Yes. That is good advice for every part of your business regarding the law and taxes.
You operate at a level much higher than a typical investor and most of my comments on this board are targeted to them. Because this is a public board, I sometimes add extra comments for those reading the thread. LLCs have a place and I recommend people use them when appropriate, but I can think of only a few situations where LLCs make sense for a new real estate investor. My opinion changes dramatically when net worth is measured in millions instead of thousands.
Here’s something you may find interesting. This attorney was convicted of fraud for executing a transfer that was deemed fraudulent. It speaks a little to my previous comments on civil fraud.
In this case, the trustee was able to take over the LLC. It speaks a little to my point that good protection needs more than just an LLC.
Even though these are bankruptcy cases, it’s not very hard to force a debtor into involuntary bankruptcy to take advantage of these precedents. It’s outrageous acts like these that create bad law and it make it easier for creditors to collect. These types of cases are part of the reason I don’t recommend LLCs for the typical investor and don’t recommend free forms and low cost providers. Most of the LLC law harmful for protection is the result of poor planning and a poor understanding of the issues involved. This is not a DIY activity.
Be very careful when transferring assets between entities and/or funding them. Here is the definition of fraudulent transfer used by many states. This is taken from the Uniform Fraudulent Transfer Act.
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the
(2) without receiving a reasonably equivalent value in exchange for the
transfer or obligation, and the debtor:
When real estate investors say asset protection they usually mean protection form lawsuits, which really means making a judgment harder to collect. Just about every LLC or trust transfer I have seen from real estate investors has the intent of “asset protection”, item 1, and is done without consideration, item 2. It’s very easy to prove intent when the defendant is shown to have used a guru course with some absurd title like “Bulletproof Your Assets” or some other similar title or employed the services of a firm known for such work. I have also never seen the transfer done for value. It’s always a quit claim or warranty deed without any consideration, which could mean intent doesn’t need to be proven to win.
Here’s an example of bad planning that used “Asset Protection” in the name of the trust. I can’t speak as eloquently as my colleague and have quoted his message in in the ABA’s estate planners message group. The same fraudulent transfer laws apply to LLCs, corporations, partnerships, etc.
This popped up on my Google reader today at
“Stuart L. Mathias, Jane S. Mathias and Mathias Family Trust to Stuart
A. Mathias and Stuart L. Mathias & Jane S. Mathias Irrevocable Asset
Protection Trust, 91 Pricetown Road.”
Do planners not think that gratuitously naming a trust an “Irrevocable
Asset Protection Trust” doesn’t key creditors to what it is and what
they need to do to attack it, i.e., maybe throw the settlors into
involuntary bankruptcy and use the 10-year clawback?
Also, naming something an “Asset Protection Trust” for a fraudulent
transfer analysis or the clawback analysis is basically akin to giving
the judge an affidavit that says, “We created this trust for the
specific purpose of screwing our creditors”, i.e., actual intent.
IMHO, this is much worse than titling a business entity a “family
limited partnership”, which is a bad practice.
IF YOU ARE GOING TO NAME STUFF THAT HAS AN ASSET PROTECTION COMPONENT,
GIVE IT THE MOST NONDESCRIPT NAME POSSIBLE, i.e., in this case it
would have been much better to call it the “Sudbury Trust” or
something. Let a creditor try to figure out what, if anything, that
means or whether the trust is linked at all to the settlors.
Hey everybody, according to the public records Stuart and Jane Mathias
of 91 Pricetown Road are hiding their assets from creditors! It’s now
on Google too, so that a creditor will pick it up in about 0.007
Jay D. Adkisson
RISER ADKISSON LLP
100 Bayview Circle, Suite 210
Newport Beach, CA 92660
jay [at] risad.com
This is a good discussion. Merry Christmas to you as well!