Asset Protection - Is "Equity Split" Best Rental Protection Strategy?

[Jimmy H.]

In my research of trying to discover the best asset protection strategies, I have come to a conclusion that an "equity split" (as I've heard it referred to) strategy is the best in terms of simplicity, cost and maintenance, and most importantly asset protection.

The strategy in layman's terms looks like this. You set up two LLC's. Real Estate #1 LLC is the entity that holds the actual real estate and operates to collect the rents, etc. Real Estate #2 LLC holds a note against those properties held in Real Estate #1 LLC for the gross amount of equity available. That way when someone tries to sue you there is no equity to be had.

I understand state and local laws differ and all of that good stuff, but am I on the money on this one as being the BEST for protecting rental income property? Opinions?

Also, how many properties (or rather gross value of the properties being held is perhaps more important than the sheer number of buildings) would you hold this way before establishing a new equity split LLC set up?

[Don Konipol]

Your scenario is what is known as a fraudulent transfer. It not only has the badges of fraud, but also intent to defraud. It may slow down a creditor for 30 minutes or so, but no court will uphold the transaction as being arms length.

Unfortunately, Kentucky, unlike Texas and Florida is not a debtor friendly state. So one must use more complicated strategies. Irrevocable Trusts, family limited partnerships, and if enough money is involved Foreign Asset Protect Trusts come to mind. None of these strategies is full proof.

Here is why Texas and Florida are asset protection heavens

1- All money in virtually any retirement plan is exempt from creditor attachment

2- All equity in your home up to an unlimited amount is exempt from creditors

3- All money in annuities and insurance policies are exempt from creditor attachment.

4- Your automobile is exempt from creditor attachment

5- $30,000 per person (in addition to above) is exempt from creditor attachment

6- Wages up to an unlimited amount can not be garnished (except IRS or child support)

The above is not true in Kentucky or most other states.