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Texas has an established history of being a haven for debtors. For more than a hundred years, there has been a saying "So-and-so has gone to Texas." Sometimes this meant that someone had physically relocated to Texas; just as often it meant that he had left town to avoid his creditors. This grand (if ethically dubious) tradition continues. The Texas Property Code, the Texas Business Organizations Code, and the Texas Constitution make it possible for individuals and businesses to shield substantial income and assets (particularly equity in homestead real property) from execution upon a judgment. Together, these Texas laws make the Lone Star state an ideal venue for asset protection.

Texas offers unique protections for individuals that should be integrated into any asset protection plan. These "homestead protections" are principally 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. In other states, execution on a judgment can strip you of your possessions and put you on the street – but not 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 the collection process. It is even wiser to formulate an asset protection strategy long before these 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, 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. Furthermore, an attempt by 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.

It is also possible to move safely from one homestead to another. The Property Code 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 equity to be rolled over from one homestead to the next. 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 Sec. 41.001(5)(c). Some title companies have a reflex reaction requiring that all judgments on Schedule C of the title commitment must be paid or released. In such cases, if the property is homestead, then the seller should aggressively assert Sec. 41.001(5)(c). If the title company continues to insist that the judgment be released, then the remedy is to change title companies.

Sec. 28 of the Constitution prohibits garnishment of wages, which protects the income of a person who receives a salary or wages. A creditor cannot touch either one.

A considerable amount of personal property is also exempt from execution. Property Code Sec. 42.001 et seq. specifically lists 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 (see Prop. Code Sec. 42.0021); college tuition funds (including IRS Sec. 529 funds and accounts established under Subchapter F, Chapter 54 of the Education Code) which are exempted under Sec. 42.0022; and the cash value of annuities and life insurance policies exempted under Sec. 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.

Cash is the most vulnerable of all assets, even in Texas. Prop. Code Sec. 42.0023 protects $5,000 in cash, but this is not much comfort if you are sitting on $50,000 or $500,000. Cash should be promptly converted to homestead-exempt assets or progressively, incrementally withdrawn from the bank in the orderly course of business or personal life. No asset protection lawyer can shield cash over $5,000 held in a bank in a client´s name.

Note that only individuals (not corporations, LLC´s, or partnerships) may take advantage of homestead protections. In most cases, this means converting non-exempt assets (cash, for instance, or investment real estate) into exempt assets – and doing so without delay if collection action or a lawsuit is likely. As an example, one might consider paying off the homestead or primary vehicles. The conversion process can be tricky, particularly if a lawsuit is already pending, but it is nonetheless best to go ahead and do it. If challenged, assert the "ordinary course of business" defense.

The guidance of an attorney knowledgeable in asset protection is essential. Our companion article, Homestead Protections in Texas, offers more detail on this subject.

Clearly, if one owns one's home debt-free or has investment property or cash balances, the statutory homestead protections are not enough. The next level of protection is achieved by forming a Texas Series LLC which accomplishes two critical goals: it creates a liability shield for the protection of member-owners; and it creates individual "series" or compartments which, when properly implemented, insulate each series from the liabilities associated with the other series. Visualize a firewall between Series A, Series B, etc. The benefits? Simplicity and economy. An investor no longer needs multiple entities (LLC´s, LLP´s or corporations) to safely do business.

Our recommended asset protection structure involves two LLC´s – one to hold title to assets (the "holding company") and the other to manage them and engage in business generally (the "management company"). The holding company may either be a Texas Series LLC or a Nevada Series LLC. It stays quietly in the background (in legal terms, it avoids contractual "privity" with anyone). The management company is a separate, stand-alone entity with no real assets that does business with the public (and therefore intentionally attracts possible lawsuits). It is a disposable shell that leases office equipment and vehicles, employs personnel, etc. The conceptual key to this two-company structure is that it separates activities from assets.

Not only does the management company become an intentional target for lawsuits, but – since it remains a shell – the remedy if sued is simply to form a new management company and continue business as usual. If the lawsuit results in a judgment, the loss to the investor is minimized. Furthermore, using the two-company structure enables your attorney to successfully argue to a court that the holding company should not be a defendant in the suit since it has no "privity" with the plaintiff.

All LLC documents – beginning with the Certificate of Formation ("COF" in Texas) or Articles of Organization (Nevada) and continuing with the company agreement, the first meeting of members (also called the organizational meeting), and other documents – should be drafted with an eye toward asset protection. Every company document should be prepared with the expectation that it will be intently scrutinized by both an opposing attorney and a judge. Using minimal "forms" for LLC documents will therefore not do the job of asset protection.

As previously mentioned, a big part of asset protection is deterrence. Public (i.e., 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; it should go into specific detail concerning matters such as series separation and insulation. It should also declare that there are two classes of membership interest – Class A for "regular" members and Class B for creditors who acquire an interest in the company. A creditor succeeding to a membership interest (whether by assignment, collection action, execution on a judgment, or any other means) falls automatically within Class B. The creditor is therefore unable to vote its membership interest; may not serve as a manager or officer; may not direct that assets of the company be encumbered or sold; and may not alter or reduce in any way the company's ability to do business. What sensible plaintiffs´ attorney would want to spend time and money suing a company when he knows in advance that even victory would be worthless? For more detail, read our companion article LLC´s in Texas – The Series LLC.

One of the first goals is to transfer investment property into the company. In the case of real estate, this is done by means of a general or special warranty deed; if the asset is a business, then a bill of sale is used (plus a deed if the transfer involves real property); other assets may call for an assignment of interest. Each of these executed documents 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 your lender or internet alarmists may tell you. Lenders have their plates full with monetary defaults and generally do not accelerate a current, performing loan in such circumstances, especially if the property is being transferred to borrower's personal company. Refer to our companion article, Due-on-Sale Clauses in Texas.

Tenants, creditors, vendors, and the public generally should be instructed that they are doing business with the DBA of your LLC (or, if you are utilizing our preferred two-company strategy, with the DBA for the shell management company). They should sign contracts, send invoices, make payments, etc. – all to the LLC´s DBA and never to the investor/owner directly. When a W-9 is required, it should contain the LLC's tax identification number. There is an old rule of thumb that people tend to sue the person or entity they write checks to . . . so ideally, the investor/owner´s personal name, address, or social security number should never appear anywhere on any paperwork or documents. When a personal name appears, what does an opposing attorney see? A potential additional defendant.

Once a company is formed, it must be maintained with appropriate actions and documentation. There are minimum actions and formalities that should be observed in order to order to preserve the LLC´s liability barrier – which is the main reason one forms an LLC in the first place. These include proper organizational documents including an organizational meeting and a company agreement; issuing membership shares; holding annual meetings; obtaining a TIN number and filing tax returns; having a company bank account; and other actions which establish the independent nature of the entity. Failure to do this sort of routine "company maintenance" is a common mistake. It can make your company vulnerable to a "piercing the veil" suit and therefore be fatal to your asset protection plan.

Asset protection strategies fall into two groups – strategies implemented in advance of collection action or suit by a creditor/plaintiff; and strategies that can be put into effect 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 are reduced by laws relating to "fraudulent transfers" – moving assets around to defeat the legitimate claims of creditors – and courts are on the lookout for these. For details, look at Chapter 24 of the Texas Business and Commerce Code entitled "Uniform Fraudulent Transfer Act." The purpose of the 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, not pet.).

After suit is filed, the Texas defendant is largely limited to converting assets to homestead-exempt items (one´s primary residence, cars, etc.), moving depository accounts into cash and USPS money orders, and pre-paying certain key items (taxes, attorney´s fees, and the like which are unlikely to be questioned as fraudulent). Even these measures may be challenged under Property Code Sec. 42.004, which states that an exemption is lost if non-exempt 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. Accordingly, these steps should be taken prudently and incrementally, over time, so as to be able to justify this defense

Once litigation is commenced, the defendants´ actions during the suit will likely be subjected to scrutiny by the creditor/plaintiff and its attorney. Obvious attempts to maneuver and manipulate assets will likely be detected, so any actions along these lines should be subtle and incremental and accomplished in the ordinary course of business. Otherwise the creditor/plaintiff may ask the court to set aside or unwind a transaction as fraudulent (i.e., specifically intended and designed to defeat creditors' legitimate claims). Fraudulent transfer rules allow courts to reach back up to two years. Such 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 (e.g., made his cash disappear all at once).

In post-suit strategy, it is important to move assets in such a way that you can utilize "the ordinary course of business" defense contained in Prop. Code Sec. 42.004(c). In other words, one needs to be able to convince the court that the action in question is something one might legitimately have done anyway, for good reasons that are independent of avoiding creditors´ 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 their business.

How do creditors that are suing you find out when you move your assets around? By using the discovery process (interrogatories, requests for production of documents, and depositions – all under oath) to inquire into your 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. Creditors may do research on you – particularly if the debt is substantial – but most of the time creditors have only the information that you give them in pre- and post-judgment discovery.

The most pernicious discovery occurs post-judgment, since creditors 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 since creditors may nonetheless attempt to go after the exempt assets, forcing a debtor to seek protection from the court. You can see why it is important that the defending attorney make a creditor fight vigorously for every bit of information that is provided in responses to discovery.

An 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 is intentionally designed as a shell or pass-through, without substantial assets. Many people already have an LLC or corporation and wonder what to do with it now that a Series LLC is available in Texas. Utilizing the existing entity as a management company is an excellent option, so long as it is "clean" – without pending litigation or judgments, unpaid taxes, extensive contractual obligations, or other adverse baggage.

The management company should own no substantial amount of real or personal property – ideally, it should lease everything, including office equipment and vehicles. It should also hire and pay employees. The public should do business solely with your management company (more specifically, with your management company acting through its assumed name) and not even be aware of true underlying ownership or the location of assets – which are of course held in your Texas Series LLC or your Nevada Series LLC.

Why this structure? In addition to its management duties, the role of the management company is to serve as a target that is deliberately put "out there" to draw fire away from the owners and their assets. If anyone sues and obtains a judgment against the management company, it will be uncollectible. If the management company becomes burdened with lawsuits, then it should be abandoned and a new one formed.

What is to keep the creditor/plaintiff from suing the holding company? The legal doctrine of "privity." Since the holding company has not signed leases or contracts or done any direct business with anyone, it is highly unlikely that legal action can be successfully maintained against it. Any such suit would be subject to dismissal on a motion for summary judgment.

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.

An appropriately drafted trust can be useful because it can provide:

Note, however, that a trust does not have a liability barrier as does an LLC – so trusts standing alone are insufficient for asset protection, although such a trust may be useful for anonymity purposes. Trusts are merely one tool in the toolbox.

How do an LLC and trust work together? Once the LLC is established, it can choose to transfer its investment properties to an "anonymity trust" which indicates nothing of record about real underlying ownership. Example: title to property is transferred from "ABC LLC" (an entity of record with the Secretary of State) into the name of the "Main Street Trust" (a private entity that has no public information available).

It is untrue that one must name the trustee in the deed, at least for purposes of recording, since county clerks gladly record such deeds so long as they are property acknowledged. Anyone seeking to know who the principals are and what assets they may have has their work cut out for them. Note, however, that certain title companies object to this approach based on the theory that a trust is not an actual entity under Texas law (true) and therefore cannot hold property if the trustee is not specifically named in the deed; other title companies will, for purposes of subsequent transactions out of the trust, be satisfied with a copy of the trust agreement. The worst case scenario is that the title company you are working with will require that the deed into the trust be re-done and re-recorded naming the trustee. This is a minor inconvenience, since anonymity has nonetheless been preserved during the time of ownership. For most of clients, this represents "mission accomplished."

We are occasionally "lectured" by a title company attorney on this trust issue as if we do not know what we are doing in this area. On the contrary, we know exactly what our goals are and how to achieve them.

A written trust agreement must actually exist for this strategy to work. There are two good reasons for this: as mentioned above, a title company may want to see a copy of the trust agreement before transferring title out of the trust to a new buyer; and secondly, courts are likely to ignore the existence of an alleged trust that has no written agreement behind it.

Apart from investment land trusts, there are also living trusts which are a valuable probate-avoidance device for the homestead and should be considered by everyone who owns a home and has a family. Anyone who has probated an estate is familiar with the procedural nightmare that occurs when dealing with attorneys and judges who will happily reduce your "castle" to rubble.

Do not be deceived into purchasing so-called standard land trusts off the internet. Firstly, there is no such thing as a "standard trust form," in any state; secondly, Texas has very particular trust laws which can be found in the Texas Trust Act (part of the Property Code). Consult a Texas attorney experienced in investor and anonymity trusts to be certain that your land trust will not only be valid in Texas but will accomplish what you want it to do.

More information on investment trusts is available in our companion article, Land Trusts in Texas. Information on probate-avoiding living trusts for the homestead can be found in Living Trusts in Texas.

An investor´s goal should be to achieve maximum anonymity combined with the liability barrier created by one or more LLC´s. Such a strategy creates legal, practical, and psychological obstacles to a potential creditor/plaintiff.

Anonymity is an important aspect of asset protection. An LLC can provide a certain measure of anonymity depending on the amount of information that is furnished to the Secretary of State when the initial document (the "Certificate of Formation") is filed. The Certificate of Formation requires three names and addresses: the registered agent (physical address only), the initial manager (POB acceptable), and the organizer (this firm). This firm is available to act as registered agent for an annual fee.

A word about the company´s registered address: some people go to the trouble of forming an LLC but then list their home as the registered address. This hardly enhances anonymity, nor does it prevent a constable from banging at your door at 5:30 a.m. to serve a lawsuit. A physical address (not a box) is required, 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 Certificate of Formation will be rejected.

Either use your office address, if you have a physical office; use your attorney as registered agent of the company ($250 annual charge) – this also invokes the attorney-client privilege under certain circumstances; or make another arrangement for a real