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A primary purpose of a Texas 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 rental property, should be held in the name of a Texas LLC – never in a personal name.

The New Texas Series LLC

The Texas Series LLC is now the vehicle of choice for real estate investors.  Unlike a traditional Texas LLC, a series company permits a single entity to hold multiple properties in separate “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. 

Texans formerly had to go out of state (e.g., Delaware) to obtain a series company.  With the recent changes and improvements to the Texas Business Organizations Code (the “BOC”), there is now no good reason to do so unless one is contemplating going entirely offshore (Panama, for instance).  The Texas BOC is a model of progressive legislation.

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 Formation in Texas and Asset Protection in Texas.

Deeding Property to the Texas LLC

If possible, rental or investment property should be acquired in the name of the Texas LLC.  Often, however, lenders require that an investor take the property in his or her personal name.  If that is the case, then the property should be moved into the company by means of a general or special warranty deed without delay. 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, thereby losing series 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.  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 security property 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 factor, but a negligible one in most cases.

What should be done with homestead?        

 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 on LoneStarLandLaw.com entitled Homestead Protections in Texas). Instead of an LLC, it is highly 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 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.  Go to LoneStarLandLaw.com and read Living Trusts in Texas for details.

Asset Protection

Asset protection in Texas is about (1) creating a barrier to personal liability with one or more Texas 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:

1. establish a Texas Series LLC for investments and businesses;
2. form a shell management company (LLC) for dealings with tenants, vendors, and the public;
3. file assumed name certificates (DBA's) for the series LLC and for the management company;
4. transfer properties held in personal names to the series LLC;
5. pay down homestead, personal vehicles, and other exempt items;
6. form a living (inter vivos) trust for the homestead to avoid probate and achieve a measure of anonymity, and then execute a pour over will to go with the trust.

For more details, see Asset Protection in Texas.

The Importance of Good LLC Documents

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” are insufficient and can actually be harmful to your asset protection goals.  Specialized, sophisticated asset protection provisions should be included in both the certificate of formation and the company agreement. Instead, internet services supply only the most basic documents and never include such provisions.  No serious investor or businessperson should ever consider using this method to form an LLC, especially a series LLC.

General Warranty Deeds vs. Special Warranty Deeds

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.  

Clauses in the Deed

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.

If two spouses are on title, then both must sign the deed into the Texas LLC.

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: 

1. transfers to a family member;
2. whether or not suit was threatened before it was filed;
3. whether the transfer was of substantially all of the person's assets;
4. whether assets have been removed, undisclosed, or concealed;
5. whether there was equivalent consideration for the transfer; and
6. whether or not, after the transfer, the transferor became insolvent as a result (eg.,made his cash and property disappear).

Transferring investment property to a Texas 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.