All Forum Posts by: Scott Smith

@Mary. Those are good questions. I can tell you're thinking thoroughly about all the legal necessities of establishing a proper trust. I agree with you that you want to make sure the Trust is properly structured, and you will want to get legal advice on that topic. I can tell you though that I believe a Trust is more cost effective than an LLC. Trusts do not have to be registered with the state in the State of Texas, and they do not have any fees from the State of Texas associated with their establishment. This can make a Trust cheaper to establish than an LLC. They are also quicker to establish because they can be created without any delay in processing from the State. If you have any questions about how Trusts can help you as a wholesaler please let me know and I'll consider writing an article about it.

A Series LLC is great tool and I haven't seen any Texas Law that would show that it is vulnerable; however, I also haven't seen anything that convinces me that the Court's strictly uphold the Series as separate entities. In fact, the series is not technically their own legal entities, at least technically. Tex. Bus. & Com. Code §101.622.

Also with Series you're accounting has to be impeccable, or you risk commingling funds and destroying your protections in whole or in part. In fact, series insulation is preserved only so long as "records maintained for that particular series account for the assets associated with that series separated from the other assets of the company or any other series." Tex. Bus. Orgs. Code § 101.601(b)(1). In other words, records must be maintained "in a manner so that the assets of the series can be reasonably identified by specific listing, category, type, quantity, or computational or allocational formula or procedure." Tex. Bus. Orgs. Code § 101.603(b). Implicit in the statute is the idea that assets and liabilities of a series can and should be separate both from the assets and liabilities of other series and those of the company at large.

A Trust structure may be more beneficial since there is a judicial history of upholding them and you don't have the same concerns and liabilities regarding commingling of assets. 

When protecting your assets, build a castle not a fence. You've made the effort to make your money, now keep it. You've built a fence to protect your assets by using an LLC, now learn how using the awesome power of Irrevocable Trusts will build you a castle.

Protecting your assets is about building legal walls to keep out a litigation attorney after a successful lawsuit. Using Trusts builds a strong, high wall to defend against an attacking litigation attorney. The properly structured Trust strategy isolates your assets where if the attorney wins a lawsuit against you or your LLC, they can't get at your prized assets. Poor guys, all that work for nothing.

Think you’re protected with an LLC? Think again…

Assuming you're a real estate investor with 10 properties held in an LLC, you're vulnerable. There are many tricky ways litigators are able to break into an LLC and get access to all your assets even though the lawsuit only pertained to a single property.

LLC protection is limited. The LLC will protect the properties from suits against you individually, but a lawsuit relating to the sale or lease of property will go against the owner, the LLC. In a landlord/tenant dispute or a dispute relating to the sale of a property, the LLC will be liable as the owner of the property. If the opposing party is successful in the lawsuit, they will be able to collect on their judgment against the assets of the entire LLC, all of your properties, not just the property or sale they based their lawsuit on. They will be able to foreclose and auction off your properties at a discount until they have collected enough money to satisfy their judgment.

Poof, there went your years of hard work into the pocket of an attorney.

A Trust stops the fight over your assets before it starts…

The more walls you have, the harder it is for the other side to recover and the more likely it is that they will not even bother filing suit. Lawsuits are a three legged stool, and a Trust destroys one of the legs and the lawsuit crumbles.

The three stool legs which support a successful lawsuit are: (1) legal liability, (2) injuries, and (3) recovery. In layman terms it translates respectively to: (1) the law recognizes liability either by common law or statute, (2) the facts show that the party suffered money damages because of the defendants conduct, and (3) assuming that previous two are true, there are assets which we can take from the defendant to satisfy the judgment. An attorney won’t file a lawsuit without all three legs being in place.

Using a Trust cripples litigation because it makes the pool of assets for recovery, the third leg of our stool, unattractive. Ten properties held in an LLC makes me slobber worse than Saint Bernard because there is likely lots of money for me to go after. A single property doesn't even get me to the keyboard to type a petition unless there is a hefty chunk of equity in the property. Without multiple properties, usually there just isn't enough equity to recover against.

A Trust is the individual stone that builds a castle around your assets

You have all your property held in an LLC and it's time to transfer each of those properties into individual Trusts. You have 10 properties, you'll need 10 Irrevocable Trusts.

A Trust isolates the assets. By establishing an irrevocable Trust, the property is not held in your name or in the name of the LLC, but in the name of the Trust. Since the Trust is the owner of the property, neither you nor the LLC own the property. You or the LLC are merely a beneficiary of the Trust, which entitles you to the income from the property. In effect, you get all the benefits of owning the property without the liability. In a dispute regarding the property, the opposing party will only be able to collect against the asset of the Trust, the Trust property, which hopefully has limited equity.

Why do I hope that the Trust property have limited equity? The lawsuit that is filed against the Trust is limited to recovery against the Trust property. If the mortgage on the property is close to the value of the property, then there isn’t enough equity in the property to justify a lawsuit. Remember, the litigation attorney only gets paid after he auctions off the property and pays off all the liens including the mortgage. The fees for the auction and the costs in litigation to get it to auction are also subtracted from the equity. In the end, there is hopefully little that he and his client will get paid out of. If the attorney can’t make money, they won’t file suit.

THE LAW FAVORS THE PROACTIVE. Set up your Trusts today and rest easy knowing you’re protected.