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A primary purpose of a Texas or Nevada LLC (whether the company is a series company or a traditional LLC) is to provide asset protection, i.e., protection from personal liability for its members. For this reason, any property that could potentially generate a lawsuit or other liability, especially investment and rental property, should be held in the name of a Texas or Nevada LLC - never in a personal name.

The series LLC – we prefer series companies formed in Texas or Nevada – is now the vehicle of choice for real estate investors. Unlike a traditional LLC, a series company permits a single entity to hold multiple properties in separate, insulated "compartments" – for example, Series A, Series B, and so forth. The assets and liabilities of each series are confined to that series only. In other words, if there is a lawsuit or a foreclosure that affects the property in a certain series, the other series are not affected or in any way liable for the outcome. Because of these features, the traditional Texas LLC should be considered only for single-purpose projects.

For a summary of the advantages of LLC´s and related topics, see our companion articles on TexasSeriesLLC.com and LoneStarLandLaw.com. These include LLC´s in Texas – LLC Formation and LLC´s in Texas – Series LLC.

If possible, rental or investment property should be acquired in the name of a Texas or Nevada series LLC. Often, however, lenders require that an investor take title to the property in his or her personal name for underwriting reasons. If that is the case, then the property should be moved into the new owner´s investment LLC without delay, using a general or special warranty deed. When deeding property into a series company, the deed should specifically reflect which series the property is going into; for example, title could be taken into the name of "ABC, LLC – Series A." Failure to do this will result in the property being held as a general asset by the company at large, thereby losing series insulation and protection.

Investors occasionally wonder if they should be worried if there is a "due on sale" clause in their deed of trust. There are two points to note on this subject. First, the standard due on sale clause contained in the FannieMae deed of trust prohibits nothing; it merely gives a lender the option to accelerate a note if a transfer of title occurs – so it is not correct to say that such a transfer "violates" or "breaches" the due on sale clause. Lenders may choose whether or not to act under this clause.

Second, lenders seldom protest transferring real property into a personal company and, in any case, are far more concerned with loans that are in monetary default. Some lenders will send a threatening letter if they discover that their collateral has been transferred, but little comes of it so long as the note is kept current – nor is credit affected. The due on sale clause is a risk factor, but a negligible one in most cases.

It is neither necessary nor advisable to transfer a homestead into an LLC that holds investment properties. As a general rule, homestead-exempt assets should be kept separate from investment assets. One reason is that the homestead is already protected by the Texas Constitution and the Property Code against forced sale or execution upon a judgment (See our companion article entitled Homestead Protections in Texas). Instead of an LLC, it is recommended that the homestead be transferred into a living trust, also called an inter vivos trust. Such a trust does not provide a liability barrier, but this not usually necessary because homestead laws do substantially the same thing; what the living trust does do is provide for the transfer of a "beneficial interest" in property upon death without the delay and expense of probate. This is a huge benefit. There is nothing to lose and everything to gain from using such an arrangement. A "pour over" will should then be executed along with the living trust to complete the picture. Read Living Trusts in Texas for details.

Asset protection in Texas is about (1) creating a barrier to personal liability with one or more Texas or Nevada LLC´s, at least one of which should be a series company; (2) maximizing anonymity in the public records; (3) utilizing homestead protections afforded individuals by the Texas Constitution and the Property Code; and (4) deterring lawsuits and judgment creditors and, in the event of suit, exhausting their determination and resources. Planning ahead is critical. The benefits of asset protection measures usually decrease substantially after a suit is threatened or filed.

Although there is no such thing as a "bulletproof" asset protection plan (in spite of whatever internet and seminar promoters may claim) you can get close. The rule is this: the more fences a plaintiff and his attorney have to jump, and the more money they have to spend in order to get to you personally, the better protected you are. A basic but excellent asset protection structure for most real estate investors is the following:

For more details, see Asset Protection in Texas.

LLC documents, particularly the company agreement, should be drafted by a knowledgeable asset protection lawyer to maximize protection of membership interests from creditors. So-called "standard forms" (available on the internet and from seminar "gurus") are insufficient and can actually be harmful to your asset protection goals. Specialized, sophisticated asset protection provisions should be included in both the LLC´s certificate of formation and the company agreement. No serious investor or businessperson should ever consider using a non-lawyer internet service to form an LLC, especially a series LLC.

This distinction pertains to the grantor´s warranty of title. A deed with general warranty conveys the property "to Grantee and Grantee´s heirs, executors, administrators, successors, and assigns against every person whomsoever lawfully claiming or to claim the same or any part thereof." The legal effect of this is to warrant title all the way back to the origins of the real property records. A special warranty deed conveys the property "to Grantee and Grantee´s heirs, executors, administrators, successors, and assigns against every person whomsoever lawfully claiming or to claim the same or any part thereof, when the claim is by, through, or under Grantor, but not otherwise." Title is warranted from the grantor, but no further back than that. Commercial properties are typically conveyed by special warranty deed. Deeds into an LLC may be either with general or special warranty, depending on the situation.

Under no circumstances, however, should a "quit claim deed" be used. Quit claims, technically speaking, are not even true deeds. Texas title companies do not respect these documents, so using them can create problems with the chain of title. Instead of a quit claim, use a deed without warranties.

One factor that should be considered in deeding property into a Texas LLC is whether or not the property is to be transferred with an assumption of the existing loan or "subject to" the existing loan (i.e., the LLC does not take liability for the loan). This choice has accounting implications – for instance, whether or not the company will in the future be carrying the loan on its books as a company debt. Most such transfers are "subject to." An appropriate clause specifying assumption or "subject to" may be included in the deed.

It is also generally advisable to include an "as is" clause in the deed. If the property is rented it may be appropriate to assign the security deposit to the LLC. Consideration should be given to assigning the escrow account as well.

For married investors, it is advisable for both spouses to sign the deed into the Texas LLC (this is a community property state).

If the objective is to protect an asset, it is preferable to transfer that asset into an LLC before trouble arises. Otherwise the usefulness of doing so may be limited by rules against "fraudulent transfers" that reach back up to two years (these rules apply in many foreign jurisdictions as well). Fraudulent transfers are generally indicated by so-called "badges of fraud," including:

Such transfers are called "preferences" in bankruptcy court. Be advised that judges have the power to reach back up to a year or more and void these transfers.

If you did not move property into an LLC prior to a lawsuit or judgment, can it be done now? The answer is a qualified yes – if it is done for consideration and in the ordinary course of business. Since most investment properties carry indebtedness, an example of a transfer for consideration would be the payment of $5,000 (a random number, but one with substance) plus an agreement on the part of the LLC to assume and pay the existing indebtedness on the property. Such a transfer made by an investor into an investment LLC would be perfectly defensible as a transfer for consideration made in the ordinary course of business. It would be difficult indeed for a court to justify setting such a transfer aside.

Transferring investment property to a Texas or Nevada Series LLC should be part of an overall asset protection plan – a plan that should be made prior to a catastrophic event such as a lawsuit or judgment. In preparing such a plan, one needs at least two professional resources: a good CPA to consider the tax ramifications of any action, and a skilled asset protection lawyer who has experience – including courtroom experience – keeping the wolves away.

Note on Legal Fees: This office charges $175 for a cash warranty deed conveying property into an LLC, $225 for an assumption deed. Per-page recording fees (usually about $28, depending on the county) are not included. We need a copy of your existing deed and the name and address of your Texas or Nevada LLC. These can be emailed or faxed to (832) 201-5321. Specify whether the note will be assumed or if the transaction will be "subject to" the loan. Mention any special requirements you may have.

Information in this article is proved for general 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.

Copyright © 2012 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 www.TexasSeriesLLC.com and www.LoneStarLandLaw.com.