All Forum Posts by: Scott Smith

I generally recommend investors to own properties under an LLC. The only real exception that I would make for that rule would be for new investors dealing with investments less than 50k, which is a pretty rare exception. The main reason you would want an LLC is in the chance that a lawsuit (in your personal life or regarding your investments) would either exceed or be excluded from your insurance policy. If that happens then the lawsuit can "spill" into anything your name is attached to.

In the case that there is an expensive "slip and fall" at your investment property you might find out that your insurance can refuse the claim, stating you should have known about the unsafe condition of the house. In this scenario you would end up being sued by the tenant and then having to turn around and sue your insurance company - or just take the loss. But if the settlement/judgment exceeds the value of the value of your property they can reach over to your house or other assets to cover the difference.

It's not a common thing, but it does happen. I cut my teeth in New York litigating these insurance companies and I can attest that these are usually rough cases - insurance companies have legal teams to push back on you, and even if they don't have a good case they drag it out for as long as they can to try run your bank dry. LLCs wont stop this from happening, but they can provide stop-gaps in your assets and put you in a better position to negotiate favorable settlements since they can't threaten everything you own. The best asset protection strategies generally include multiple forms of protection. So ideally you would understand what exposure you face and establish an asset protection strategy that is adequate for you and allows you to invest forward without the fear of something bad happening.

P.S. I do love insurance, I just don't rely on it solely. I rely on them for small claims and nuisance claims, since they are amazing at dealing with these for me. But you need to understand that insurance is a business, so they need to avoid the big claims in order to make their bottom-line look as good as they can. This article goes over the general approach I have when building up a new asset protection strategy.

While I do love Series LLCs in regards to their ability to protect growing portfolios, California gets a special exception. California has extended their franchise tax beyond simply applying to individual LLCs, but the tax can also apply to each individual child series within a parent Series LLC. The best strategy I have seen in California to both protect assets and not drive you financially into the ground is the Delaware Statutory Trust. Setting up an asset protection strategy around this entity can save you from paying the franchise fees since it is a disregarded entity, but you can still introduce liability protection into the structure. The article covers it in a bit more detail.

The biggest obstacle is that the DST is more difficult to establish and will often cost a bit more to establish up-front. I find that it pays off the difference within 1-4 years of creating based off of the savings you accrue by not having to deal with the annual fees - the difference depends on how many assets you own. The biggest benefit of the DST is that it also has the "child" series function, allowing you the ability to scale your portfolio without having to create brand new entities each time.

These guys already stated what I would recommend. The main reason you want a new LLC would be because it wouldn't be carrying old liability into this new deal. Even if you have an LLC restructured it can be impacted by the investments that it was used for in the past. And paying an attorney to edit a document will cost nearly the same amount it would to have them write you up a new one.

You can read up a bit on venture specific LLCs in this article, if you are still trying to find more resources on the topic.

There are some banks who will lend to LLCs, but it can take talking to a few lenders before finding one. The only issue with lending is that you face higher interest rates on a commercial loan, as you mentioned. The best strategy I have seen to navigate your issue is to implement a land trust. While you can transfer the property into an LLC, you can transfer the property into a Land Trust because it is considered an estate planning tool and protected by the St Germain Act. Once you transfer it into the Land Trust you can assign the LLC as the beneficiary to retain the liability protection.

This way you have access to the beneficial financing options available in your personal name, the protection of the LLC, have entities that will easily integrate with future estate planning, and you can even introduce anonymity into your asset protection strategy.

 Hey Dennis,

The ideal is to establish the LLC in the most business friendly state that involves the least expenses. The main obstacle is that if the LLC is housing an asset from another state it will incur an additional foreign filing fee. The only strategy to avoid that is by using a land trust to hold the property, then assigning the LLC as the beneficiary (meaning the land trust is conducting business in the state, not incurring the additional foreign filing fee of the LLC.)

I say this simply to state that you have options, depending on how you structure the assets. I know many investors who will establish an LLC, or Series LLC, in a business friendly state even if they don't own any properties in that state. Then they just use land trusts to hold the properties and assign them to the LLC. This also is beneficial for financing and rolls into any future estate planning you might consider.

Mostly just touched on the option. Would probably be a good idea for you to connect with an experienced real estate attorney to chat about your options moving forward. It could save you a lot of money over the next few years, so it's worth a bit of up front costs to get good advice now.

You can be pretty flexible with this, actually. You can either operate all child series under the parent Series LLC bank account, you can also split it up and have a few child series holding their accounts separate from the rest of the entity (this is especially helpful if you only have some child series taxed as an SCorp,) or run them all individually. Some investors wont even open a bank account for the Series LLC and just run all their operations through a regular LLC to help separate the liability out even more.

The responsibility is on the investor to prove that the entities operate separately from one another. So the challenge is to make sure your bookkeeping is solid - but with how good software is for tracking your finances it mostly just requires you to be conscientious in earmarking funds properly. The issue with running a bunch of different bank accounts is how easy it can be to grab the wrong card when you have a business (or personal) expense, and in doing so you coming funds. When it's all under the same account you get in the habit of writing expenses down as you go. If a judge requires proof that these entities are not commingling their funds you can present the single  statement, rather than having to pull together statements on multiple accounts and avoid the mess.

Ideally you want to have your CPA and attorney available via email/text to help you learn how to operate these entities correctly when you set them up. Once you get it rolling these entities make life much easier, it can just be a pain to learn how to run things differently.

1 - There are three roles affiliated with each land trust. The Grantor, who has the power to create and terminate the trust. The Trustee, who manages the property - you would either list yourself as the trustee to manage the property or use your operating LLC to do this. You can also list a Nominee Trustee to create the trust, which is part of the strategy to introduce anonymity. Finally you have the Beneficiary (or Beneficiaries) who receives the proceeds (benefits).

2 - I had not noticed it was written like that, thank you for bringing it to my attention. You would use a warranty deed to transfer the property from your personal name into the Land Trust, at which point you would leave the property in the Land Trust. You would simply assign the beneficiary of the Land Trust as the LLC. I apologize for any confusion that may have caused.

3 - The Land Trust provides no liability protection, though it is a strong tool for asset protection due to it's ability to remove your name from public record. It is an estate planning tool primarily and can also provide anonymity by having an attorney sign as Nominee Trustee upon formation. When you list yourself as the Trustee, or your operational LLC, you are essentially functioning like a property management company. Ideally you establish an operations LLC to take care of your high liability operations like collecting rent, hiring contractors, etc. 

a. The ideal structure would be to have one property per LLC (or child series, if using a Series LLC,) and then using a different LLC to carry out your operations. This means you separate your highest liability actions from the properties. If there is a lawsuit against the operational LLC you will not lose your property, as long as you operate the LLC and management correctly.

4 - You can prove it through the documents that you have access to. The main thing is that you can do it at your won discretion because all of that documentation. The biggest thing you want to avoid is allowing your information is floating around out there for anyone to find. It's much better to run your own investments on your terms. 

One part of dealing with asset protection is understanding the underlying motivations of a lawsuit. The United States is litigation crazy and people are always looking for any excuse to sue someone who they perceive has "extra" money. Individuals who want to sue you with this type of strategy in place need to be highly motivated - it will cost thousands of dollars in discovery. It will not be worth trying to tackle an asset protection strategy like this over a frivolous lawsuit. Good attorneys have more work then they can ever complete, so most of them would prefer going after the investor who owns a few properties in their personal name rather than gambling on a lawsuit against entities that look well structured and probably well protected - that is bad business for attorneys since they want easy wins or their own record.

Just some thoughts. If you have additional questions feel free to shoot them my way.

I also just noticed you were from California. In that case you will have additional costs involved with an LLC, due to their beastly franchise taxes. Another option you could look into which functions similarly to the LLC to protect your assets is the Delaware Statutory Trust.

When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.

The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.

The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you're interested in using an LLC, this article also further explains the advantages of a Series.

The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

The fifth pillar is owning everything anonymously. If people don't know that you have assets, then they are less likely to sue because there's no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn't matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.

One thing I really do recommend is talking with an experienced attorney to get an accurate idea of the exposure you face. From that point it can be pretty easy to select a strategy that you are comfortable moving forward with. I personally invest a lot of time and money into protecting my own investments because I have found that I can focus 100% of my energy on moving forward rather than being fearful of the "what-ifs."

Good luck moving forward!

The primary use of the LLC is for asset protection purposes, rather than taxes. There are ways to leverage the LLC in order to save you money, but those are just benefits they offer. The main reason you would get an LLC is to protect yourself from any accidents that exceed or are excluded from insurance with your investments, and vice versa. If you have no protection in place then a lawsuit that exceeds or is excluded from your insurance can spill past the initial source (a rental or a personal car accident) and impact everything else.

I would encourage you to check out the 5 Pillars of Asset Protection article, since it explain asset protection from more of a birds-eye view. Some investors are very risk-averse and will place each investment in their own asset (this is what I personally do,) while others will hold multiple properties in their own name to try leverage their money. It is a strategy that works great until it doesn't... Best option is to chat with an experienced attorney about your portfolio to get an idea what exposure you face, then pick the level of protection that you are comfortable moving forward with.