What You Can Expect From a Full Service Entity Formation Firm

When you form your entity for your real estate business, there are plenty of choices to make. Using a full-service entity formation firm like Royal Legal Solutions helps take some of the guesswork out of entity set-up and gives you a place to go with your questions. Resist the temptation to give in to the cheap allure of entity-in-a-box services, and learn more about what full-service formation means now.

Access to Actual Specialized Attorneys

Creating your entity at a full-service firm means legal experts are drafting your legal documents, filing the appropriate information with the state, and customizing your entity to your needs. Perhaps you want to bring in a partner on one deal, but not another. Or maybe you’d like a Series LLC because you plan to grow your portfolio. These are simple goals to accomplish when you have a full range of legal tools and experts who know how to use them.

But if you’re using a service that provides one-size-fits-all companies, you’ll get the same thing all their clients get: a one-size-fits-all entity. We can’t recommend that you be that careless with the entity that is supposed to protect your investments.

Forming an LLC: Easy as 1-2-3

Just because you’re using a law firm doesn’t mean the process is complicated. We can’t speak for the entire legal profession, but our pros don’t care much for pointless tasks or meaningless paperwork. We keep our process simple and transparent. Forming the entity you need is done in three steps:

Attend your personalized consultation to pick your entity. Our advisors will get to know you. You’ll have a quick chat about your business, ambitions, and anything else you think we should know.
Provide the relevant details for forming your entity. Depending on what you select, you may fill out a quick form, speak to a consultant, or both.
Wait. We need time to do your legal work, make appropriate filings with the state, and ensure your entity will work for you. Most of the time, we can get new clients going in about six weeks, but your project may take more or less time depending on its complexity and the components of your strategy.

We can form both Traditional and Series LLCs, as well as other entities and legal agreements for your real estate business. If our experts advise that another entity structure such as a corporation or Delaware Statutory Trust is more appropriate for you, forming these entities is just as easy for us. Document services usually won’t even mention, let alone offer, these nuanced options.

First of all, these are well outside of the cookie cutter services offered. If you only sell LLCs structured one way, it’s easy re-use the exact same documents for each client. That’s not what full-service firms do. We actually have to listen to, understand, and explain things back to our clients, making a genuine assessment of what is best for each based on the client’s situation and our expertise.

Advice on Using Your Business Entity

When you form your entity with Royal Legal Solutions, our skilled asset protection attorneys can also advise you on the best way to use your new structure. This level of personal attention, and your ability to ask real experts your personal questions, is what makes full-service formation far more worthwhile than a quickie online service. Other companies may be happy to form your entity but will gladly go silent when it comes to how to use it. Most of the time, this is because these companies aren’t allowed to give you legal advice like lawyers can. Giving advice isn’t what they do. Selling pre-fabricated LLCs is. But strategy is our domain. If you want a company you can build a real asset protection plan on, you want full-service. You want Royal Legal Solutions.

Understanding 1031 Exchanges and Asset Protection Entities

Anyone keeping up with real estate market trends or news will inevitably encounter mention of the 1031 exchange. The 1031 has even made its way into investment jargon, as if we need more confusion in that area.

Some people insist on using “1031” as a verb, as in when you overhear that investor at your MeetUp group asking his buddy: "Should I 1031 that property for the condo down the block?"

While we can’t condone the use of this verbiage, we can say the 1031 is useful. But it’s no wonder folks have questions. Today, we’re here to demystify the 1031, its uses, and how it works in the context of your asset protection plan.

What is a 1031 Exchange?

1031 Exchanges, so named for the IRS code portion that permits them, are a type of real estate “swap.” In a 1031 exchange, an investor can sell one investment property and use the proceeds to buy a similar property that is worth as much or more than the one being sold. By doing so, that investor gets temporary relief from capital gains taxes.

Ordinarily, capital gains taxes would be owed upon the sale of one property. But this cost can be a major expense, one that traditionally would come out of your budget for any potential “replacement” property. For this reason, investors opt to take advantage of the 1031 exchange when possible. Without capital gains taxes in the mix, the real estate investor can easily reinvest the full pre-tax value of the first property towards a second.

But of course, it is crucial that investors considering this move are clear about what they want out of it, and whether the terms of their deal meet the IRS’s criteria. Let’s take a closer look at what is required if you want to perform a 1031 exchange transaction.

1031 Exchange Rules

For a proper 1031 exchange to take place, the following three circumstances must be present:

Properties must be similar enough to meet the legal definition of “like-kind.” Determination of this will depend on your intended use of the property, which should fit the next criteria as well. Like kind properties will have the same listed owner. Major asset class changes on their own, like switching out an office space for an apartment complex, aren’t violations of this rule. You can even swap one property for two, provided the next criteria are also met.
Properties must be investments or otherwise business-owned. Your personal home cannot enter the equation at all.
Property purchased must be greater than or equal to the value of the property being exchanged. Value for these purposes means both equity and net market value.

If the deal does not meet these terms, it won’t be possible to reap the full tax benefits of a 1031 deal. There are cases where investors who meet all but the third criterion execute “partial 1031 exchanges” on properties of lesser value, but in doing so, they forfeit the full tax protections of an ordinary 1031 exchange. Finally, keep in mind that these are not all of the requirements but simply the basics. For more information, see our article: Is a 1031 Exchange Investment Strategy Right For Me?

Plan Ahead For Successful 1031 Exchanges With Asset Protection Entities

Using legal tools like the Anonymous Land Trust, LLC, or Series LLC is great for your asset protection plan, but may pose potential issues during a 1031 exchange. We find these situations are best avoided through simple proactivity. The further ahead you can anticipate your desire to do this kind of real estate deal, the better. Let’s take a closer look at some possible problems, and why planning ahead helps.

Entity Issues: LLCs and 1031 Exchanges

The good students of the Royal Legal School of Asset Protection all know what we tell people about keeping property in your own name: just say no. Entities controlled by the investor are far preferable for several reasons. You might need one to begin with for simply conducting business. But they also make suing you personally for any liabilities relating to your investment property a chore for would-be litigants.

The Internal Revenue Code specifies that the property you take in a 1031 exchange must be titled in the same name as the property you give up. For those who purchased property in their own name for financing, then transferred it into an LLC or other structure, the titling requirement can pose issues. But if you, say, sell a property from an LLC but later learn you would need to acquire the second property in your personal name, you would be in violation of this requirement. Your exchange would become void.

Planning ahead is helpful because you can simply transfer the first property into your own name before making the sale. This will be helpful if you need financing again, and most owners of residential real estate will find that there is not an affordable and practical way to make this exchange directly to and from an LLC, even when there isn’t a particularly strong need for financing.

Properties Owned By Multiple People Through Partnerships

Issues with 1031 swaps can also come up when the initial property is owned by multiple people through a Limited Partnership. Again, in this situation, the problem is about titling. However the sold property is titled is also going to need to be the way you buy the next one. Most of the time, the same “cure” can be used as for the first problem: plan in advance regarding titling.

Sometimes, you may want to execute a 1031, but your partner wants to cash out. Investors in this position can execute a move called a “drop and swap.” Essentially, you would be bowing out of the partnership as it is currently structured. With the help of a qualified real estate attorney, you can deed property out of the partnership and into the names of each individual involved. Your legal relationship to your former partners can become one of tenants-in-common, which allows each person to decide whether to reinvest in the exchange or drop out.

Anonymity on the Internet: Why Asset Protection Requires Online Privacy

Maintaining your anonymity can be harder than ever in the digital era. Anybody who can type can search for—and find—an astonishing amount of your personal information. Your name, insurance policies, companies you have an ownership interest in, and especially properties you own are all potentially compromising details that you likely don’t want spread far and wide.

We also know that anonymity on the Internet is crucial to effective asset protection. So what’s the investor with an online presence to do?

Your Personal Information Is Most Likely on The Internet

The simple reality is that unless you’ve taken measures to protect your personal information, it is likely somewhere online. Without taking precautions to preserve your anonymity, many of your personal details which you might consider private can end up on the public record. Anything on the public record can be easily located with a Google search. There’s no need for sophisticated skill sets or deep knowledge on the other party’s part.

Why is this a problem for real estate investors in particular? Frankly, we have more to lose from too much public information.

Of course, the simplicity of locating public records is one of the main reasons we encourage investors like you to never own property in your own name. This is just one of many steps you can take to secure your anonymity, and it is basic yet incredibly important. When you own property in your own name, simply looking up the address leads straight to you, and by extension, everything you own. This is the most vulnerable position you and the asset can be in. Asset protection is largely about moving those easily seized assets out of your name and into a more secure structure under your control.

You might recall that investors can only lose money in two ways: bad deals and lawsuits. Anonymity helps address the threat of lawsuits. After all, for another person to successfully sue you, they will need to know who exactly you are. They will also need to prove your connection to the property or entity owning the property, a problem savvy attorneys can anticipate and prevent. Put simply, our job as asset protection attorneys is to complicate potential lawsuits as much as possible before they ever materialize. Anonymity helps stop lawsuits by complicating the initial research phase conducted by opposing lawyers to see if suing you is worth the trouble.

That said, you can undermine your own asset protection plan if you aren’t thoughtful about protecting your own privacy. The point is, the less information about you that is freely available online, the better.

Online Best Practices To Ensure Anonymity

Some common-sense techniques paired with simple awareness of the value of your anonymity can help you eliminate potential problems as you navigate an increasingly digital world.

Avoid Openly Discussing Investments or Finances

You’ll also want to steer clear of any behavior flaunting wealth. If you have it, that’s wonderful. But in order to keep it, it should stay your business. You can absolutely enjoy the luxuries of wealth, but you don’t need to Instagram your vintage Moet Chandon or post photos of your exotic car collection to Facebook. Instead, play it cool. Be mindful that the internet really is a public space.

Of course, it may be unavoidable for people to know that you are an investor. They do not, however, need to know the particulars of where you invest and what you own.

Be Wary of Info Scammers

Sadly, the web is crawling with scammers of all sorts. They come in the form of Facebook Marketplace ads that are a little too good to be true, leading you to a “third-party” registration that looks legitimate, but exists just to capture your information. They can also appear as friends of friends, love interests, wealthy relatives hoping to reconnect, and even as potential investing partners. Even if you realize you’re being scammed, some cons are so finessed that you won’t realize anything’s up until you get an obvious red flag.

Here are some quick and dirty tips that can help you avoid falling prey to scams that could compromise your anonymity on the Internet:

Don’t talk to strangers. If everyone really stuck to this all the time, scams would hardly be possible.
When you must talk to strangers, vet them. That mutual friend? Maybe see that they’re actually a friend instead of a victim.
Be skeptical of anything that sounds too good to be true. The cliche exists for a reason.
Observe Craigslist rules when making any large purchase. That means meet the person face-to-face, so buy locally when possible, and use cash or something that can’t be falsified.
If you even hear words like “Western Union” or “Moneygram,” run.
Last but not least, never ever give away account info, passwords, or codes generated by your services.

Bottom line: scams and breaches are best avoided by being tight with your security and smart.

Legal Solutions for Real Estate Investors Who Want Anonymity

There are also legal tools you can use to preserve your anonymity and limit the amount of personal information about you online. At the very least, you can obscure any connection between such information and your business and assets. Not everything can be “undone” online, and absolute anonymity is nearly impossible. What legal tools can provide you with is layers of protection that will make penetrating your anonymity, and therefore connecting you to your valuable assets and suing you for them, far more difficult.

Anonymous Land Trusts. The Anonymous Land Trust is a tool you can use to remove your personal name from the title of an investment property. The trust will instead hold title for you, and may be set up in such a way that you receive any benefits or profits from the real estate asset, including rental payments.
Delaware Statutory Trust for California investors. The Delaware Statutory Trust serves the same functional purposes as Series LLCs and Anonymous Land Trusts, but is friendlier to California’s tax law.
Anonymous LLC Options. Some states require that you report each member of your LLC. When you operate a Traditional LLC as a single person or with your spouse, your names may be recorded by default. Multi-member LLCs may not be exempt, either depending on the state where they are formed. Fortunately, there’s a fairly straightforward solution: pair your LLC with an Anonymous Trust. For real estate investors, the Series LLC presents an elegant anonymity solution and an effective, scalable business entity. The Series LLC may also be owned by an Anonymous Trust or make use of Anonymous Trusts at the “bottom level,” protecting each asset within each Series.

Asset Protection: The Frequently Asked Questions

There’s always something new that investors can learn about defending themselves with the tools and strategies of asset protection. We also understand though, that this area of law is less commonly understood. Heck, there are even solid business attorneys even who know about asset protection tools but still have fundamental misunderstandings about actually practicing this legal art. In the interest of clearing away some of the mystique that surrounds our growing field, we wanted to begin answering some of the most common questions that we get from our real-life clients. Let us know in the comments section if you learned something new today, or what FAQ you think needs to be on our next list.

Which Asset Protection Tools are Right for Me?

Woah, we’re just getting to know each other. In all seriousness, we can’t tell you what’s best for you without knowing more about you, your goals, and of course, your business and major plans.

In fact, if anyone tells you they can divine the ideal tool set for you without knowing much or anything about you, your B.S. Detector should ding. There is no one-size-fits-all asset protection solution, and in fact, our circumstances are all so vastly different that there can’t be.

There are, however, some common basics. Most of us in the real estate world will need an entity as the foundation of our asset protection system. Limited Liability Companies are great choices, as they offer an easy way to both organize your business and have inbuilt mechanisms that prevent lawsuits. Your entity can also be used alongside anonymity tools like land trusts, and other legal work including strong contracts.

Full service firms like ours can even use retirement and estate planning tools to strengthen your asset protection plan. If you really want to learn about the best tools for you, schedule a consultation with an asset protection expert.

The Entity I Want Isn’t in My State! What Can I Do?

Since the Traditional LLC is in all 50 states, we’re guessing you might be talking about our good friend, the Series LLC. This entity is indeed great for investors in most states, yet it isn’t offered in every state. Daily, we get emails and social media messages from investors scattered across the country lamenting that their state doesn’t have a Series LLC option.

It’s okay if your state hasn’t yet been hit by the Clue Train. You can always form a Series LLC in another state. For instance, many Royal Legal Solutions clients use Texas Series LLCs but haven’t even been to, let alone owned property, in Texas. Some leverage our presence here, cost-reducing flat fee offerings, and ability to serve as the Registered Agent for more effective Series LLCs than their home-state would ever offer.

Isn’t The Series LLC Structure Too New to Rely On?

We get this question and variations all the time. Perhaps a little history lesson will help. The first Series LLC was born in Delaware back in 1996--over 20 years ago. Let’s compare that to the Traditional LLC, which Wyoming pioneered not even 20 years earlier in 1977. Not so new after all, right?

So, the reality is that the Traditional LLC, so often hailed as long-established institution, isn’t much older than the Series LLC. It’s not a huge departure legally speaking either, but simply an offering with more nuance and possible uses for the savvy investor to exploit.

Some criticize the Series LLC as “untested,” but this is also untrue. It’s simply harder to document the structure’s “wins” because of its defensive nature. You can see plenty of Traditional LLC court cases where the structure was “tested”--and lost. The absence of a reliable way for attorneys to pierce the properly-established (S)LLC structure is a huge point in its favor. It’s hard to count how many lawsuits didn’t happen. But this structure effectively stops them before filing.

Is Using Trusts to Disguise Company or Property Ownership Legal and Ethical?

If you’re using Anonymous Land Trusts correctly, meaning under an experienced attorney’s guidance, there’s nothing illegal about using them for asset protection purposes.

For the ethically concerned, consider that you are using tools that anyone can. Anyone with a wifi connection can read this article and others like it to learn about the power of trusts. So, you’re not getting an unfair edge. In fact, these tools were once so cost-prohibitive that only the exquisitely rich could use them. Why shouldn’t you? But some investors also mistakenly believe, or at least fear, that anonymity is only necessary for those with something to hide. Well, that’s just plain false.

Thinking privacy is just a shield for wrong-doing is a huge mistake. You want your privacy as a real estate investor, above all else, to protect yourself. The more difficult you are to connect to your valuable assets, the more difficult you are to sue: end of story.

Further, asset protection tools aren’t designed to help someone who’s up to no good or breaking the law. Your lawyer actually can’t help you break the law on purpose. These tools are all about preserving the wealth you’ve already built.

What Should I Look For in an Asset Protection Attorney?

Specific, tangible asset protection experience. Those like us at Royal Legal Solutions who are investors ourselves will also bring that experience to you. You can verify your attorney’s credentials with their state Bar, and your attorney ca

Asset Protection Structures: 3 Benefits (Plus The Best Entities For REI)

The following is a discussion of both the most common perks of an asset protection strategy as well as the benefits that you can start enjoying at any time. Your customized plan will depend on the asset protection structures that you and your team of qualified professionals decide are best for you.

3 Benefits of Asset Protection Structures

Your "structure" (or your business entity and how you set it up) typically conveys several benefits at once. The most common asset protection structures we recommend for our clients are the series LLC, a Delaware Statutory Trust for the Californian investor, or a network of a traditional LLC and an asset-holding company. All of these structures give you some unique freedoms and avenues for defending your assets.

#1 They Organize Your Business

Operating your real estate business as a sole proprietor has tons of disadvantages. As asset protection professionals, the first threat we think of is the threat of lawsuits. The easiest way to make yourself a target and your property vulnerable is to own investment property in your own name.

Using an entity can streamline your real estate investments, or truly, any business that you choose to operate with these structures. Some have legal requirements that require organization, but in general, we find that the entities used for asset protection also make running a business easier.

#2 They Compartmentalize Your Asset Protection Plan

Ideally our assets are compartmentalized, meaning that they are separated legally from one another and you personally. Your entity is typically your best tool for compartmentalizing assets.

The optimal way to protect assets is with Limited Liability Companies that “stand in” as the owner of the property. Of course, you control the company. The beauty of LLCs is you can form as many as you like, preferably with each holding a single asset. Both the the series LLC and Delaware Statutory Trust for California investors make compartmentalization easy. In the case of the series LLC, each asset simply goes into its own series.

Unlike the traditional LLC, investors can leverage the series LLC’s scalability to minimize the cost of compartmentalization. At Royal Legal Solutions, we love teaching investors how easy it is to create a new Series Document from home. Many of our clients have been empowered to create their own series at any time, on their schedule, from the comfort of their homes.

#3 They Limit Your Asset Liability

You may be wondering why there’s so much talk of types of limited liability companies in the asset protection world. These types of companies, including the series LLC variation, are designed to remove your personal liability. Because of their legal protections, LLCs offer an elegant solution for basic lawsuit prevention for real estate investors. From a legal perspective, if an opposing attorney can’t make a good case for “piercing” your corporation (a possibility we can anticipate and prevent by deploying certain tools and tactics in the set-up phase of an asset protection strategy), your assets are safe from seizure.

Why? Because for your assets to be seized, an opposing lawyer would need to secure a judgment against you. For that to even be a possibility, that hypothetical attorney must connect you to the property and the liabilities to the property. Our asset protection plans can thwart every step in this process, to the point that we can make it nearly impossible for the lawsuit to even be filed at all.

Enjoy Real Privacy: The Value of Anonymous Structures

The best asset protection plans take advantage of every opportunity to secure an investor’s anonymity. Attorneys can use tools like the anonymous land trust to ensure your name is nowhere to be found on public records.

In addition to fortifying your asset protection plan by helping prevent lawsuits, preserving your anonymity is also a reliable way to protect yourself from the threat of identity theft. In the digital era where all of our information is easily stolen, it is critical that investors and high earners protect themselves—and their personal information. Be cautious of who you give information to online. Many scammers have convincing, professional-looking sites designed exclusively for stealing private information.

The Relief of Being Truly Judgment-proof

A properly configured asset protection plan can make suing you nearly impossible. That is part of your attorney’s job: to get you the structures you need to never worry about lawsuits again.

The only way to design the perfect plan for you is to work with a reputable real estate asset protection attorney. Your lawyer should take your entire personal situation into account, get to know you and your investments, and make a tailored plan for your circumstances. After all, what works for one investor may be useless to another.

What we know from talking to our clients is that the peace of mind of not living in fear of a life-ruining lawsuit is worth it. Lawsuits are among the most stressful life events a person can experience, right up there with death and divorce. But unlike the latter two unfortunate realities, lawsuits can be prevented.

The smart play is to be proactive, and create your asset protection plan before there is ever even a potential threat. Take action now, and you might never have to see the inside of a courtroom.

Custom Asset Protection: Investing in Texas Vs. California

Imagine making an appointment at your family doctor’s office. After driving to the appointment and a brief stint in the waiting room, the doctor calls you back to his office.

Before you can even open your mouth, he informs you that you’re scheduled on surgery for Monday.

You haven’t told him why you’re there. You could have a cold or need a physical for all he knows. But he’s giving you a treatment already—and an expensive, invasive one at that.

Most of us would be confused and outraged at this bizarre behavior. We would want to know why the doctor was making this decision.

So you ask.

The doctor informs you: “This is the treatment I’m giving all of my patients now, regardless of who they are or what their ailment is. You’ll be fine!”

Would that comfort you at all? Of course not.

You need a treatment customized to your problem and your unique circumstances. One-size-fits-all treatments would hurt more people than they would help.

The same is true in the nuanced, complicated, and personal world of real estate law. So why would we expect a one-size-fits-all approach to work any better for asset protection?

In short, we shouldn’t. Assuming the same tactics will work for everyone is using the same type of thinking as assuming the same medication will cure every illness. Furthermore, a cookie-cutter approach to asset protection is a mistake that can undermine its purpose.

The Importance of a Customized Asset Protection Strategy

Your asset protection plan should be tailored to you, your needs and your goals. That means your lawyer should be using the most suitable tools available. This means he or she must have an intimate understanding of your situation.

Some of the things that can influence which tools are best for you include:

Where you live (which states allow anonymous LLCs, for example)
What kind of properties you own
How many properties you have
Where your properties are located
Whether you are married
What goals and personal ambitions you have for your real estate business
How quickly your business is growing
How much you are making off of your investments
What other sources of income you have
What your tax needs are
What other financial considerations you may have

And that’s actually a pretty short list, considering that it is far from exhaustive.

Case Study: A Tale of Two Investors

While it is true that there are best practices in asset protection, creating a plan that will work best for every investor is impossible. Even when two situations look an awful lot alike, one small detail can make the difference between a sound asset protection strategy and an unnecessarily expensive or ineffective one.

Let’s look at two investors who seem similar at first, but who saw very different outcomes with the same plan.

Luke Sloan is a 35-year-old tech sector employee and real estate investor in Austin, TX. Luke has three passive investment properties and plans to acquire a fourth. After attending a seminar with his brother where he learned the dangers of keeping these properties in his own name, Luke read about the Series LLC as an option for limiting his liability and preventing lawsuits.

He consulted with an attorney who was experienced in forming Series LLCs. He checked out his attorney’s website and saw authoritative content on asset protection and a wide range of offerings, and looked into his attorney’s reputation to find it was positive. Luke’s attorney guided him through the process of forming a Series LLC and transferring properties into it using land trusts. Luke’s attorney also educated him on how to use his entity, and how to form additional child series when Luke acquired new properties.

Luke’s brother, Eli, is also a real estate investor. He is a 38-year-old passive investor with a day job in the technology sector in Silicon Valley. They have roughly the same income.

Also like Luke, Eli has three properties and wants to protect them from lawsuits. It occurs to Eli that perhaps he could save some money on legal fees by duplicating his brother’s plan with the cheapest means possible. Surely with so much in common, down to their tax bracket, these two brothers could use the same asset protection strategy, right?

Wrong. Even if Eli got an attorney to create a carbon copy of his brother’s plan, it would leave him with an unpleasant surprise.

Can you guess what it is?

It’s okay if you can't. The difference is subtle.

Although they’re otherwise alike, Luke lives in Texas while Eli lives in California.

The Series LLC is a great entity for investors in most states, but it is not generally the ideal for California investors with multiple properties. If Eli went through with that plan, he would owe $800 in franchise taxes per series to the state of California (so, $2,400). That figure would rise with each newly acquired property.

There is a better solution for Californian investors like Eli: the Delaware Statutory Trust.

Again, it’s okay if you didn’t know that. It’s probably not your job to know it. An experienced asset protection attorney, however, would certainly be aware of this fact.

The really expensive problems begin when investors like Eli attempt DIY asset protection. Even small mistakes like using a cookie cutter entity from an online service can undermine the entire purpose of an asset protection strategy.

4 Vital Asset Protection Strategies: Eligibility, Rules & Regulations

As we continue our series on asset protection fundamentals, let's take a look at some of the major strategies (including rules and regulations) you will need to know. You are certainly eligible for some form of asset protection, but how does a real estate investor know which strategies are best?

Although you need not meet any particularly stringent eligibility issues with the tools discussed here, there are some rules and regulations that govern these tools. Below, you will find some information about state and federal law regarding your structures and some rules-of-thumb for optimal asset protection. These guidelines should help you make informed choices.

Strategy #1: Location Matters for Your Asset Protection Entity

We all know the real estate maxim, and feel free to chant along: location, location, location. Well, it’s not just your property’s locations that matters. Your entity’s location can make or break your asset protection plan.

If you watched the video on real estate basics, you already know that we think very highly of the series LLC for real estate investors.

While any entity is certainly better than no entity or leaving property in your own name, the series LLC offers a high level of protection while also being versatile.

When Out-of-State Makes Sense: The Series LLC

We bring up the series LLC because it is one of the most obvious examples of an entity that is effective but not yet universal. Your state may not offer an in-state series LLC option. Only a handful of states in the country do. Keep in mind also that there is not necessarily a meaningful benefit to having your business in-state. The only “advantages” are usually that an in-state entity may be spared certain fees that a competent attorney can get around anyway. For instance, at Royal Legal Solutions, we use an Agent Trust so that our clients don’t need to worry about “foreign registration” fees on our Series LLCs.

Keep in mind this is just one example of a “rule” that varies from state to state. There are many in this line of work. So choose wisely. You have your pick of where you form. We recommend getting hip to the Texas series LLC and Delaware series LLC as options--unless you’re in California or Canada. You two are special, and a Delaware Statutory Trust or Limited Partnership would be more helpful, respectively.

Anonymous Land Trusts

While you’re setting up your entity, look at that state’s laws about land trusts (or have your attorney do so). If you plan to use these trusts, you may wish to form in a state that is friendlier. What are land trusts? They're an anonymous trust that provide superior asset protection over an LLC or series LLC alone.

Strategy #2 Keep the Books in Order and the Tax Man Happy

Asset protection strategies will work best if you’re keeping our friends at the IRS as happy and can often double as tax savings measures. Know what you owe and when to pay it. Pay on time. If you’re at all unclear about how money should be flowing through your legal structures and entities, get clarity from your attorney—someone who understands series LLC tax treatment and other asset protection issues.

When in doubt, call in the cavalry. A tax-savvy attorney and CPA can work wonders on making taxes relatively painless, and even finding you points where you can save.

Strategy #3: Know and Do Your Part to Protect Your Asset Protection Plan

No matter where you or your properties are located, you do have to do some work to ensure your asset protection plan will work for you in the long-term. Here the major things you want to stay on top of to do your part:

Operate with integrity. There is no substitute for good business.
Keep clean, tidy records of everything. This need not be complex, and a simple spreadsheet will do.
Know how to use your entity, its corresponding bank accounts, and who to ask for help.

Strategy #: Always Work With a Qualified Asset Protection Attorney

There are many temptations to save a buck on asset protection, whether that’s using an LLC template with the Dollar Store price, avoiding professionals or attempting to do your own legal work, or delaying getting asset protection. Ignore these ideas. They’re terrible.

What you “save” today could land your backside in court on the losing end of any lawsuit. How? Asset protection strategies are an especially complex subject, even for real estate attorneys. There are simply many places along the way where errors can be made if you’re on your own.

Do you have the training, time, and desire to select the entity that is best for you, draft the appropriate documents correctly, file the correct paperwork, use your entity correctly, and maintain corporate compliance with ever-changing state and federal laws? If so, congratulations on your many talents! For the rest of us it makes more sense to hire an expert than to waste our time on teaching ourselves all about asset protection only to miss a crucial step or make a fatal mistake.

That’s not to say lawyers are special. With the time, inclination, and education any of us could become anything. But if my heart gives out tomorrow, I’m calling a surgeon rather than cracking a medical book and attempting to be my own doctor. Why? Because I’m not a doctor. It makes more sense to hire a good one to worry about my heart while I do what I happen to be good at, which like most of you, is running my business.

Asset Protection: Understanding The Basics

Asset protection may sound intimidating and complicated, but it doesn’t need to be. In this primer, we’ll go over some asset protection basics and learn more about the legal tools investors can use to stop lawsuits before they even start. If you read this start to finish and still have questions, shout them out in the comments section below.

Before we can dive into those details, let’s start with most people’s first question.

Why Do Real Estate Investors Need Asset Protection?

The reality is that anyone with assets is at risk for a lawsuit. This is true whether you own a single rental property or several hundred apartment complexes. You’re not safe.

There are only two real ways to lose money in the real estate business: bad investments and lawsuits. Bad investments will happen to anyone who is in the game long enough. Sadly, so will lawsuits.

Ninety percent of us investors will be sued. Will some of those investors be okay? Sure. Will some lose everything? I've seen it over and over.

But are you willing to take the chance with everything you’ve worked for in the most litigious country in the world?

No, and you don’t have to either. The best asset protection strategies aren’t about defending you in court. They’re about keeping you out of court altogether by stopping lawsuits before they start.

We’ll get more into this strategy piece below, but for now, the critical thing to understand is that one of the two things that is most likely to cost you dearly. You can have peace of mind that you won’t experience the emotional, financial, and personal stresses of a lawsuit, and that your real estate assets will be safe and protected.

How Asset Protection Works: The Two Pillars of Asset Protection

The two pillars of asset protection are the defining features of a good strategy. These two principles are the separation of assets and anonymity. Ideally, you should have your name off of your assets, and they should be separate from you and each other (with a corporation which acts as your property management company).

The more compartmentalized your assets are, the safer they are. Let’s move on to how we achieve these goals.

Asset Protection 101: The Legal Tools For Protecting Your Assets

It’s time for our closer look at the legal tools we use, and how they support the goals of your asset protection plan. Each piece of your plan serves at least one of the pillars of asset protection. By no means is this an exhaustive list of all of your options, but more of a glance at the most effective weapons we have in the asset protection arsenal.

Company Structures

Asset protection relies on entities to remove personal liability from you. The A-students in the crowd may have realized by now that this is meeting the first pillar of asset protection: separation of assets. The entity is the most straightforward way to separate your assets not just from you, but also each other.

Some of your entity options include the following:

Of these, we tend to recommend the series LLC for most investors. We have a laundry list of reasons why, but the biggest is its structure’s ability to grow and provide liability protection for each asset easily.

This unique form of LLC allows you to grow your business indefinitely, scaling up as much as you like for no additional cost. Whether you have one series or a hundred, you pay the same filing fee as everyone else and can have the protection of an infinite number of LLCs. While each entity has its pros and cons, the series LLC is highly effective for a diverse range of investors.

Anonymous Land Trusts

What is a land trust? The anonymous land trust is a valuable tool that can hold title to real estate for you, thus removing your name from the public record. Property owners are typically named on the public record, and this is in fact one of the first things an opposing lawyer will do in attempting to sue you.

If they see your name, you’re toast. If they run into our network of trusts and LLCs, they hit a corporate brick wall that preserves your anonymity. If a lawyer can’t even prove you own a property, they know you’ll be difficult to defeat in court for quick material gain. When you’re a pain-in-the-neck to sue, smart attorneys move on to lower hanging fruit (or in reality, a defendant with their name on the deed.)

Bottom Line: Defend Your Investments With Asset Protection Today

If you wait until someone threatens to sue you, it could be too late. The best time to set up asset protection is well before you ever have a problem. When you choose to protect your assets today, you’re potentially saving yourself the value of your entire portfolio. And take it from a lawyer and fellow investor: it’s generally cheaper for an investor to spend money on legal services preventatively on asset protection than in a frenzied panic after being served with a lawsuit.

A Bad LLC Operating Agreement Can Ruin Your Real Estate Investments

Your operating agreement/operations agreement is one of the first documents your attorney will draft when forming your LLC. Learn more about the common problems in LLC operating agreements and their remedies below.

Common Oversights in LLC Operating Agreements

The vast majority of the time, the problems in operating agreements come down to wording. Language that is vague, irrelevant to your situation, or ambiguous in any way can create real-world problems for your LLC. Here are some common issues, along with examples of phrases to watch out for in your operating agreement.

Decision-Making Powers

LLC members must have a procedure for decision making. When an LLC has multiple members, some decisions may be made by majority. While you can specify unanimous consent under certain circumstances, clearly defining what constitutes a “majority” clarifies your agreement. Decide with your fellow members whether you want to define majority as a percentage of ownership or by number of members.

Another common problematic clause is one which states that any member may do business with the LLC absent any restriction. This can create issues if a member abuses this freedom. To avoid potential problems, specify that any member of the LLC must get majority approval before performing any transaction directly with the LLC.

Managerial Powers

These issues are particularly important for multi-member LLCs. When an LLC is formed, the operating agreement must spell out who the Manager is, how a Manager is selected, and what degree of control they have over the LLC. Unfortunately, clauses that give too much power to a Manager may be abused at the expense of other members or the company. A good document keeps managerial powers in check in the following ways:

Eliminating vague language around Manger selection. Instead, spell out how manages are elected or removed. If voting is the method you choose, specify who is allowed to vote on this issue.
Rephrasing wording that could allow for abuse of power. Any action where the manager is acting unilaterally should be questioned. Provisions giving a Manager exclusive control over the company are inherently problematic, and best left out of operating agreement. Unless you want your Manager to have the power to sell off company assets without your approval, it’s time to get clear. Specificity, again, can solve potential abuses of power. Clarify how and when company assets may be sold, including when such decisions should be put to a vote.
Limiting unnecessary managerial powers. Some agreements allow powers that simply should not be included. A common example is a provision stating that the manager may hire any person to work for the LLC. Requiring majority approval for new hires offers more protection. Securing majority approval for all new hires may prove burdensome for multi-member LLCs, so you may choose to apply this condition to C-suite employees and others with major decision-making powers. This approach is a practical way to ensure member power is balanced appropriately.

Bottom line: any clause that has the potential for abuse of power will catch the attention of a seasoned attorney. Lawyers who do not regularly form LLCs may be aware of the necessary parts of a legally-binding agreement, but are more likely to overlook these nuances. An experienced business attorney or real estate attorney who regularly forms LLCs is your best bet for getting what you want out of your operating agreement.

To learn more, see What Is The Difference Between An Authorized Member And A Manager In An LLC?

DIY Asset Protection: 3 Common Mistakes You Can't Afford To Make

Perhaps you’re familiar with the expression “The man who represents himself has a fool for a client.” While this is typically a phrase applied in a criminal law setting, it also holds true for real estate and business law.

This doesn't mean you are incapable of "DIY" asset protection. But it means that all of us have blind spots.

Online services like LegalZoom may make it look easy to DIY your asset protection plan and save a few bucks while you’re at it. However, the money you “save” now could end up costing you far more later if you end up in court.

Asset protection is a topic that many investors become interested in for all of the right reasons: they want to protect their hard-earned assets from lawsuits. Specifically, they don’t want the fruits of their labors to motivate a lawsuit or be seized upon judgment. However, to execute an asset protection plan that will truly defend your assets and stop lawsuits before they even start, you will want to get help from an attorney with experience in asset protection. Let’s look at three of the most common DIY asset protection planning mistakes to illustrate why.

Mistake #1: Using Incorrect Asset Structures

You may do some research and learn that there are some common structures that serve as the foundation of effective asset protection plans. But it’s also easy to overlook some of the factors that help determine which structures are best for you. After all, you don’t know what you don’t know.

Let’s look at an example. Jim is an investor in California who has read about asset protection online. He has four properties in his portfolio that he would like to defend from lawsuits.

Jim is a smart guy who knows the importance of researching the changes he plans to make in his business structure. So he gathers information from multiple sources including BiggerPockets.com and educational articles from law firms like the one you’re reading now.

Jim is a smart man. Sort of.

Jim quickly learns that LLC structures usually serve as the foundation of most asset protection strategies. He notices that other investors use LLCs for asset protection and feel confident about their decision. He hops online and uses a cheap service to create LLC articles of organization and create a single-member traditional LLC for his real estate holdings.

Seems like a good enough plan, right?

Wrong. In fact, there are three problems with Jim’s approach. First, Jim did not consider (or perhaps did not know) that a traditional LLC is generally not the best approach for Californian investors. LLC laws are defined at the state level, and the best states for LLC formation depend on where you live.

For Jim, the recommended structure would actually be the Delaware Statutory Trust. By establishing an LLC instead, Jim is paying an unnecessary $800 in California franchise tax annually. If he established his LLC in a different state, he may be on the hook for foreign entity registration fees, registered agent fees, and more.

The next problem with Jim’s plan is that he is pooling properties inside of a single traditional LLC. If Jim becomes the subject of a lawsuit because of one of his properties, all of them may be vulnerable to seizure if he loses in court. All the opposing attorney would have to do is prove that the LLC is simply an alter-ego of Jim, an act known as “piercing the corporate veil.” This would be easy for opposing counsel because of Jim’s third mistake: failure to preserve his anonymity. LLCs generally must have their membership recorded with the Secretary of State for the state they are formed in. Since he formed a single-member LLC with no additional structures, Jim’s name is listed on this public record. A competent attorney could make quick work of piercing the corporate veil because of this oversight. Now all of Jim’s properties are vulnerable--not just the one related to the lawsuit--and a judgment against him is easier to secure. If he had used a Delaware Statutory Trust established by an asset protection attorney instead, Jim would have preserved his anonymity, kept his assets separated from each other and him personally, and avoided the $800 state Franchise Tax.

As you can see, there’s a lot to consider when creating your asset protection structures.

Mistake #2: Failing to Use Asset Protection Tools Correctly

Even if you do determine which structure is best for you, you must use it correctly. Let’s imagine you do some research and discover that a Texas series LLC is a great structure for real estate investors. This is true in most states. But you still need to know how to use it appropriately.

Using your entity correctly requires a degree of specialized knowledge. Some of the factors you must consider to effectively use a Texas series LLC include the following:

Whether you are using a shell company in conjunction with your series LLC. How you will conduct business strongly depends on how whether you use a traditional LLC as a shell company or not.
How to set up your banking to protect the integrity of your series LLC structure and streamline operations.
How to avoid commingling personal funds or business operations with your series LLC. Ideally, this structure should serve to hold assets only. It should never do business with the public.
Whether and how to use Anonymous Trusts in conjunction with the series LLC, and how to appropriately structure those trusts.
How to execute property transfers. This is truly an area that is difficult to navigate without professional help. Failure to properly execute transfers into your asset protection structure can undermine its entire purpose. What good are these structures if they aren’t actually defending your assets?

That is just one example. Trusts are no less complex. You must know which type of trust to use.

Do you know off the top of your head whether you need a revocable or irrevocable land trust? Or which of the many types of trusts are best for asset protection? If not, that’s a sign you will either need to spend hours educating yourself or get help from someone who knows this territory.

Investors can also make errors with drafting their trust documents that legal professionals would not. For instance, you never want to state that a trust is being created for asset protection purposes (more on that below). Similarly, the documents must be written correctly while also applying to your specific situation. This is a task that is almost impossible without a legal background.

Correctly identifying the parties to the trust is also vital for the trust to do its job. Finally, you must also know how to file trust documents privately to preserve your anonymity. There’s a lot to know about any of these tools. The above doesn’t even take into account the many more minor errors that could undermine the protections of your trust, nor the role it should play within your asset protection strategy.

If this seems overwhelming, just consider whether it would be the best expense of your time to study all of these items. For most investors, it isn’t. But these details are all things your attorney should be able to advise you on and assist with.

Mistake #3: Stating That Legal Structures Are in Place for Asset Protection Purposes

When creating articles of incorporation for LLCs or setting up trusts, you never want to state that you are doing so for asset protection purposes. Instead, you want to give an acceptable reason such as “real estate investing,” or another business purpose.

Remember: Once you’ve set these terms down in the relevant documents and signed on the dotted line, you’re bound to them.

Should you end up in court, testifying that you created a Trust or LLC for asset protection purposes can also land you in hot water. You must state a legitimate business reason for the creation and use of the structure or it will have no asset protection value. The good news is that this situation is completely avoidable. In fact, all of the above mistakes have the same basic remedy: get help from a qualified attorney instead. Good attorneys will set up your structures ahead of time and advise you on these matters. The best asset protection attorneys will be able to give you the peace of mind of keeping you out of court altogether. Not only will you not have to worry about all of these details, but you also will have someone to turn to if you are ever threatened with a lawsuit who can advise you on what to say--or in this case, what not to say.

A Professional Asset Protection Plan Requires Expertise

There is no good reason to take the risk of creating your own asset protection plan without the help of a qualified asset protection attorney. Even if you’re fairly certain what you need for your asset protection plan, it is still best to get the opinion of a lawyer who is familiar with your specific situation.

The professionals at Royal Legal Solutions have years of combined experience setting up effective asset protection plans for clients all over the United States and Canada. Our attorneys are aware of the state laws that may affect your strategy, and also keep track of changes in the law that could influence how effective your plan would be in the face of a lawsuit threat.

We are also well versed in the best asset protection strategies for a wide variety of situations, as this is the central focus of our practice. As investors ourselves, we are sensitive to your concerns and the value of your time. Using a firm like Royal Legal Solutions allows us to take care of your asset protection strategy while you dedicate your time and effort to finding deals and running your business.

Charitable Gift Options Using a Self-Directed 401(k)

Charitable contributions are a popular strategy among the wealthy for lowering tax payments. But this method isn't exclusively for the Michael Dells and Kim Kardashians of the world. Investors from all income levels, including you, can use it too. But even savvy investors don't always know that charitable gifts can be made from retirement accounts. So whether you simply want to donate money from your 401(k) to a cause close to your heart, save on your taxes, or both, this article is for you. Read on to learn more about your options for giving charitable gifts with your Self-Directed 401(k).

Why You Should Consider Giving Your Retirement Funds to Charity

The funds in IRAs and 401ks are among the most heavily taxed that the average investor will hold, and redirecting them towards charity can make a meaningful difference. Charitable donations help you save money by reducing your taxable income. This is why many highly wealthy individuals give in large quantities. Sure, many of them are philanthropic at heart, but there is also a distinct tax advantage to donating. The higher your taxable income, the greater your tax responsibilities when Uncle Sam comes around to collect his bills.
Giving to charity also qualifies you to receive a Charitable Gift Tax Credit. Literally anyone can take advantage of this. Generally, the credit is computed by taking the market value of an item or actual amount of cash donated, then subtracting the percentage of your tax bracket.
Strategic donations can lead to thousands returning to your pocket. Of course, there are limits: you cannot donate more than half of your income in a given year. Similarly, for these benefits to apply, you must itemize each donation.

What Options You Have For Giving to Charity

You're likely already familiar with some types of donations. Others are less obvious. Here are some, but not all, of the many methods you can use to your taxable income to a charitable cause:

Real Property Gifts (includes real estate, stocks, etc.)
Trusts (Charitable Remainder Trusts, Charitable Lead Trusts, and more)
Charitable Sales
Deferred or Traditional Charitable Annuities
Life Estate Gifts
Retirement Plan Asset Gifts (including the Self-Directed 401(k) plan)
Life Insurance Gifts

Which Options Are The Most Beneficial?

While any of these options is certainly beneficial and altruistic to the receiving organization, smart investors may be wondering which will benefit their own bottom lines. You may be surprised to learn that retirement and life insurance donations are among both your strongest and lesser-known gift choices.
Many potential donors do not know much about life insurance or retirement plan asset gifts simply because charities are less likely to request them. Many nonprofit organizations have a need for immediate cash that is simply not addressed with these types of donations. They are nonetheless useful for the charities--and you.

Ways to Give To Charity From Your 401(k)

Below, we'll describe the two simplest options for donating to causes you care about with your 401(k) funds.

Option 1: Donate Directly From the Plan

You can liquidate an asset (or several) held by your plan, then directly donate the funds to the nonprofit group or cause of your choosing.

Option 2: Name a Charity as a Beneficiary of Your Plan

Naming the charity of your choosing as a beneficiary works the same way as designating any other beneficiary. However, this option has the added advantage of allowing plan funds to pass through to the charitable organization completely tax-free. If you have tax-deferred funds, this is actually the smarter expense than passing those same funds on to your heirs. Your heirs would have to pay the taxes, but the charity does not. Though this may not directly benefit you as much, it is certainly the most efficient use of money that would otherwise be gifted to the U.S. Government. That you can control the funds by selecting any qualifying charity means you have the luxury of supporting a cause you truly believe in.

Section 280A: Home Office Deduction Rules

Many people who have office jobs envy those who can work from home. If you're a small business owner, freelancer, or kick-ass entrepreneur who uses a home office, you probably know that the truth is a little bit more complex. Sure, you can sometimes get away with working in your pajamas, but working from home also takes a lot of discipline and incurs many costs. Fortunately, there is an entire section of the Tax Code that allows for home office deductions that can add up to significant savings. Meet Section 280A, the birthplace of those sweet, sweet write-offs. Read on to learn how to make the most of your Home Office Deductions while staying compliant with the IRS's rules.

Rule #1: You Must Have an Actual Home Office

You can take advantage of the benefits of Section 280A if you have a dedicated office space in your home. Uncle Sam calls this the "regular and exclusive use" requirement. Now, Uncle Sam is reasonable about this. Your entire home does not have to be business-only, but you must have a space in it that is solely for business purposes.
In theory, you could convert your neglected TV room or basement for this, but you have to use it only to manage your business. We have many real estate investor clients who do exactly this and are still acting within the lines of the law. This rule is designed to keep unscrupulous taxpayers from writing off personal expenses as business expense. Of course, we know you wouldn't do that. Just be sure you can prove your case if anyone looks into the use of your home office space.

Rule #2: Your Home Office Must Be Your Business's Base of Operations

The IRS calls this rule the "principle business location" requirement. In plain English, this means your home office must be where the majority of your business is conducted. Let's say you are running a real estate business from a home office. If you are using it for most of your business activities (phone calls, meetings, computer-based work), you can still use another location for other purposes. But only to a point. Having a separate office for meeting high-profile clients or completing shipping duties, for instance, would still qualify you for Home Office Deductions.
One caveat of this rule to understand is that the IRS takes the literal amount of space in your home devoted to business only into consideration. The more physical space in your home that you devote to your business, the better.

Get Professional Help With Your Home Office Deductions

Most people with reasonably stable mental health don't enjoy spending their free time deciphering the tax Code. While this article has explained the basics, these issues are complex. Fortunately, you don't have to slave over the time-consuming process of understanding every detail of Section 280A. That's why the smart move is to get advice from the tax professionals at Royal Legal Solutions. Our tax attorneys already know the Internal Revenue Code inside and out. After all, many of our clients are take-charge entrepreneurs who work from home. In fact, so many of our investors are self-employed individuals that we also offer retirement planning advice for self-employed individuals. Don't torture yourself too much trying to understand the regulations: get professional help today.

Solo 401(k) Contribution Deadlines: What The Self-Employed Need To Know

Nobody loves them, but deadlines are nonetheless an important part of "adulting." If you have ever participated in a traditional employer-sponsored 401(k), you likely already know (or have been reminded) that you cannot contribute to these plans beyond the end of the calendar year. What about the solo 401k contribution deadline? Are things different with this type of plan?

Yep. You see, if you don't work for "The Man," the burden is on you to be aware of your contribution deadlines. That's why we have written this little cheat sheet, which will explain your deadlines based on the type of business you own.

Spoiler alert: these deadlines are unlikely to line up neatly with the traditional ones.

Sole Proprietorship Solo-K Deadlines

Elective Deferrals

If your business is set up as a sole proprietorship, you can make contributions all the way up until your personal tax return is due on April 15th or October 15th. You may choose to make traditional (pre-tax) or Roth (post-tax) contributions to the account. Those interested in making Roth contributions to their Solo-K will want to check to ensure their plan allows for such contributions.
One thing to keep in mind is that regardless of when you make the contributions, you must fill out a form to formally elect the deferrals no later than December 31st, which is generally assumed to be the end of the business year.

Profit-Sharing Contributions

Like elective deferrals, profit-sharing contributions share a deadline with your tax filing: either April 15th or October 15th. Calculating profit-sharing contributions accurately is essential. These contributions are based off of your income, which for these purposes is determined by your net earnings. The IRS has helpfully defined net earnings as your earnings minus half of the self-employment tax deduction as well as the Solo-K contribution deductions. Learn more about how much you can contribute from Uncle Sam's handy memo on Solo-K profit sharing.

S-Corp or C-Corp Solo-K Deadlines

Elective Deferrals

Using an S-Corporation or C-Corporation structure simplifies contributions because they are simply made through payroll. Typically, this means employees elect to defer and their contributions are automated alongside pay.

Profit-Sharing Contributions

Corporations have the luxury of being able to contribute up to 25% of an employee's earnings. These pre-tax contributions are due at the time of business tax filing: either March 15th or September 15th. If the plan allows, employees who wish to may later convert such contributions into Roth contributions.

Royal Legal Solutions Can Help You Understand Your Deadlines

Still with us? If that seemed like a lot of information, it's because it was. We're here to help you wade through the alphabet soup of retirement accounts and meet your deadlines. Of course, deadlines may differ for investors using LLCs or other business entities. The retirement and tax professionals at Royal Legal Solutions can offer you the best advice for maintaining your Solo-K's compliance.

How to Make a Lien Friendly & Protect Your Real Estate

Yes, there is such a thing as a “Friendly Lien." This is a lien against your property held by a party who is friendly to you. Ideally the “friendly party” is an LLC or corporation created in a jurisdiction (like Wyoming or Nevada) that allows you to use a nominee to make your involvement with the business anonymous.

The friendly lien will prevent potential litigants and creditors from pursuing the property since it’s "encumbered." No sane lawyer will dive into a lawsuit before crunching the numbers. After all, why waste time trying to get a favorable judgment if you can’t get paid? This is why a friendly lien is a great addition to your asset protection toolbox. The lien will help make your property less attractive to predators.

But here’s the rub. It’s not foolproof and it can also end up being a quick lesson in how to lose money in real estate.

Friendly Liens Can Go Bad

You need to file a friendly lien the right way to avoid running afoul of the law. Offering a counterfeit lien or false instrument for recording can land you in the slammer in many states. Civil courts refer to it as “slander of title” and issue hefty fines for such actions.

So, what exactly is a bad lien? This is a lien that lacks economic substance. For instance, you shouldn’t claim that your LLC loaned you some money when it, in fact, did not. The IRS and the court system won’t be forgiving. And you’d better hope you look good in black and white stripes if you go this route. Criminal penalties can include jail sentences of two to three years.

Using Friendly Liens the Right Way

You need to get a few things right to keep your property safe when using friendly liens. Unless, of course, your intention is to use the lien to obfuscate or defraud, in which case nothing will protect you from the law.

The lien must reflect the substance of the transaction. If an LLC you’ve created files a friendly lien against your property, make sure the lien is structured as an Equity Line of Credit (ELOC) and not a loan. ELOC transactions usually involve lending party agreeing to lend an amount of money upon demand by the borrower.
Your LLC must have the funds for the loan available.
Liens must be recorded. Drafting a promissory note for the LLC is also vital. The LLC must be set up in commercially reasonable terms (see our resources on how to start an LLC).

It’s Only an Asset Protection Smokescreen

The friendly lien only acts as a smokescreen. It will definitely not protect you from creditors coming to collect. If you have not actually borrowed any money from the LLC, then a friendly lien becomes a meaningless document. This is why we recommend a multi-pronged approach to asset protection for rental property owners.

Top 3 Types of Tax Professionals Real Estate Investors Should Be Aware Of

When dealing with life's only two certainties, it's hard to tell which is more painful: death or taxes. Death is painful no matter what. But fortunately, there are ways to actually minimize the misery involved with dealing with Uncle Sam. As a real estate investor, you already know how important it is to maintain adequate tax records.

Fortunately, you do not have to go it alone with only Quickbooks and TurboTax by your side. There are professionals who deal with this all day long that you can outsource your tax issues to while you focus on your investments. Here are the top three tax professionals you should know about, and what they can do to ease your pain come Tax Season.

1. Certified Public Accountant (CPA)

Accountants are a special breed of people. They commit their working lives to running numbers, and a good CPA will know the Tax Code inside and out. Accountants must be accredited by the state, take continuing education courses annually, and pass a difficult exam to verify their credentials. While many CPAs are knowledgeable about taxes because of their education, smart investors pick an accountant who specializes in tax issues. You want someone who deals with Uncle Sam and his rules on a daily basis to worry about your books so you don't have to. Our firm partners with such CPAs for this exact purpose.

2. Enrolled Agent

An Enrolled Agent (EA) is a professional who must pass a rigorous exam exclusively about IRS regulations and tax matters. Once they have passed this notoriously exam, they hold the distinction of being licensed to practice in every state in the Union. These professionals are also the only people who can represent you in IRS hearings without any type of limitations.

3. Attorney

We promise this isn't just our bias because we are attorneys ourselves. Here's a fact you may not know about being a practicing attorney: becoming an attorney is hard. We must not only attend law school, pass the State Bar, but also participate in continuing education so that we are up to date on state and federal laws. This includes tax matters.

The value of an attorney is in their knowledge and ability to advocate for you. In fact, any attorney can represent you for tax purposes. That said, you are best off selecting an attorney who specializes or has experience in tax law. Our tax professionals at Royal Legal Solutions are licensed attorneys who routinely assist investors like you with filing appropriately, understanding your tax obligations, and ensuring compliance with IRS regulations. Regardless of who you pick, a good lawyer is worth their weight in platinum. We can save your backside in a dispute with the IRS, but more importantly, we can prevent this situation from happening in the first place.

Bottom Line: The Pros Make Your Life Easier

You may use any of these professionals to assist you in preparing your taxes, if only to relieve the stress involved. Do your research on any person you add to your real estate dream team to verify their qualifications. This little bit of proactivity will ensure you are better protected as a real estate investor.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation. TAKE THE TAX DISCOVERY QUIZ

Beneficiary Mistakes — Self-Directed 401(k) or IRA

Designating a proper beneficiary is essential for retirement account holders to guarantee their interests will be served. Whether you're using a Self-Directed IRA or 401(k), you want to ensure that you are doing the most you can for the appropriate beneficiary. Other investors have made critical errors in judgment on this subject, but you can fortunately learn from their mistakes. Today, we are going to talk about major mistakes investors make regarding their Self-Directed 401(k) or IRA's beneficiary, and how to avoid making them yourself.

Mistake #1: Naming Your Child as Your Beneficiary

Most people immediately want to name their child as a beneficiary. This is only natural, but if your child happens to be a minor, things can get extremely complicated. Run this scenario through your head: if you're hit by a bus tomorrow, will your 8-year-old know what to do regarding your retirement account? Do most 8-year-olds even know what an IRA or 401(k) is, let alone how to responsibly direct one?
Even if your little angel is a MENSA-qualified financial prodigy, it is nearly impossible that a court would allow your tiny genius to directly receive your plan's benefits.
Some investors believe they can avoid this issue by simply designating their child as a secondary beneficiary, with their spouse as the primary. But if something should happen to both you and your spouse, you're still going to run into the problems above. Fortunately, there is a simple solution for these situations: appoint a guardian to represent your minor child's interests in your plan. Note that you'll want to do this yourself. If you don't, the judgment call will be up to the court. Make the choice while you can so you know your child will be protected by a person you trust.

Mistake #2: Bungling The Beneficiary Form

There are several ways your beneficiary designation form can actually sabotage the person it is intended to help. The most obvious of these is lacking one altogether. But let's assume you did everything correctly when filling out and filing the form. Don't skip this next critical step: let your beneficiary (and ideally your attorney) know where it is.

If you don't, you're adding even more troubles to your already grieving loved ones. We recommend that you not only provide copies of your form to all interested parties, but that you also keep an additional copy in a home safe or safety deposit box. Anyone who needs the form, from your professionals to your heirs, should be notified ahead of time of the copy's secure location.

Solution: Help Your Beneficiary Efficiently in Other Ways

Of course, when you name a beneficiary, you are hoping that he or she will actually benefit from your account and its investments. While they likely will, we have found that there are limits on how much a Self-Directed IRA or 401(k) can actually do for your chosen party. To be precise, there's one big limit: Uncle Sam.
Uncle Sam likes his money. He will always get it. And getting it from your retirement account upon your passing is child's play for Uncle Sam. Every dime that goes to him is essentially coming out of your beneficiary's pocket. That brings us to one of the most common-sense ways to look after your loved ones: life insurance.
Life insurance is an incredibly valuable tool, particularly if you have children. Yes, you will pay premiums for the policy, and they may be expensive. But in the event of your death, the benefits will pass directly to your heirs without the Taxman getting in the way.

How a 401(k) Affects Real Estate Investors on Tax Day

You are probably already familiar with the benefits of a 401(k) for retirement planning. But did you know that using this type of account can also help you save on your taxes? In fact, there are multiple tax benefits to taking advantage of the 401(k). Read on to learn about some major ways to save on Tax Day.

401(k) Tax Credits

That's right: you can actually get a tax credit just for contributing to your 401(k). The Retirement Savings Contribution Tax Credit, also known as the Saver's Credit, is intended to ease tax burdens for workers with moderate or modest incomes. But if you meet the eligibility requirements, you can receive a credit up to $2,000. Married couples filing jointly may benefit even more, as their maximum credit is $4,000.

401(k) Contributions Can Lower Your Tax Bracket

Whether you are using a traditional 401(k) or the Solo 401(k), any pre-tax contributions you make are automatically going to lower your tax liability. How does this work? In simple terms, the contributed funds are being pulled from your paycheck before you even receive it. You're already receiving less on your paycheck, but this is actually an advantage when Tax Season comes. The IRS essentially acknowledges the loss you take from these withholdings. They're counting the money you actually receive, meaning your taxable income is lower. Thus, your tax obligations are also lower.
Smart investors in any tax bracket can take advantage of the rewards of making pre-tax contributions. Larger contributions lower your taxable income further. This means, if you contribute enough to the account, you can potentially lower your tax bracket--and enjoy massive savings on your taxes.

Roth 401(k)s Save You Money in The Long Run

There are many reasons to love a Roth 401(k). Roth retirement accounts in general come with many benefits, namely that contributions to the account are tax-free. Distributions won't be taxed when you take them, either. You can also take advantage of strategically timing your Roth contributions to relieve tax obligations.
Using a Roth 401(k) offers a multitude of exclusive benefits in both the short and long term. If you are having a low income year, are early on in your career, or expect to retire in a higher tax bracket than your current one, the Roth 401(k) is seriously worth considering. Check out our previous educational article to help determine if converting your 401(k) to a Roth plan is right for you.

Royal Legal Solutions Helps Our Clients Use 401(k)s to Save on Taxes

Retirement accounts can be intimidating, even for seasoned investors. Since we all must take accurate tax filing seriously to avoid penalties, savvy investors choose to get some help from the pros. The tax and retirement professionals at Royal Legal Solutions can help you get the most savings possible out of your 401(k). We offer a variety of retirement planning services to ensure you are using the correct types of accounts for your circumstances. And, of course, we can advise you on how to get the most tax benefits out of your retirement account.

Don't Pay Taxes With Your Credit Card

If you have considered paying your taxes with a credit card, you're not alone. The urge can be strong, if only because of the convenience factor. Some investors are tempted to pay this way in a lower income year, or if they are unprepared on April 15th, because they feel it's the smart call to be billed at a later date. But doing so can have serious consequences. Let's talk about some of those repercussions, why you should never pay taxes with a credit card, and what alternatives you have.

Using a Credit Card Will Cost You More

The IRS penalizes taxpayers who pay with plastic heavily. Uncle Sam charges a "convenience fee" and may also hit you with every penalty the law and Tax Code allows. You could end up paying an additional 2.25% of your tax balance. Most of us don't have that kind of money laying around to donate to the IRS. On top of all that, your credit card company's interest will mean you're paying more in the long run anyway. With hefty interest rates on some cards reaching 20% or more, these costs can become astronomical. The longer you take to pay off the credit card bill, the more you will pay. The only "winners" in this situation are the IRS and credit card companies--not the taxpayer.

Paying Taxes With A Credit Card Damages Your Credit Score

Making payments with credit will affect your FICO score. This one mistake can follow you for years. Using large amounts of credit at once damages your credit, particularly if you have a hard time paying it off. The huge costs alone could also result in maxing out cards, which for most people means digging yourself into a deep hole of debt. Credit score damage has many real-world consequences, particularly if you are ever going to need a loan. But don't worry, there are better ways to get this job done.

Alternative Ways to Pay

Here are some of the options you have for ensuring you don't end up in nightmarish debt with the IRS.

Get a personal loan. If you are fortunate enough to have family and friends who will assist you in meeting your tax debt, take advantage of this. You won't suffer significant interest, but of course, it is wise to pay your benefactors back quickly. Failure to do so could damage these valuable relationships.
Explore installment plans. The IRS actually offers installment plans for struggling taxpayers. If you get one, you will pay your debt back in increments monthly. There will still be fees and interest rates. After all, Uncle Sam loves squeezing us all for every penny. But he has a heart: these interest rates will most likely be far lower than what a credit card company would charge. Just be sure to file on time to avoid the 5% late penalty, so that you won't add to the debt.
Plan ahead. If your real estate business is structured properly, you can minimize your tax payments. Consider structuring your business as a pass-through entity to minimize debt.

Royal Legal Solutions Can Help You Manage Tax Issues

Whatever your reasons are for wanting to make your tax payment with a card, firms with tax attorneys like Royal Legal Solutions can help. Our tax professionals can evaluate your personal situation and help you determine the best way to make your payments.

Self-Directed 401(k) Contribution Limits: What Investors Have To Know

Every year, the IRS updates contribution limits for the various types of retirement plans. If you want to ensure that you are getting the most out of your plan, you need to know the self-directed 401(k) contribution limits.

This issue is particularly pressing for plan holders over 50, who are allowed to contribute more than younger individuals in the early stages of their working lives. Wherever you are in your career, it is helpful to know the most current information to effectively plan for retirement.

Elective Employee Contributions

The contribution permitted from the employee to the plan is now $18,500 for those under age 50. This is a $500 increase from the 2017 limits.

Catch-Up Contributions

If you are over the age of 50, you have the option to make "catch up" contributions to maximize your retirement savings. There was no increase in catch up contribution limits for 2018. The limit remains the same as it was in 2017: $6,000.

Total Annual Maximum Self-Directed 401(k) Contributions

Total Annual Maximum Contributions take into account all possible sources of plan income. The new limit is $55,000. This is an increase of $1,000 from the 2017 maximum. For those over 50 who choose to make a catch-up contribution of $6,000, the limit is $61,000. You can learn details about why taking advantage of this maximum is a good idea from our educational article on the Solo 401(k)'s unique features.

Health Savings Accounts (HSAs)

Many investors who want to maximize their savings take advantage of HSAs alongside their 401(k). If you are among them, then you may want to know about the new HSA maximum contributions. The new limit for individual HSAs is $3450, which is $50 more than was permitted in 2017. Family HSA plans also saw in increase of $150 from last year, up to $6900.

What About IRAs?

At the time of this writing, contribution limits for IRAs have remained unchanged for several years. The most recent increase was in 2013. If you're using an IRA, the contribution limits remain the same as they did last year: $5,500 for individuals under 50, and $6,500 for individuals over 50. For many people planning their retirement, this is yet another compelling reason to look into the Self-Directed 401(k).

What Are The Tax Filing Requirements of a Partnership?

Partnerships, and LLCs taxed as partnerships (MMLLCs), do not pay tax at the partnership level. Instead, their income and losses are passed through to the individual partners, and reported on their individual or corporate tax returns.
Despite the partnership not being taxed at the partnership level, it is still required to file its own tax return called Form 1065.

Filing Form 1065

On Form 1065, a partnership will report its income and losses for its business activities for the year. It will also report the assets and liabilities of the partnership.
To report this, you will need to provide your tax preparer a profit and loss statement, balance sheet, and any potentially additional supporting documentation.
Other common information reported on Form 1065 includes:

Partnership types (general vs limited)
Percentage of ownership
Distributions
Tax credits

Partnerships may also have state filing requirements that will vary from state to state.

Schedule K-1

Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. is completed and distributed to each partner. Each partner will then file their K-1 with their individual (Form 1040), or corporate (Form 1120 or 1120s) tax return.

Filing Deadlines

Form 1065 is due March 15th, but can be extended to September 15th.
For corporate partners, Schedule K-1 must be filed on Form 1120 or 1120S, due March 15th, but can be extended until September 15th.
For individual partners, Schedule K-1 must be filed on Form 1040, due April 15th. This can also be extended until October 15th.

Related Issues & Tips

If you raise capital from Limited Partners (i.e. a syndication or fund), it is in your best interest to keep very clean records. This will help your tax preparer file Form 1065 and issue K-1s to those Limited Partners prior to the April 15th filing deadline for individuals.
This is a good investor relations practice that will keep your investors from continually asking for their K-1, make your company look professional, and increase the likelihood of receiving repeat investments and referrals from your current investors.
Since the partnership itself pays no tax, individuals will pay the 15.3% self-employment tax if applicable.

The Bottom Line

Even though partnerships do not pay income tax at the partnership level, they are still required to file Form 1065 by March 15th of each year.
Schedule K-1 reports each partner’s share of income, deductions, and other important information. If you raise capital from Limited Partners to fund your business or investment, it is a good investor relations practice to have your tax preparer file Form 1065 and distribute K-1s prior to April 15th.

Author: Thomas Castelli, CPA is a Tax Strategist and member of The Real Estate CPA, an accounting firm that helps real estate investors keep more of their hard-earned dollars in their pockets, and out of the government’s, by using creative tax strategies and planning.

401(k) Investment Options

For many individuals who want to plan ahead, a retirement account is one of the best means to save for the future. For most, an individual retirement account (IRA) or 401(k) plan are the primary means of doing so. However, did you know there were other options? At Royal Legal Solutions, we understand your desire to capitalize on a diverse investment portfolio. Below, we talk about the types of 401(k) accounts available to you, as well as the investment options each present.

Different Plans, Increased Options

There are several types of 401(k) accounts you can have. Depending on the type of 401(k) you have, your investment options can be greatly expanded.

Company-Sponsored 401(k):

For most individuals, a company-sponsored 401(k) account is the kind that comes to mind. These accounts, set up through your employer, come with their own set of guidelines. Typically, a company will partner with a financial service business in order to provide these accounts to their employees. More often than not, these plans are strictly limited to the typical stocks, mutual funds and bonds. Can a business elect to have a more diverse investment portfolio for their employees to choose from? Yes. Yet, this is seldom the case. Most employers, however, do help you save for your retirement faster by matching all or part of your contribution.

Individual 401(k):

If you are self-employed, without employees, you may elect to open your own 401(k) account with a financial institution. These accounts, known as individual 401(k) plans, are also limited in scope. This is because most financial institutions do not offer “self-directed” options to their clients. In fact, your investment options will be limited to those options offered by the company.

Individual Self-Directed 401(k):

As with the individual plan above, a self-directed 401(k) can be established by anyone who is self-employed without employees. In a self-directed 401(k) account, your investment options are almost limitless. In fact, with a self-directed 401(k), you can expand your investments from those traditional options above to include real estate, private placements, precious metals, and more. A self-directed 401(k) can be either traditional or Roth-based, which allows you to use either pre- or post-tax dollars for your contributions.

Invest with a Reputable Firm

There are many benefits to opening a self-directed 401(k) account. (Likewise, you can also open a self-directed IRA account too!) To do so, however, you need to find a reputable and specialized firm that offers this. Royal Legal Solutions can help! Our professionals specialize in self-directed retirement accounts. We understand the laws established by the Internal Revenue Service (IRS), as well as any state and federal laws that may affect your account too. If you would like to learn more about self-directed accounts, saving for your future, or IRS regulations, contact us today.

Pay for College With a Real Estate Investment Trust

Whether you have kids now or plan to in the future, paying for college is something you've no doubt thought about.

Real estate investors should be aware of the options they have when it comes to using their property to help pay for college tuition. In this article, we’ll discuss one method of paying for college tuition that doesn’t get much attention. This method involves utilizing a land trust to hold title to investment properties.

Set Up a Land Trust For Each Child

Once you’ve identified the investment property you’d like to use to fund future college expenses, make sure that the title to each of those properties is held in separate land trust. This is especially important if you have multiple kids because each child will serve as the beneficiary of his or her own separate land trust. Also, we’ve seen several cases where separating assets into their own individual entities, such as multiple “child LLCs” within a series LLC, has helped investors manage the impact of lawsuits.

Have Each Property Appraised

After ensuring that each child has their own land trust and is named beneficiary to that trust, have each property appraised at its current market value. Afterwards, sell an option on each investment property. Each child’s land trust will hold these options and accumulate the appreciation value of their respective properties.

Cash in on Your Real Estate Investment Trust for College

Whenever your kids are ready to head to college, you’ll be presented with two options. First, the kids can exercise their contractual right to sell the property in their land trust, using the money earned for tuition. Alternatively, you can buy the options back and use the profits for college expenses. Either way, parents can put their properties to work in accumulating funds for college rather than taking funds from their current income.

Manage Multiple Land Trusts With a Series LLC

As you can see, a land trust is not only useful in providing privacy when it comes to your wealth and assets, it can also be used to pay for your child’s college expenses. However, key to this method is putting each property in its own trust. This insulates each property from each other, so that a negative hit on one doesn’t impact the others. We specialize in managing multiple land trusts and LLCs within an entity called a series LLC. The land trust combined with a series LLC provides maximum asset protection. However, you’ll want to work with an experienced team of legal professionals to devise an overall asset protection strategy.

Advantages of a Self-Directed IRA

If you are looking to save money for your golden years, it is likely that you have heard of an individual retirement account (IRA). These accounts allow you to invest your pre- or post-tax dollars in mutual funds, stocks and bonds. However, if you are looking for more – you might want to consider opening a self-directed IRA, also known as a SDIRA. These special retirement accounts allow you to invest in alternative assets.

Advantages of a Self-Directed IRA

The advantages of a SDIRA go beyond those of a simple IRA account. Below are just a few of the reasons we recommend a SDIRA account to anyone interested in opening a retirement account.

Diversify Through Alternative Assets

One of the greatest draws of a SDIRA are the alternative assets you can invest in. Real estate, precious metals, and renewable energy sources are just a few of the options available to SDIRA owners. Private placements, foreign currency and many other things are also allowable investments. (In fact, the Internal Revenue Service (IRS) actually allows you to invest in much more than it restricts with a SDIRA!) Because of the greater investment options available to you, you have a greater likelihood of reaping a larger reward.

Tax-Advantage Account Rewards

A SDIRA is considered to be a tax-advantage account. If you open a traditional SDIRA, with pre-tax dollars, you can invest in alternative assets with tax-deferred dollars. This means you have more money to start your investment with. If you open a Roth SDIRA, with post-tax dollars, you can reap tax-free profits. Because you already paid taxes on these dollars, the growth and profits are potentially tax-free. (Speak with one of our experts today to learn more about what the different types of accounts can mean for your future!)

Asset Protection

Opening a SDIRA with a reputable firm, like Royal Legal Solutions, can ensure you know the best way to protect your assets. For example, Royal Legal Solutions makes it easy for you to open a business entity, such as a limited liability company (LLC) or business trust, with your SDIRA. By forming a SDIRA LLC or series LLC, you can shield your account assets and personal assets from lawsuits and bankruptcy rulings.

Total Control

The IRS specifies that any self-directed account is the responsibility of the account owner. This means you make all of the decisions. While your custodian acts on your direction, you can gain even more control. Through opening a LLC or business trust in the name of your SDIRA, you also gain checkbook control. This means you can make investments instantaneously without running it through your account custodian. Think that house at the end of the street is a great investment opportunity? All you need is SDIRA checkbook control.