, list his name as the initial member and registered agent, and then privately assign his membership interest to the client. Result? The client’s name does not appear in public records.

In the case of a trust, the attorney can be named as trustee but then appoints the investor’s LLC as managing agent and attorney-in-fact to conduct day-to-day operations.

In both cases, expect that the attorney will charge extra for the services and risks involved.

An additional option is to create an offshore entity (Panama or the Cayman Islands are our preferred jurisdictions) which will own the Texas LLC or operate in tandem with it. This structure is entirely legal and provides superior asset protection. It makes assets very difficult and expensive to get to – usually requiring obtaining a U.S. judgment first, then persuading a foreign jurisdiction to honor that judgment and execute upon it, which can take years and tens of thousands of dollars out of a creditor’s pocket. Offshore entities also allow flexibility in holding some of your assets in currencies other than the dollar.

Note that asset protection is an entirely separate concept from tax avoidance. All U.S. citizens must pay tax on income, wherever and however earned. Use of an offshore LLC or any other entity to cheat the IRS invites trouble of the worst kind, particularly in light of the 2009 settlement in the UBS case in which the names of holders of thousands of Swiss bank accounts (formerly sacred) were turned over to the U.S. government. One can pay one’s taxes and still achieve substantial asset protection.

It is often asked if obtaining liability insurance alone is sufficient. The answer is a resounding “No.” Insurance is a passive measure. It is possible to be far more proactive. 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 or avoid coverage in your case (particularly if the plaintiff alleges fraud, which is never covered). It may then become necessary to sue the insurance company.

Also, even if the insurer concedes coverage, extravagant claims made in lawsuits nowdays may (and often do) exceed available limits. 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!

Bankruptcy – Chapter 7 in particular - is the “nuclear” option in asset protection. Even so, rules against fraudulent transfers (called “preferences” in the Bankruptcy Code) apply in this area as well. Also, false information in a bankruptcy petition may be investigated by the FBI; and of course bankruptcy does not discharge 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 debtor fails to list on the petition.

The Bankruptcy Code allows a debtor to choose between the federal exemptions (ie., list of exempt assets) or the state ones – and in Texas we always choose the state exemptions since they are so favorable. These are summarized later in this article.

By and large, filing bankruptcy is an admission that your previous asset protection strategies have failed. The bankruptcy trustee and the court assume control of your life. It is a last resort. This office does not handle bankruptcy – we recommend obtaining a board-certified lawyer in the field.

There are many other asset protection devices and entities that are beyond the scope of this introductory article.

There is much discussion about family limited partnerships (FLP’s) in states other than Texas. For Texas asset protection, this author prefers LLC’s and/or trusts. Texas FLP’s (like LLC’s) 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 superior liability protection and anonymity. Another drawback of the FLP is its concept of a “friendly lien” on the homestead, which is not workable in Texas.

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

Texas offers unique homestead protections for individuals that should be integrated into any asset protection plan. These protections are contained in Art. XVI, Sec. 50 of the Texas Constitution and in Chapters 41 and 42 of the Texas Property Code. They 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, Lien Removal in Texas.

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 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.

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.

Our companion article, Homestead Protections in Texas, offers more detail on this subject.

Absolute, “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 (which is not to say that an overseas entity may not be useful – see below).

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 is imposed on a potential plaintiff or his attorney makes your income and assets incrementally more secure and makes it less likely that you will have to endure the living nightmare of a lawsuit.

InforInformation in this article is proved for general informational and 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 expressly retained in writing to do so.

Our fees for LLC formation (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 $100 if the company is to be organized as a series LLC; $250 annually for the attorney to serve as registered agent; and $550 (one time) if the attorney acts as organizer and initial member so that your name does not appear in public records. Important: an attorney will not do this if there is any reason to believe that it is being done for purposes of fraud. If you are seeking to form an offshore entity, expect fees to be in the $2,500 range. Our article LLC Formation in Texas contains a checklist of information that will be needed from the client in order to form the LLC.

Fees for creation of land trusts range from $450 to $750, depending on the type and complexity of the trust.