But with the taxes and maintenane and other fees isnt there a way to set up a sort of “umbrella” company that will invest money into all the LLCs? So you can have different people invest money into the “umbrella” company and structure their returns according each deal but hold the properties in LLCs under that one “umbrella” company?
That’s how I do it. I have a c-corp that loans money to LLCs and the money is used to buy real estate. The interest payments are used to fund benefits programs for the c-corp employees (e. g. retirement, health insurance). The interest payments are deductible to the LLC as interest expense where the money ends up in a related company. The c-corp gets a tax deduction for funding the programs and thus has no tax liability. The best part is the money in these funds are immune to creditor claims. They key is to make real, arms length transaction loans and comply with all the corporate benefit laws.
That is a smart way to legally avoid the tax liability. Do you list yourself and the investors as employees in the C-corp? Can you recommend a professional to set up that kind of benefit program to comply with the corporate laws?
I have an S-Corp that has a number of companies under it and historically I have been taking owner withdrawls and paying full boat on tax to buy my rentals that I put in LLC’s. This way you are doing it sounds like it will save me a lot of money.
C-Corp must have more than one member, right?
You and your family would be officers and employees. I suggest a trust actually own the corporate shares to limit liability. Keep in mind the purpose of the corp is to generate tax deductible expenses to offset taxable income. The strategy works well for someone generating excess cash he doesn’t want to invest. If you are just starting out, building the business is more important than conserving cash.
It would be too expensive unless you are kicking off at least 50K in excess cash you don’t want to invest in more property. These aren’t guru courses you do yourself or pick some lawyer off the Internet. They are the same kind of programs set up by multi-national corporations. The only difference is the size of the company. GE or IBM can’t be too generous because every employee must be able to participate, but that isn’t a concern if all the employees are family.
Your plans can be extra generous. Employees have access to a company yacht, ski lodge, summer camp on the lake, or box seats at the local football/baseball stadium. They get deductible free health insurance that covers over the counter medication, massages, and many other things not covered by traditional insurance. You can have dogie day, where the company pays to have the employees’ pets groomed.
Possibly. You should review the structure with your attorney to determine set up and maintenance costs along with your tax adviser to determine the tax consequences.
Corporations have shareholders who elect a board of directors who appoint the officers who will run the company and hire employees. One person can hold all positions or the duties can be spread among several people. There are many formalities that must be observed in order to maintain the full benefit of the c-corp.
LLCs have members. Partnerships have partners. It is important to understand the difference because each entity has different liability rules.
Of course. I don’t know what I was thinking when I made that post. :rolleyes. :banghead
Another thing I was thinking of: if you have multiple LLCs, will a registered agent agree to be served with all of them for a fee or do you have to pay additional for each LLC?
They are going to charge you per LLC, but at a discount rate. However, you open yourself by merging the expenses of the multiple LLCs. They should all be as separate as possible.
I gravitate towards a management entity with the LLCs or trusts as owners who have nothing to do with the operation of the business.
Thanks. It seems like in the long run it would make more sense to have one or just a couple of LLCs with equity stripped properties in them, that way you don’t have to pay for annual fees, registered agents and the initial filing fee on each one, not to mention separate business checking acounts for each one. Some people on here say they maintain a separate LLC for each house they own, but that sounds like a huge PITA to me.
As for having LLCs under the management of another corp, that’s a bit over my head–I assume that type of arrangement’s not for the small time/beginning investor?
It is.
The typical investor can get by with good insurance until his net worth is in the 2-5 million range.
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BLL,
Myself, brother and mom are equal owners of one particular property. My brother is presently in the process of a divorce and the X hired by far the best divorce lawyer in this area and she is cleaning him out on alimony. They haven’t yet gone through the division of property. Is there a way to use this equity stripping or some other technique that you know of to keep her hands off our rental unit? Selling it right now is out of the option since the judge will know why we are doing it. I’m sure she will at least get 50 percent of his third but what can be done so she will never see a dime?
I have been told by a real estate lawyer that she wont see anything until the sale of the property but is there any way of her never seeing anything out of this property other than never selling it? She is basically locking that property up if she all of a sudden becomes part owner.
You could do equity stripping and then initiate a controlled foreclosure to remove your brother from title. The ex won’t see a dime. Be very careful. The judge won’t look kindly on any monkey business.
Another option is to buy your brother out with a promissory note that pays very little until 20 years from now.
Here’s a strategy I have been thinking about, but never actually implemented. I would put assets into a pass through entity like a limited partnership and give limited partnership interests to the creditor (or ex-wife in this case) as a settlement. Hopefully, she is stupid enough to accept because she doesn’t know a limited partner basically has no rights. The partnership will generate income and submit a K-1 for taxable income to the ex, but never distribute any cash. The limited partners have no say in the operation of the business and can’t force a distribution. She will get a tax bill with no money to pay it. You offer to buy her out at a hefty discount so that she can avoid the tax hit each year or you can just be a jerk and keep generating profit to stick her with a tax bill.
Divorce is more likely than getting sued and people should plan for it rather than worry about some lawyer who is probably going to settle for the insurance limits anyway. That’s why I like trusts for the benefit of children with a parent as trustee to own assets. There is full control with no ownership and no one can ever argue the set up is invalid. There is nothing more valid than taking care of your children.
Here’s a strategy I have been thinking about, but never actually implemented. I would put assets into a pass through entity like a limited partnership and give limited partnership interests to the creditor (or ex-wife in this case) as a settlement. Hopefully, she is stupid enough to accept because she doesn’t know a limited partner basically has no rights. The partnership will generate income and submit a K-1 for taxable income to the ex, but never distribute any cash. The limited partners have no say in the operation of the business and can’t force a distribution. She will get a tax bill with no money to pay it. You offer to buy her out at a hefty discount so that she can avoid the tax hit each year or you can just be a jerk and keep generating profit to stick her with a tax bill.
That is an incredible idea. Now, the house is already in an LLC. So what would I do in this case? Do you have any idea what they (judges) often do in this type of situation? Do they make him pay half of his portion at the sale of the house or make her be listed as an owner or what?
That’s why I like trusts for the benefit of children with a parent as trustee to own assets. There is full control with no ownership and no one can ever argue the set up is invalid. There is nothing more valid than taking care of your children.
I have heard lots of good things about trusts but know nothing about them. I heard it is a good way to avoid taxes and with the death tax expiring it is almost essential. And not having to go through the probate process. I was going to start looking into them as I think my mom should have her property in one since my dad passed away a few years ago. What do you see the benefits of a trust being to the children? And, when this is done, who is on the trust, just the parent and a will for the trust to go to the kids?
Have your brother gift his interest in the LLC to a trust for the benefit of his children with him as the trustee. If no children are involved, he can sell his interest to you for a promissory note and you place a UCC lien on the membership interest. It’s like equity stripping for personal property as opposed to real property. You take the interest when he doesn’t pay.
They will whack your brother if they think he is up to no good.
Since the house is owned by an LLC, the judge can’t force a sale. However, he could force your brother to turn over his interest in the LLC to the ex. That would give her his rights and that would cause you trouble. If the LLC operating agreement is executory, meaning your brother must contribute to the LLC rather than sit back and collect a distribution, then the judge will have a hard time transferring his interest as that would disrupt the business. If not, then you can add such language or change the operating agreement so that a creditor who actually gets the membership interest of a debtor member has the equivalent of a charging order, meaning they get paid when you say they get paid. You can buy her off on the cheap or whack her with the income taxes that would be due your brother.
There are many kinds of trusts and they serve different needs. They can be used to avoid estate taxes and probate as you heard, but the expiration of the estate tax is irrelevant. The assets are removed from your taxable estate when they are of low value and thus no estate or gift taxes are ever due. The trust does pay taxes on trust income, but there are ways to let you put those items on your personal return without affecting the trust.
The one that I am referencing for a child has the benefit that your child’s creditors can’t get access to the assets and your creditors can’t get access, while you maintain complete control of the assets and get any tax losses while you are building up the business. It is a must to have someone who understand the issues, your situation, and your state’s laws to draft an appropriate agreement. It is not something done over the phone or through email.
BLL, if you don’t mind, this might sound kind of dumb, but it’s something I don’t understand: when you do equity stripping by loaning from another entity to an LLC, is there an actual lien on the house inside the LLC now, or is it just that the “borrower” LLC owes money on demand? Is this something that has to be set up like a mortgage before you purchase the house or can it be done after the fact?
Thanks again for all the help that you provide on here.
It is a mortgage. Money changes hands. Documents are filed with the Registry of Deeds. A proper closing takes place. If you are purchasing the property with cash, you can do equity stripping when you buy. Doing it after the purchase can be compared to refi. Just remember that real money must change hands and you must do everything as if it were a regular mortgage.
Here’s a discussion of what can go wrong if you don’t do things properly.
www.assetprotectioncorp.com/cgi-bin/ultimatebb.cgi?ubb=get_topic;f=1;t=000877
Assuming you are talking about revocable trusts, my understanding has always been that trust assets ARE included in a taxable estate. Yes, trusts do bypass probate and there may be no federal estate tax due if the value of the deceased’s estate is below the federal unified credit.