What Is The Difference Between An Authorized Member And A Manager In An LLC?

A Limited Liability Company (LLC) is a versatile legal entity for running a business. Since its relatively recent creation (Wyoming in 1977) it has quickly become an attractive option for real estate investors due to its tax flexibility and strong legal protections.

In practical business operations, many LLCs function either through a designated manager or the collaborative efforts of its members. Under the second model, an LLC may authorize members to make binding legal commitments for the LLC.

Whichever management framework is adopted, the details need to be outlined in the LLC Articles of Organization and the Operations Agreement. These two documents are the solid foundation of an effective LLC.

Authorized Members in An LLC

An authorized member of an LLC is a member (or members) who are authorized by the governing documents to make binding legal commitments on behalf of the LLC.

LLC Managers

A manager of an LLC is either a member or an outside party tasked with performing the day-to-day functions of managing the LLC. These duties are outlined in the LLC Operating Agreement.

Typically, the manager is given the power to perform the following for the company:

Make legal decisions for the LLC
Open and close business bank accounts
Buy and sell property e.g. real estate or financial instruments
Dispose of assets owned by the company
Obtain financing
Hire and manage LLC employees

An important note on LLC managers is that the LLC Manager is not liable for fraudulent statements for the LLC or the actions of any of the members of the LLC.

Basics of LLC Operations

Before you can understand the difference between an authorized member and a manager in an LLC, you should know the basics of LLC operations. In 2018 just under 200,000 LLCs were established in the state of Texas alone. The popularity of LLCs comes from its legal protections for owners, tax flexibility, and its less formal establishment process than traditional corporations.

As mentioned, a properly established LLC requires two foundational documents: Articles of Organization and the Operations Agreement. The first key step in how to start an LLC is filing the Articles of Organization with the state to outline the formation and purpose of the LLC. Governing the actual processes of the LLC, the Operations Agreement is important to ensure an efficiently run LLC and that it affords the most protections and benefits to its members.

The owner(s) of an LLC are referred to as its “members” and the default management is a democratic vote based on the ownership percentage. All the members enjoy protection from any liabilities taken on by the LLC and the LLC is in turn protected from any creditors of its members.

That said, it is imperative that the LLC Operations Agreement is drafted correctly as an ownership interest in an LLC is not automatically protected against personal creditors. If correctly drafted, however, the most a personal creditor of one of the members could obtain is the cash distributions that that member would have been entitled to.

LLC Articles of Organization and Operations Agreement

As one can imagine, an LLC that functions the best and provides a management structure sufficient for the purposes for which it was created will have well-drafted Articles of Organization (legally required to be filed with the state) and Operations Agreement (governing the functional processes of the LLC but not a legal requirement).

Particularly, these documents will contain provisions outlining the duties and privileges of the LLC’s authorized members and managers, if any.

Your LLC: Member Managed or Manager Managed?

Logically, there are only two options for how an LLC functions from a management perspective: democratically managed by the members or managed by an appointed manager. If it is member-managed then having an authorized member imbued with the power to enter the LLC into legal arrangements will often make practical sense.

Which One Is Right for You?

As a generalization, the larger the LLC the more practical it becomes to have a manager-managed model for the LLC. Aside from the practical advantages, the other key benefit from having a manager manage the LLC is to allow for passive member investors.

Many smaller LLCs prefer to manage the company as a team with, if needed, one or more members being authorized to sign on behalf of the LLC.

In either case, the key is getting the LLC Articles of Organization and Operations Agreement drafted correctly. With well-worded foundational documents, an LLC is an ideal flexible legal entity for conducting business in Texas.

Using a 401(k) To Buy A House? How To Tap Into Retirement Savings For Real Estate Purchases

The U.S. housing market has been booming as everyday Americans (and more than a few real estate investors) take advantage of record-low mortgage rates. As a result, now is an opportune time for many to become first-time homebuyers.

If you want to buy a house but your bank account balance doesn’t seem ready to cooperate, you may wonder if getting money for a down payment from your 401(k) is the way to go. Is borrowing (or withdrawing) from your retirement savings a smart way to achieve homeownership?

Let’s take a closer look at using a 401(k) to buy a house.

History—And Limitations—Of The 401(k)

The origins of the 401(k) plan can be traced to the Revenue Act of 1978, which included a provision—Section 401(k)—that gave workers a tax-free way to defer compensation from bonuses or stock options. The law went into effect in 1980.

A year later, the Internal Revenue Service (IRS) issued rules allowing employees to contribute to their 401(k) plans through salary deductions, which led to the widespread rollout of 401(k) plans in the early 1980s. Today, 401(k) plans hold more than $28 trillion in assets, while traditional pensions, at least in the private sector, are increasingly rare.

Section 401(k) allowed account holders to receive a deduction on the money they invest into the plan and watch their contributions grow tax-free. The main intent of creating 401(k) accounts was to provide an incentive for employees to save for retirement.

Alas, U.S. Treasury regulations put a few limits on our ability to access those funds for day-to-day monetary needs. For example, you can’t withdraw funds until you reach age 59½ (age 55 if you have left or lost a job). If neither is the case, and you decide to take money out, you will trigger a 10 percent early withdrawal penalty on the amount withdrawn. In addition, 401(k) holders must pay regular income tax on the withdrawal, just as with any distribution from the account, whatever their age.

How Much Can I Withdraw Or Borrow From My 401(k) To Buy A House?

The answer to this question depends entirely on your current scenario and the down payment you want to put down on the house you are buying. You’ll need to calculate how much home you can afford (monthly mortgage payments, plus your down payment and closing costs.

Do You Know Your 401(k) Vested Balance?

Once you know how much money you need, before you can take a loan from your 401(k) you’ll need to know your vested balance. “Vested balance” refers to how much of the employer-sponsored plan you can take to a new job or withdraw from the 401(k) at any given point in time. That number does not necessarily equal the account’s total balance.

Let’s explain. While every dollar you contribute to a 401(k) is your money, you are not entitled to all of the company matching funds right away. Every year, a certain amount of the matching funds is “vested,” becoming part of your account’s balance. Once you are fully vested, you can then claim the entirety of your employer’s matching contributions.

As a caveat, every employer has different rules and regulations regarding the vesting period, so you may want to speak with your plan administrator if you have been with the company for fewer than six years (typically the maximum amount of time an employer may withhold a portion of their contributed dollar). The Internal Revenue Service (IRS) has a helpful entry on this topic.

Should I Withdraw Or Borrow From My 401(k) To Buy A House?

First-time home buyers (without ownership interest within the most recent three years), have three options to get money from their 401(k):

A hardship withdrawal (taking money from your account)
A 401(k) loan (borrowing money from your account)
Both a hardship withdrawal and a 401(k) loan (combining both options)

Option 1: Hardship Withdrawal

Is purchasing a home a “hardship”? Generally, the IRS allows it if the money is urgently needed for the down payment on a principal residence. The IRS allows for a $10,000 withdrawal per person for those younger than 59½ to avoid the 10 percent penalty under specific circumstances (including first-time home purchase). You will have to pay income tax on the amount withdrawn; refer to the IRS website for more information.

Option 2: 401(k) Loan

The rules for loans are strict. The borrower (you) can borrow 50 percent of the vested 401(k) balance or a maximum of $50,000, whichever is lower.

Advantages to a 401(k) loan include:

No early withdrawal penalty
No income taxes on the amount withdrawn
No credit check, so it should not affect your credit

The repayment schedule and the interest rate are usually similar to a bank loan. Typically, employees have five years to repay the loan, but different employers and plan administrators have different timelines.

Most plans charge an interest rate equal to the prime rate plus 1 percent. The interest is not paid to a lender (because the employee is borrowing his or her own money.) The interest charged is added to your 401(k) account.

Regulations for most 401(k) loans generally require a five-year amortizing repayment schedule. However, you can repay the loan faster without a penalty.

Most plans allow employees to pay back the loan through payroll deductions. However, these repayments are with after-tax dollars, not pre-tax dollars as with the original investments into the 401(k).

What if you lose your job? In that case, the loan will have to be repaid by the next federal tax return or it will be considered a withdrawal. (Prior to 2018 tax law modifications, participants with outstanding 401(k) loans and were laid off or fired only had 60 days to pay back the loans.) Then, you will be taxed on the sum at the full rate, plus the 10 percent penalty.

Take note: many plans won’t let borrowers make new contributions until the loan is repaid. So, this loan can be costly in terms of what you will not be saving and not receiving (the company match on contributions).

Option 3: 401(k) Loan Plus Hardship Withdrawal

If your home purchase requires funds beyond the 401(k) loan options, you may also consider the hardship withdrawal. Be aware: some employer 401(k) plans require you to first take out a loan before seeking the hardship withdrawal.

Employer Stipulations on 401(k) Mortgage Loans

Borrowing against a 401k plan is allowed by law, but that doesn’t mean your employer allows it. Many small businesses simply can't afford it. Even so, loans are a feature of most 401k plans. If offered, an employer must adhere to some very strict and detailed guidelines on making and administering them.

Employers can impose their own requirements on 401(k) loans, including:

Whether loans are permitted at all
The number of loans allowed
Whether loans must be for a minimum amount
The interest rate that borrowers must pay

About 90 percent of 401(k) contributors have access to loans, according to research conducted by the National Bureau of Economic Research (NBER). NBER also found that on average the amount borrowed with a new loan is about $7,800, while the average total amount borrowed (across all loans) is about $10,000.

About 40 percent of plans surveyed by NBER allow workers to take out two or more loans at once. Over the course of five years, NBER found that nearly 40 percent of plan participants took out funds from their 401(k).

Drawbacks To Using Your 401(k) To Buy A House

Drawing funds from a 401(k) account can permanently set back your retirement savings. That’s because time value of money is critical to the growth of a portfolio. In other words, taking money out of a retirement account prevents interest from compounding. Be sure to read 401(K) Loans For Investment Property + Prohibited Transactions.

Alternatives To Drawing From A 401(k) To Buy A House

Many experts advise that it is best to build up other savings accounts before buying a house. Aspiring first-time homebuyers may even want to lower contributions to their 401(k) to save for a down payment instead.

Even with a small balance in a savings account, you may be able to qualify for a mortgage loan with a down payment smaller than the standard 20 percent. For example, there are a few federally subsidized loan programs. The Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) help first-time homebuyers and other qualified applicants achieve the goal of home ownership, for example.

How Real Estate Syndicators Protect Assets & Avoid Taxes

Once upon a time, only the richest and most connected investors could participate in real estate syndications.

Today, real estate crowdfunding platforms, lower investment minimums and a wealth of project information available online all mean that real estate syndications are within reach for many investors.

But here’s the bad news: Whether they’re interested in syndication investments or directly investing in a piece of real estate on their own, many investors are at risk of a lawsuit taking all these assets from them.

How safe are you?

Anyone looking to sue you can hire lawyers to go after an individual asset, track it back to you, then go after everything else you own.

The Delaware Statutory Trust is a great way for syndication investors (and certain other investors) to hold assets anonymously, compartmentalize every single one of them and avoid franchise taxes where they apply.

Let’s take a closer look.

What is Real Estate Syndication?

First, let’s define some concepts. Real estate syndication (also known as property syndication) is a partnership between members who pool their resources to purchase and manage properties.

Before the 2012 Jumpstart Our Business Startups (“JOBS”) Act, you really had to know someone who invested in private real estate deals to get in on the action. Even if you did, true syndications were secretive collaborations between the ultra-rich. The deals typically involved many millions of dollars invested in commercial real estate properties—meaning syndications were out of reach for the everyday investor.

The JOBS Act meant new securities no longer had to be registered with the Securities Exchange Commission (SEC), opening the gateway to public solicitation without registration—just so long as all investors are accredited.

So, how does real estate syndication work?

There are usually two roles in real estate syndication: the syndicator and the investor. You’ll hear different titles used. The syndicator is often called the sponsor, managing member or general partner. Investors can be called limited partners or simply members.

So who does what? In a nutshell: Syndicators find and manage properties, while investors provide the money to buy, renovate, or operate those properties.

Sponsors have a lot of responsibility to the investors. The syndication’s fiduciary stewardship falls on them, as do reporting and accounting. The sponsor should be able to recommend the best time to sell the property or have a predetermined exit strategy in place for the syndicate.

How Do Real Estate Syndicators Get Paid?

What does the syndicator get? The syndicator typically earns an acquisition fee (basically a commission) for bringing in the deal. Sometimes the sponsor will secure the property with a contract and put in some of the money, but they're usually the ones providing the “sweat equity.”

The passive investors/mentors usually don't want to deal with the day-to-day headaches of owning property. Aside from financing the deal, they typically don’t have many responsibilities. They typically receive a monthly or quarterly return on the investment. In addition to the monthly or quarterly return, the syndicate may pay other investors an annual "preferred return" as high as 10 percent.

A preferred return, sometimes called an investment hurdle or first money out but usually simply called the “pref,” is a way to protect the capital of limited partners in a real estate deal. Those capital investors want to get paid first.

Let's look at an example.

A sponsor/syndicator secures a commercial property for $1 million.
Four investors each put in $250,000 and will be paid a preferred return of 5 percent.
Each of the five people (the sponsor and the four investors) owns 20 percent of the syndicate.
The sponsor gets a 1 percent acquisition fee ($10,000)

Assuming the building’s annual net operating income is $80,000, who makes what?

Each investor will get a $12,500 preferred return each, or $50,000 total. The remaining $30,000 is split five ways ($6,000 for the sponsor and each of the investors).

Investors/limited partners end up with a 7.4 percent annual return, while the sponsor makes $16,000. The sponsor can make more if he/she manages the property without paying for third-party property management.

When the members (the sponsor and the investors) want to sell, they’ll also realize whatever appreciation the property sees. In the example above, assume that in five years, the syndicate sells property for $1.5 million. The $500,000 appreciation (remember, we bought the building for $1 million) gets split five ways.

Of course, every real estate syndication is different. Sometimes the sponsor gets a smaller cut of the appreciation. Or, if the sponsor spends tons on maintenance and repairs over the lifetime of the deal, they may get a larger share. At the start of the deal, everyone would have agreed on the split based on how much work needs to be done acquiring and managing the investment.

How Does The Delaware Statutory Trust Fit In?

Real estate syndication can be a win-win for real estate investors. But if they are located in California or if the syndicate has property in California, the costs of doing business can be huge. Knowing how to avoid the California franchise tax using a Delaware Statutory Trust is a key part of the puzzle.

The DST is not included among the business structures required to pay the annual $800 franchise tax mandated by the California Franchise Tax Board. DSTs are considered estate planning tools—not a traditional company.

Are limited liability companies (LLCs) enough to protect syndicators from lawsuits? No! The kind of asset protection syndicators need is impossible to accomplish with the LLC. We love the LLC, but if you try to lump all of the assets inside of one LLC, you end up with a huge pool that litigious sharks can easily attack.

With the DST you can create anonymity with the ownership of every single asset the syndicate opens. Those sharks won’t be able to discover the extent of your assets; if there's ever a lawsuit against one asset, they can't go after any of the other assets.

Your syndicate can form a Delaware Statutory Trust in Delaware and use it anywhere in the United States—including California (whether you live there or not). It's one single trust with one bank account, one EIN number, one set of accounting books. It's treated as a pass-through entity for tax purposes, meaning you can claim income on your personal income tax returns instead of a separate business tax return.

In a syndicate, each individual investor possesses his or her own share of the DST property. Any potential income, tax benefits and appreciation are part of this share.

Protecting Syndication Assets With Delaware Statutory Trusts

Did you know 80 percent of real estate investors will be sued in their lifetime? Don't let a frivolous lawsuit destroy your future.

If you’re a syndication investor with properties inside of California, the DST can give you affordable anonymity and asset protection so people won’t even know that you're a good target to come after in the first place.

The DST can also diversify equity to reduce your risk exposure in the event of a lawsuit by giving you both anonymity and lawsuit protection. A series structure makes it infinitely scalable at no additional costs, no matter how many assets you acquire. Incorporating new real estate investments into the structure is quick and easy.

As we’ve seen, syndication gives investors an opportunity to invest in high-value properties. When a Delaware Statutory Trust is leveraged, real estate syndicates often eliminate the liability for the individual investors altogether. When a DST acquires assets, investors can purchase beneficial shares, meaning they become beneficiaries of the DST and direct partial owners of the real estate asset. The trust takes on all property liability.

Syndicators can compartmentalize every single asset underneath its own entity structure by creating an infinite number of child trusts for free. This gives the real estate syndicate infinite scalability every single asset compartmentalized—one asset per child trust.

The Pour-Over Will: The Perfect Addition To A Living Trust

For the savvy investor looking to create a watertight estate plan, the pour-over will may be the perfect addition to a living trust. Named after the fact that it “pours” all a decedent’s remaining assets into the living trust, a pour-over will can be an effective estate planning strategy worth looking into.

So ... Let's look into it!

What Is A Pour-Over Will?

A pour-over will is a standard will form stating that whatever has not been put into the trust when you die should be moved into the trust and distributed per the terms of the trust. Essentially, a pour-over will makes the living trust the sole vehicle for passing assets to whomever you named as beneficiary of the trust. With it, your living trust can be the sole mechanism for handling your estate if you pass away.

Note: A pour-over will and a last will and testament are the same thing if the will names the living trust as the beneficiary. Doing this "pours over" the assets into that living trust. To put it another way, when the document called "last will and testament" names the living trust as the beneficiary, you have a pour-over will.

What's The Advantage Of The Pour-Over Will?

A pour-over will enables the living trust to make a smooth transfer of assets. The key advantage is that none of your assets will have to be settled according to the intestate laws of the state. “Intestate” simply means you pass away without having a legal document to determine how your estate and assets should be divided. How your estate is controlled and divided up your estate will depend on legal procedures (probate), rather than your wishes.

Estate administration is always handled by the executor/personal representative of the estate named in the will. Probate comes into play when the beneficiary of the will is not the living trust.

A probate court has the jurisdiction to “probate” wills, handling conservatorship and estate administration.

Probate is no fun for your heirs, trust us. However, with a pour-over will guiding the process, things tend to be much cleaner, simpler and faster.

A Pour-Over Will Amplifies A Living Trust

Understanding pour-over wills starts with understanding living trusts. A revocable living trust is an estate planning tool that lets you transfer legal ownership of your assets to the trust while retaining control during your lifetime. Similar to a will, the trust has a nominated beneficiary (or beneficiaries) to receive your assets when you pass away.

However, a living trust offers substantial benefits over a will as an estate planning tool.

Unlike a will, a living trust enables asset transfers to be a completely private affair. Living trusts are easier than wills to modify and more difficult to contest. Also, a living trust can be set up to stipulate what happens to your property should you become incapable of managing it yourself.

With a pour-over will, you can ensure that your living trust is the only method by which your assets are transferred to your chosen beneficiaries. That said, you may choose to leave life insurance policies (and occasionally brokerage accounts) outside of the living trust. A life insurance policy can have its own beneficiary designated and not be connected to the living trust. So there ARE ways to pass assets outside of the living trust.

What Happens If I Die Without A Pour-Over Will?

Any property not owned by a living trust is distributed by the existing will, if there is one. If there is no will, this is called intestate succession. Intestate succession means that transfer of assets is governed by the intestacy laws of the state.

Again, we’re talking about probate. And as we alluded to already, probate is often a long and arduous process that can take more than a year for your bereaved loved ones to deal with.

Some states have complicated intestacy laws, meaning that a transfer of assets involves complex legal proceedings. Furthermore, probate can be messy if you own real estate or other assets across multiple states.

Having a pour-over will relieve you of the stress of needing to continually update your living trust. When you transfer an asset into your living trust you change the ownership of the asset. The pour-over will simply transfers any assets not already owned by the trust into it when you die. An example of this would be the money in your personal bank account.

Pour-Over Will Case Study

Here’s a fairly typical scenario that may help you get the picture.

Say a husband and wife wish to leave their assets to their children and grandchildren. Although they have set up a living trust to which they have transferred their assets, they later purchase rental property (or any other type of real estate) and hold the title in their name.

With a pour-over will, that investment real estate will be transferred to the living trust in the event of their deaths. Subsequently, everything will be distributed according to the trust without going through any red tape or court proceedings.

Reasons To Set Up A Pour-Over Will Now

If you are a real estate investor, it is worth updating your estate plan whenever you acquire new investment properties. An attorney can establish the living trust and pour-over will to ensure the seamless transition of assets without the need for probate court. A new home of any kind can drive up your estate’s value, but fortunately asset protection strategies (including titling property to a land trust) may help prevent legal issues and ensure a smooth and seamless transition of assets. For those who have already put thought into an estate plan by setting up a revocable living trust, the pour-over will is the addition needed to make it as watertight as possible.

Should You Form A Single-Member or Multi-Member LLC?

All right my fellow real estate investors, let's break this down: Single member vs. multi member LLCs.

First and foremost, most of the time you can choose which kind of LLC you want. Whether a single- or multi-member company is required depends on state law.

For example, if you decide to form your LLC In Texas, a single-member LLC is fine. But in Florida, you'd need more than one member who isn't your spouse.

Single-Member LLC Vs. Multi-Member LLC

As their names suggest, the single-member LLC has one member, while the multi-member LLC has at least two members. Two heads are often better than one. This is usually true for LLCs formed for asset protection benefits.

If you get a single-member LLC, it will be your responsibility to keep records. And in case you didn't know, if you don't keep records your LLC will lose its protections, leaving you vulnerable to lawsuits.

Which brings us to our next point. In many states, a single member LLC is more vulnerable to a lawsuit than a multi member LLC. How so?

Let's say you cause a car accident while texting and you get sued beyond what your insurance policy will cover. In about 20 states, the law says creditors are allowed to come after property held in your LLC.

However, in those same states, if your LLC had been a multi-member LLC the creditors wouldn't have been allowed to come after your properties. So as you can see, whether you should get a single-member LLC or a multi-member LLC depends on what state you want to form it in.

Also, something that's worth your minor consideration is that a multi-member LLC will cost more in tax preparation. This is simply because there's multiple returns being filed.

Getting Around State Law Restrictions on LLCs

The good news is you can form an LLC in Texas and use it in any state. When the court reviews whether to uphold your Texas LLC in another state, they're going to check to see if your LLC is properly formed. If it is, you'll be protected. But if it isn't, you're screwed.

I recommend you form your LLC in Texas or a similar state with strong asset protection laws. This will prevent your LLC from being sued and having your properties liquidated on a technicality. Learn more about how the Texas LLC protects real estate assets.

If you have any questions about the single-member LLC or multi-member LLC, I'd be glad to answer them in the comments below. For personal advice about the best LLC choices for you, schedule your consultation now.

When Delaware Statutory Trust Trustees' Hands Are Tied: 7 DST 'Deadly Sins'

The Delaware Statutory Trust (DST) is an exceptional investment vehicle. It offers monthly hassle-free income and a more diverse investment portfolio. Managed under the supervision of a trustee, it combines asset protection, estate planning, and personal control.

However, Internal Revenue Ruling 2004-86 names seven deadly sins that limit the DST trustee's power. Below is a list of these prohibited acts, along with an explanation of how the DST can help the investor.

Basics of the DST

The Delaware Statutory Trust (DST) is a formal legal structure that can have multiple beneficial owners, with an underlying trust structure owning the real estate.

The structure can be seen like a “parent” and “child” …. The DST is the parent and each series beneath it is the child. Each series is treated as if it were its own entity, which provides you the same type of asset protection as individual LLCs holding each entity.

A properly structured DST is a haven for California investors looking to avoid franchise tax. You may elect that it be taxed as an LLC, trust or as a pass-through entity depending upon the manner in which it is formed.

Estate planning is simplified with the DST. The DST can act just like a living trust. Since all of the assets are underneath one umbrella of control, it becomes exceptionally simple for your heirs to manage. The DST can simply distribute assets to the beneficiaries upon your death or divide ownership interest to your liking. The DST can take advantage of all available tax avoidance strategies.

With the DST you never lose control of your assets. The DST allows you to restrict the ability of the Trustee to act. In fact, the DST can be constructed so that the Trustee cannot act at all and instead all of their powers are conferred upon you as a “managing Trustee." As such, you maintain complete control with the safety of knowing that somebody else cannot unexpectedly sell your property.

DST 7 'Deadly Sins' That Limit The Trustee's Powers

The IRS has specified seven deadly sins that limit the DST trustee's power. Let's look at them one by one.

#1 No future equity contribution is permitted

When you acquire beneficial interests in a DST, you get a percentage of ownership. If a trustee decides to accept additional contributions to the DST after the offering closed, the original investors' ownership percentages will be diluted, decreasing their claim to the DST's assets.

That's why the DST trustee is restricted from borrowing new funds or renegotiating the terms of the existing loans. Trustees are not allowed to assume greater obligations because it can hurt the beneficiaries’ interests.

#2 The DST Trustee May Not Borrow new funds or Renegotiate existing loans

Trustees are not permitted to assume greater obligations because it can lead to a significant impact on the beneficiaries’ interests. Remember, DST beneficiaries do not have the right to vote on operating decisions, and loans are liabilities.

When you invest in a DST, the sponsor will disclose the loan amounts due. Do your due diligence and understand how the liabilities impact the returns before finalizing the investment.

#3 Trustees Can't reinvest proceeds from the sale of DST investments

All proceeds earned by the DST must be distributed to the beneficiaries—not reinvested. Beneficiaries have the right to determine how to use the capital earned from their DST investment. When the assets of a DST are sold, the DST sponsor may create a new DST offering, giving beneficiaries the option to reinvest with the sponsor, but the investor can cash out or reinvest elsewhere.

#4 Capital Expenditures Are Limited

Trustees may spend money to maintain the real estate property and its value, but they can't risk the beneficiaries’ investment to enhance the property when there is no guarantee that the cost of the upgrade will be recovered at the time of sale.

To put it another way: Trustees may reasonably maintain the real estate property and its value, but capital expenditures are limited to standard repair and maintenance, minor non-structural capital improvements and any expenses required by law.

#5 Cash must be invested in short-term debt obligations

Liquid cash retained in the DST between distribution dates must be invested in short-term debt obligations. An investment in a short-term debt obligation can easily be converted back into cash that can be distributed to beneficiaries. As such, it is considered a cash equivalent. This allows the trustee to increase the value of the DST on behalf of the investors without risking the DST's value.

#6 Cash should be allocated to the beneficiaries on a current basis

DSTs can keep cash reserves on hand. This is to help with unexpected expenses, property management, and repairs. However, earnings and proceeds must be distributed to the beneficiaries within the expected timeframe.

This protects the beneficiaries' rights to receive their income in a timely manner and prevents trustee fraud.

#7 The DST Trustee May Not renegotiate Leases

DSTs operate well with long-term leases to creditworthy tenants on a "triple-net" basis (meaning tenants are responsible for paying property taxes, building insurance, and some maintenance expenses, on top of rent and utilities).

A master-lease structure to hold multifamily, student and senior housing, hospitality, and self-storage facilities are also great for DSTs. These leases provide a more secure investment than year-by-year multi-tenant contracts.

Because the IRS prohibits a trustee from renegotiating existing leases or starting new leases, beneficiaries can be assured that trustees will not make risky leasing decisions. Exceptions are allowed in the case of a tenant bankruptcy or insolvency.

The Bottom Line For DST Trustees

These seven deadly sins are in place to allow DSTs to qualify as suitable investments for the purpose of a tax-deferred 1031 exchange. DSTs have benefits for investors, but can create challenges for trustees.

Remember: if a DST is in danger of losing a property because the seven deadly sins prohibit the trustee from taking necessary actions, the state of Delaware permits the DST to convert to a Limited Liability Company ("LLC"), assuming a provision was listed in the origination documents. DSTs are excellent investment vehicles, but you must complete due diligence and choose the right kind of DST for better and secure returns.

Combat Fear With Financial Planning

Fear without direction is a scary thing. We’ve all had our lives upended in the past month, both personally and professionally, in the face of the global Coronavirus pandemic and it’s left many of us feeling a lot of fear about the future. What we’re missing is a plan, though. With a plan to guide our moves, fear and panic can begin to subside as steps are being taken to move past this and make our families safe again.

Though we have little control of the plan, or lack thereof, at the national level, we can do something to alleviate our fears at a personal level. The threat of COVID-19 has challenged my core belief that “Everything Happens For Me, Not To Me.” I used to see opportunity in chaos but now I am focused on how I can protect my family, support my business and serve my neighbors and community so we can all leave this stronger than when it started.

So I made a list of the things I can control:

I can take steps to ensure financial security in spite of a coming storm;
I can be the calm, level-headed person that my team, my clients and my family depend on;
I can be open to new opportunities and ways to transform this panic into something good for the people I care about.

A great place to start is to build yourself a budget.

No one likes creating a budget, it’s about as fun as nails on a chalkboard, but controlling your expenses is a key aspect to keeping yourself afloat during trying financial times. Being aware of all of your expenses, the timing of them versus when your paychecks come through and your overall cash flow can help you make smarter choices and increase your savings or investments over time.

It may seem daunting, but you can create your budget with just three simple steps:

Step One: Collect and organize all of your credit card statements, bank statements and income sources.

Most of us just finished doing our taxes, so much of this will be easy to gather. How you organize is up to you and what works best for you. For me, it’s compiling a spreadsheet. For you, it may be spreading everything out on your kitchen table with paper and pen at the ready. What’s important is that you’re getting a complete picture of what comes in and goes out each month. If you’re tech-adept, there are a number of free or cheap online budgeting tools like Mint or Personal Capital.

Step Two: Now that you have a clear picture of your monthly expenses and income, decide how tight or loose your budget needs to be.

If you anticipate an upcoming loss of income or change in financial circumstances like having a kid or relocating your family, or if your family is just saving for an upcoming vacation or big purchase, this is when you start going through your monthly expenses and decide which ones can be eliminated.

Step Three: Ask for help.

There are affordable personal finance coaches for nearly every situation, whether you’re looking to get out from under debt or plan for the future. If you’re planning for your business, a cash flow coach can provide guidance in your futures planning. There should be no shame in asking someone with more experience to share their expertise—take advantage of the vast wealth of knowledge resources available to you and plan for a secure financial future for yourself and your business!

The most valuable thing to do right now is to take action and make a plan. Channel that fear into productivity where you’re able and be proactive about your financial future. Stay at home right now, spend some time planning and emerge from this pandemic ready for what comes next.

How A Delaware Statutory Trust Attorney Can Help Your Investing Strategy

Delaware has long been known as the preferred jurisdiction for corporations. Did you know the “First State” is also recognized as a leader in the area of statutory trusts?

In 1988 Delaware adopted the Delaware Business Trust Act, which became the Delaware Statutory Trust Act (the “DST Act”) in 2002. This legislation overruled the principles of common law trusts. which were deemed disadvantageous. The new rules authorized a high degree of freedom of contract between the trustor and the trustee in determining their respective liabilities and the manner in which a trust (a “Delaware Statutory Trust”) could be administered.

While other states have each enacted their own versions of the act, Delaware's has evolved over the years and remains the most advantageous for investors all over the country.

Properly set up by an experienced attorney, a DST is easy to form and maintain. Delaware residency is not necessary; all business decisions of the trust may be delegated to out-of-state co-trustees and managers. Additionally, there are no annual fees or filing requirements—simply a one-time fee upon the filing of the certificate of trust.

Why is the DST useful for investors based or doing business in California?

Short answer: The Delaware Statutory Trust is seen as an estate planning tool. As such, it is not subject to the California state franchise tax that an LLC would pay.

What about dispute resolution? The Delaware Court of Chancery is generally regarded as the preeminent business court in the United States. It has jurisdiction over trust and fiduciary matters as long as the trust agreement contains certain required language, which your lawyer can help you with.

A Delaware Statutory Trust comes with tax flexibility. For example, the trust may qualify as a RIC (registered investment company), a FASIT (financial asset securitization investment trust), a REMIC (real estate mortgage investment conduit) or a REIT (real estate investment trust).

As a “bankruptcy remote” entity, the DST protects individual beneficiaries from liens against the property, giving greater security against judgement. DSTs are typically financed with non-recourse debt, which limits a lender’s remedies to the DST’s underlying property.

Is it contractual flexibility you seek? The parties to the trust are able to dictate matters such as management and economic rights of owners, duties of managers, indemnification, mergers and other management and operational issues.

Beneficial owners of a DST enjoy the same liability protections as stockholders of Delaware corporations. We’re talking limited liability here. Trustees and other managers are not personally liable to third parties for acts, omissions or obligations of the DST.

Getting Help From a Qualified Delaware Statutory Trust Attorney

You should have dependable legal counsel before entering into any 1031 Exchange or Delaware Statutory Trust property exchange. We often hear about investors forming entities then not using them appropriately or failing to maintain compliance. This is less likely to happen when you form your structures under the supervision of a qualified professional.

Hire an attorney with a thorough understanding of the essential statutory requirements for formation, maintenance, and termination of a Delaware Statutory Trust. There are other options available, and your lawyer should help you decide which of these entities can meet the needs of the trust owners, creditors, and management.

If you’re considering an interest in a Delaware statutory trust, particularly in the context of a 1031 exchange, you need an attorney who is current with important developments in the world of tax, business and finance. He or she should know about tenant-in-common (TIC) and other DST structures. These offerings are often structured so that investors can successfully achieve tax deferred exchange treatment.

Delaware Statutory Trusts: Rate of Return, Tax Treatment, and More

First thing to know: A Delaware Statutory Trust (DST) can be used anywhere in the U.S. (not just in the state of Delaware).

A DST is a legally-recognized trust in which property is held, managed, and invested. DSTs allow investors to pool together their 1031 exchange proceeds into the trust, making it an attractive investment option.

DSTs are commonly organized and sold (appropriated) as securities that must be acquired via a securities agent, or broker. DST brokers ordinarily work with sponsors to help investors make an informed choice about whether or not DST property proprietorship interest is good for you.

We point out the Delaware Statutory Trust advantages primarily for California investors because it allows them to save money on taxes. If you’re an investor with, say, 1-3 properties and you’re looking for budget conscious options, the Series LLC may be the solution you seek.

That said, the DST is available to investors from all locations. Advantages include:

Limited Liability. The investor is shielded from personal liabilities beyond the amount of their investment, similar to an LLC or corporation.
Non-recourse debt. The investor is not underwritten for the debt on the property owned by the DST. Therefore, the debt does not show on your credit report.
"Pass-through" taxation: The profits and losses of the business pass through to the trust’s individual investors, who report them on their personal tax returns
Bankruptcy Remote. Individual investors are protected against creditors holding the DST’s debts. The DST also prohibits an individual investor from placing liens on the property of a DST, giving protections to mortgage lenders and other beneficiaries.
Control. The DST’s trustee makes all major decisions. This minimises disagreements between investors.
Single Borrower. The DST owns the property and serves as the sole borrower, making the process of obtaining a mortgage much simpler.
Pre-Packaged Investments. Typically, the DST properties have been acquired and the mortgage put in-place before they are offered to investors. This makes it easy for investors to use the 1031 Exchange funds to purchase one or more fractional DST investments.

Delaware Statutory Trust Rate Of Return

The typical range you can expect to see on DST investments will usually be a fixed percentage based on the expectations on projections of the DST portfolio of properties. The rate of return is anywhere from 5-9% on your cash-on-cash monthly distributions.

One factor to consider is Delaware Statutory Trust appreciation rate of return, which is impacted by supply and demand and is often the most overlooked yield on your investment. A 1031 DST is typically held for 10 years or more, during which time you should see an appreciation—unless there’s been an economic downturn—in the double digits.

How are Delaware Statutory Trust Investments Taxed?

Investors should understand Delaware Statutory Trust tax treatment and go over various DST taxation topics with their CPA and tax attorney prior to making any investment decisions.

When you purchase an interest in a DST 1031 exchange property, you will get a year-end operating statement that shows their pro-rata portion of the property's rental income and expenses. Your CPA will enter the numbers into Schedule E of your tax return, along with any other rental and commercial investments you own.

Depreciation Deductions

Your basis in property is a specific value assigned to property at various points in time. It's used in determining your periodic depreciation deduction for the property, and in computing gain or loss when the property is disposed of.

With a 1031 exchange, if you fully depreciated the property you sold, the basis from the property you recently sold will carry forward into the new DST property you purchase. If you still have basis in the property you sold, or if you purchased a greater value in the DST properties than you had in the property you sold, you can take advantage of depreciation deductions to shelter the income from the DST properties.

State Tax Treatment

When owning DST properties out of state, you will need to file state income tax returns in that state unless the property is in a state with no income tax filing requirements, such as Texas or Florida.

Future 1031 Exchanges

When a DST investment property eventually sells, you are free to purchase any other type of like kind real estate. “Like-kind property” generally means both the original and replacement properties must be of “the same nature or character, even if they differ in grade or quality.” In terms of real estate investing, you can exchange almost any type of property, as long as it’s not personal property. Many investors end up 1031 exchanging back into more DST properties when it is time to reinvest.

Purchasing Equal of Greater Value

Many investors that are at or near retirement have already paid off their properties in full. Taking on more debt is not wise, especially considering the 1031 exchange rules. One of the 1031 exchange rules requires investors to purchase property of equal or greater value.That’s why investors who have paid off their properties in full should invest in DST properties that are all-cash/debt-free if they are able to do so—not using leverage/loans reduces the risk of loss.

What Is A DST 1031 Property And Why Should I Care?

As we’ve seen, a Delaware Statutory Trust is an entity used to hold title to investment real estate. A Limited Liability Company (LLC) can also hold title to real estate; however, a DST 1031 Property will qualify as “like kind” exchange replacement property for a 1031 exchange.

“Like-kind property” generally means both the original and replacement properties must be of “the same nature or character, even if they differ in grade or quality.” In terms of real estate investing, you can exchange almost any type of property, as long as it’s not personal property.

What Is A Delaware Statutory Trust?

A Delaware Statutory Trust (DST) is a vehicle for passive real estate ownership. “Passive” means that you (the investor) are removed from the day in, day out headaches of property management such as dealing with tenants, collecting rents, maintaining the property, etc.

The DST an also diversify equity to reduce your risk exposure in the event of a lawsuit. This, a Delaware Statutory Trust in California gives you both anonymity and lawsuit protection. A Series structure makes it infinitely scalable at no additional costs, no matter how many assets you acquire. Incorporating new real estate investments into the structure is quick and easy. Each individual investor possesses his or her own share of the DST property. Any potential income, tax benefits and appreciation are part of this share.

How Does A Delaware Statutory Trust Work?

Delaware statutory trusts, derived from Delaware statutory law, are a separate legal entity qualifying under Section 1031 as a tax-deferred exchange. DSTs are considered a preferred investment vehicle for passive 1031 Exchange investors (more on these in a minute) and direct (non-1031) investors.

The real estate sponsor acquires a property under the DST umbrella and opens up the trust for investors to purchase a beneficial interest. Most DST investments are assets that your average real estate investors could not otherwise afford. However, by pooling their assets, DST investors may benefit from a professionally managed, potentially institutional quality property. These investors can deposit their 1031 Exchange proceeds into the DST or purchase an interest in the DST directly.

What Is A DST 1031?

In 2004, the IRS (via Revenue Ruling 2004-86) specified how to structure a DST to qualify as replacement property for 1031 Exchanges. This allowed the DST to own 100 percent of the fee simple interest in the underlying real estate, with up to 100 investors to participate as beneficial owners of the property.

If you sell a property to invest in a DST, you can defer the capital gains tax through a 1031 exchange. You have 45 days to identify replacement property or else you are going to be slapped with the capital gains tax and/or the Depreciation Recapture Tax, along with state taxes and sometimes a NIIT (Medicare surtax).

If you’re an accredited investor, you can defer taxes by investing your money into another property within a specific timeframe. This property replacement is called a 1031 exchange.

Note: The Security and Exchange Commission (SEC) defines an accredited investor as an individual with a net worth of at least $1 million (excluding the equity in your home) or net income the last two years of $200,000 ($300,000 if joint income with spouse) and with a reasonable expectation of equal or greater earnings in the current calendar year.

Thanks to IRC section 1031, investors can postpone paying taxes by reinvesting proceeds in similar property as part of a qualifying like-kind exchange.

What Is A DST Exchange?

A “DST Exchange” is the same as the tax strategy outlined above. The term “1031 Exchange” is defined under section 1031 of the IRS Code. To put it simply, this strategy allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long another “like-kind property” is purchased with the profit gained by the sale of the first property.

DST Offerings/1031 Exchange Properties

As mentioned, DST offerings might include high-value commercial real estate that the private investor isn’t typically able to afford. The property could be a 500-unit apartment building, a 200,000 square-foot office property, or a shopping center. Other types of DST 1031 exchange properties include self-storage buildings or medical facilities. These properties typically have long-term lease contracts with the tenants.

Most DSTs are set up by real estate syndicators or private investment corporations. Even though the beneficiary of a Delaware Statutory Trust has no management responsibilities, some due diligence on the tenants and the particular property is required. The trustee and the management company selected are also important

Financing a DST Property

The financing used on DST 1031 properties is typically non-recourse to the investor, meaning the lender’s only remedy in the case of a default is the subject property itself. The lender is not able to pursue the investor’s other assets beyond the subject property. So, in the case of a major tenant bankruptcy, marketwide recession or depression, you (the investor) could lose your entire principal investment amount, but your other assets would be protected from the lender.

Internal Revenue Code Section 1031 defines an investor’s exchange requirements of taking on “equal or greater debt.” However, in order to mitigate the risk of using financing when purchasing properties, some DST 1031 properties are offered all-cash, without financing. You can find 1031 exchange DST portfolios with minimum investment requirements in your price range.

Can You 1031 Out Of A DST?

Yes, you can 1031 exchange out of a DST. Two scenarios for this to occur would include:

Scenario One: When the DST property itself goes “full cycle” (meaning the property is sold on behalf of investors), you can exchange out. Once the DST sponsor has sold the asset (per the DST business plan) you and any other individual investor will enjoy the same options you had when you first exchanged into the DST. This means you can exchange into any other type of like property, which you would then own and manage. At this point you could exchange into more DSTs or simply pay taxes.

Scenario Two: When an individual investor wants to sell out of their DST position before the DST property itself goes full cycle. This scenario is a bit more tricky. DSTs are considered illiquid investments; There is no public market where an investor can sell their ownership interests in a DST. That's why you should only purchase a DST via a 1031 exchange if you can hold the investment for 5-10 years or more. There may be secondary markets available if you want to sell early, but all the same rules apply as though you were selling a traditional investment property.

Investment Options for Your Self-Directed IRA

One of the best things about rolling over your retirement assets into a self-directed IRA is that it opens up a wide range of investment options—including our favorite, real estate.

Typically, IRA investment options are limited to stocks, mutual funds and bonds. Holders of a self-directed IRA, however, can also invest in:

Real estate
Land
Precious metals
Tax liens
Tax deeds
Mortgages
Mortgage pools
LLCs
LPs
Cryptocurrencies

With all those options, more and more individuals are converting their traditional IRAs to self-directed IRAs to take advantage of a very favorable market. There are, however, certain rules and restrictions that need to be followed in order to enjoy tax-free and tax-deferred status.

Investment Restrictions for Self-Directed IRAs

The IRS does not list what self-directed IRAs are allowed to invest in. On the other hand, it provides a detailed list of prohibited transactions and specifies what individuals are not allowed to invest in. Generally speaking, you cannot directly benefit from any investment you make with your IRA. For those that own property, the property must be held in the name of the IRA trust and not your own. Rent, for example, would be paid directly to the trust.

In addition, you can not hold property in your IRA that either you or your family members benefit from. This includes homes, businesses, and loans. You can’t borrow against your IRA to start your own business. Generally speaking, if you or your family reap immediate rewards from the holding of an asset in your IRA, that is disqualified.

While certain assets are restricted by the IRS, the IRS is most concerned with who is benefitting from the holding of the assets in an IRA. If it’s you or a member of your family, that will raise their eyebrows.

Investment Possibilities With Your Self-Directed IRA

Self-directed IRAs significantly expand your options. They also afford you all the benefits that IRAs have to offer. What are some of those options and benefits?

Tax Deferral

Both traditional and self-directed IRAs enjoy tax-deferred status. Roth IRAs are essentially tax-free. Due to this preferred tax status, the IRS insists that certain rules are followed. Nonetheless, returns and contributions to non-Roth IRAs are tax-deferred. You won’t begin paying a dime in taxes until you begin taking distributions.

Roth IRAs, on the other hand, are taxed on their way into the account. You won’t pay taxes on either distributions or gains. Contributions to the Roth, however, are not deductible. There are also limitations on what you’re allowed to contribute depending on how much you make in a year. This is something to bear in mind when considering a Roth IRA.

Real Estate

Real estate is one under-utilized option for self-directed IRAs. So long as the real estate is property of the IRA trust, any money that the real estate generates is allowed to be entered in your IRA tax-deferred. This can include rent or gains from the sale. One restriction, however, is that neither you nor anyone in your family is allowed to reside in or take advantage of the property in any way. That would create a conflict of interest and potentially void your IRA.

Stocks, Bonds, and Mutual Funds

IRAs are set up to receive passive income from such things as dividends. In fact, the IRS prefers that you pad your IRA with passive earnings. Traditional or non-self-directed IRAs relied on bonds and mutual funds to accrue value. You can still invest in stocks, bonds, and mutual funds, but with a self-directed IRA, you can choose which ones you invest in.

Precious Metals

While the IRA expressly prohibits the use of your IRA to invest in collectibles, there are certain kinds of coins that gain their value intrinsically from what the coin is made of. Instead of being an investment in the coin, it’s considered a precious metal investment. The U.S. government mints such coins for this express purpose. So do most major countries across the globe. These coins are largely considered an acceptable form of investment for your IRA.

Tax Liens

Another interesting option for your self-directed IRA is tax liens. Essentially, the government will sell liens on real estate where the owners have failed to pay property taxes. They will recoup their money in this manner. Meanwhile, interest is building on the unpaid taxes. If the owner fails to pay at all, the real estate will become property of the IRA. For the last decade or so, tax liens on real estate have become a very lucrative investment. With your self-directed IRA, you can reap the rewards tax-deferred.

Private Businesses

This is a bit tricky, but it can be done. You’ll need to bear in mind that you cannot purchase an interest in any business belonging to “disqualified” persons. This basically includes anyone in your family or yourself. The IRA can own an interest in a business and have profits paid to the account, but the disqualified persons statute of the IRC must be abided absolutely. Otherwise, you risk the IRS considering the transaction a distribution thus voiding the IRA entirely.

Loans and Notes

You can purchase notes or make loans using your IRA. However, the same rules concerning disqualified persons still apply. Likewise, you can’t borrow against your IRA.

Foreign and Cryptocurrencies

The IRS permits investors to use their IRA to invest in both foreign currencies and cryptocurrencies. Cryptocurrencies have made a lot of headlines recently, but the jury is still out on whether or not they constitute a good long-term SDIRA investment. It seems that if the technology to process transactions improves over the next few years, as everyone expects it will, then cryptocurrencies could represent a major disruptive technology that would change the face of global commerce forever.

Foreign currencies also represent an excellent investment option as they offer easier liquidity than stocks or bonds.

The Bottom Line

Self-directed IRAs have many advantages, not the least of which is that they allow tax-deferred earnings and unmatched investment options. Using your self-directed IRA to secure your future has never been easier or more effective.

Benefits Of LLC For Rental Property Ownership

As a rental property owner, you are accustomed to solving many different kinds of problems. Ensuring you are protected in case something goes wrong is one of the problems. So we're going to talk about the benefits of having a limited liability company (LLC) for rental property investing.

This is where many owners will say, “I have asset protection insurance, so I am protected if something bad happens” It is true that insurance covers accidents, but you'll start to understand the benefits of using an LLC for rental property ownership if you watch this video:

Why an LLC Can Protect Assets Better Than Insurance

Insurance will not protect you from most lawsuits regarding the buying and selling of real estate. Every time that you're entering into a contract, selling a piece of property, or leasing property to a new tenant, insurance doesn't give you the asset protection strategy you need.

This happened to one of my clients after the sale of a property: After the sale took place the buyer emailed asking if my client had replaced the plumbing under the house. My client simply replied via email that he had replaced, “all of it.” In the context that would be understood as all the plumbing under the house. However, the buyer misinterpreted that email as referring to all the plumbing in the house.

These types of miscommunications happen all the time. Especially now that texting is more and more common between renters and their landlords! This is only one example of an issue that insurance may not cover. This is where the LLC comes in to save you.

Benefits of Owning an LLC For Rental Property

Real estate LLCs are powerful entities that separate the liability of your asset from your personal name. When there is a lawsuit against your rental property, it cannot impact your personal assets. It also means that if you are personally sued, your LLC assets will be protected. In addition, when a lawsuit occurs against the LLC, it will not impact your personal credit score.

Operating an LLC is quite simple, but must be done properly in order to reap its benefits. Forming an LLC is quite straightforward, but needs to be done correctly the first time. To create an LLC you need to select a name for the LLC that the state approves. After that, you choose a registered agent. You will need to file the Certificate of Formation and create an Operating Agreement. Finally, the state will assign you an Employer Identification Number (EIN.)

One LLC is Great! How About More?

An LLC is a great entity, but your rental property still holds a lot of liability. No investor likes having the possibility of losing an entire property to a lawsuit. Because of this, many will create additional layers of defense. The first of these layers is a secondary LLC. This LLC carries out the operations of the company. People refer to this LLC as a “shell company.”

The operations LLC doesn’t own any property. It simply functions similarly to a property management company for your “asset holding LLC.” That means it collects rent, pays contractors, and carries out the operations of that property. This tag-team duo is called a two-company structure. The operating LLC holds most of the liability and is most likely to be sued. However, you only risk the money in THAT LLC. The asset-holding LLC is not involved, and thus the rental property is still legally separated.

Have more than one rental property? You can scale your asset holding LLC up to a Series LLC. This entity scales infinitely with your portfolio. In this case, you can still be using the operating LLC to carry out the activities for all these different rentals without risking any of your properties directly.

Protect Your Investments From Claims

An insurance claim usually results from a "slip and fall" on a property or something else you would normally characterize as an accident. Typically this is what your insurance is willing to cover. But your insurance doesn't cover you for any intentional acts that might occur.

What's considered an intentional act? Well, that depends on what you consider to be intentional. And that's where the law comes in!

In the example above, my client was hit with a lawsuit alleging intentional fraud, an incident that insurance doesn't cover. Yet even after this simple misunderstanding, my client walked away from that lawsuit without paying a dime. This was all because she had a proper asset protection strategy in place.

Benefits of Forming an LLC (And A Few Risks)

By reading this article you are either a real estate investor or an aspiring real estate investor. You have surely talked with people discussing LLCs (Limited Liability Companies.) One of the struggles investors run into is finding reliable information that they can trust. Learning about the benefits of forming an LLC is no different.

Today I will tackle how to start an LLC. I will also list the risks involved in operating an LLC. After all, knowing the weaknesses of an entity can allow you to build a stronger strategy. This allows you to sleep well at night knowing all your bases are covered.

Benefits of an LLC

There are many benefits to using a LLC as the foundation of your real estate business. The most important benefit is that this entity limits liability and minimizes personal exposure in the event of a lawsuit. When a LLC owns a property it will be responsible for the property in court, not you. If the lawsuit it lost, the losses are limited to what is in the LLC.

Avoids the issue of “double taxation.” The LLC gives you the ability to file the property as a pass-through entity. You list any profits, or losses, on your personal tax return. But LLCs are flexible! They can be taxed differently depending on your needs. See our article on the tax benefits of the LLC for more.

The LLC can be formed and operated in all 50 states and is uniformly upheld across the United states. You can choose to form a LLC in your local state or in a any other state, depending on your needs.

A LLC can also function as a “operating company.” Sometimes also referred to as a “shell company.” Using a LLC in this way allows investors to limit their exposure even further! Utilizing a LLC as an operating company means that it holds the liability for your business operations. The difference is that you don’t place any assets in it. When it gets involved in a lawsuit you aren’t risking your properties, just your LLC. This article and video explains what this structure will look like.

Risks of an LLC

There is no “perfect” business entity, and the LLC is no exception to this rule. The important thing is to understand its strengths AND weaknesses to ensure your asset protection strategy is effective.

Most LLCs will have an annual fee and corporate management requirements. This will vary from state-to-state, so be sure to know what your state requires.

You need to form and operate the LLC to ensure it provides the liability protection you want. If you don’t form and operate the LLC properly, you are investing into an entity that does not protect you! This type of work needs to be done right the first time. You can also pay someone experienced who will file the entity and teach them you how to operate it right from the start.

The LLC will require separate banking, records and tax returns. This is to ensure that you are able to prove it operates separately from you. This also means more work for you. Once you get the hang of these entities it is very simple, but the learning curse can be rough.

All properties owned by a LLC are held in a “pool,” and are not protected from each other. This is why we recommend that investors with more than a single investment property use the series LLC instead.

The Importance of Anonymity for Your LLC

The Limited Liability Company (LLC) has more than fairly earned its reputation as an excellent foundation for asset protection. But even the trusty LLC isn’t the be-all and end-all of your asset protection strategy. LLC anonymity is another piece of the puzzle.

True, LLCs and Series LLCs make wonderful entities for protecting your real estate investments and other high-dollar assets, but did you know these entities can actually become even stronger? The secret component that can strengthen any investor’s asset protection plan is actually critical for preventing lawsuits and even keeps identity thieves at bay. If you haven’t yet guessed, that secret ingredient is anonymity. And there’s more than one way to achieve a truly anonymous LLC.

Let's look at a few of them now.

Don’t Assume Your LLC Is Already Anonymous

Unless you made a conscious choice to buy an anonymous LLC, odds are good that your traditional LLC has membership recorded somewhere on the public record. If that’s the case, don’t panic! You can still take proactive action to increase your anonymity.

But of course, the best thing any investor can do is not compromise anonymity in the first place.

In most states, members of LLCs must be recorded by the Secretary of State. Those sites are a quick web search away, so anyone who can type can find an LLC’s owners. For this reason, most LLCs aren’t truly anonymous. If you record your real name, you can be directly tied to your LLC, which means it’s not really protecting you.

Although there’s a surprising amount of consistency between traditional LLCs, each state’s asset protection laws are unique. Most investors don’t even take an up-close look at the state statutes for LLCs/series LLCs until they’re planning to buy an entity for themselves. If you’ve already established yours, you should know if you took anonymity steps.

If your attorney took these extra steps, to make sure your LLC was anonymous, your attorney likely would have mentioned it at the time of formation.

If you have specific questions about how protecting your anonymity preserves your hard work, speak with a qualified real estate attorney as well as an advisor who is familiar with your investment market(s). Let’s shift gears and dive into the decision-making process you’ll use to select the entity for your real estate investing business.

Options for Forming Anonymous LLCs

We’ve chosen two of the easiest methods any investor can use to form an anonymous LLC. Let’s break down two of the most common options for real estate investors who need anonymous LLCs.

Method #1: Use Land Trusts Alongside Your LLC Structure

The Anonymous Land Trust is commonly referred to as a title-holding trust, because that’s exactly what it does. These revocable trusts can be used in conjunction with LLCs in several ways.

First, a land trust may be the owner of an LLC. So even if you must record your LLC’s ownership for the public record, you can still remain personally anonymous. The harder you are to tie to your LLC, the better protected you are. Anyone who goes digging won’t see your name on the public record, or that of your other members if it’s a multi-member LLC. They’ll see the name of your anonymous land trust.

If you want total anonymity, you can even pre-select an individual to sign in your place on business documents. Regardless, you can enjoy the other benefits of the land trust, which include the ability to easily assign interest to new partners. Anyone in your LLC or even a joint venture-owned property in a trust can be made a beneficiary of the trust. One of the many lesser-known perks of the anonymous land trust is it makes adding investors and dividing property simple.

Method #2: Purchase an Anonymous LLC From a Service Offering One

Not all real estate attorneys or even asset protection professionals offer a pre-fabricated anonymous LLC, but those who do generally can substantiate what they’ve done to make their LLC truly anonymous. If their webpage doesn’t offer an explanation on the anonymity benefits of such an offering, you can even dial up the firm and ask questions.

Keep in mind that people in all sorts of positions pick up law firm phones, so you might get a great receptionist who takes a detailed note and gets you a callback, a busier staffer who simply takes your number, or you could luck out and get to talk to an attorney briefly about your question. Most firms have staffers who can help explain their products, so don’t assume only the attorney whose name you see on the sign is the only person who can help with your question. A reputable law firm will generally have many qualified people around to help you understand their services.

Knowing how to select a good law-firm option often comes down to asking the right questions. Some key things to look for if you’re not sure about an Anonymous LLC offering include these details:

Is the Anonymous version of the product the only one available? If not, how does an Anonymous Traditional LLC differ from the firm’s standard Traditional LLC? Even if only anonymous versions are available, you can still ask for (and reasonably expect) an explanation.
What about this product is the same or difference from a comparable LLC from another firm in the same state? If you find few differences, you make want to start asking questions.
Does the Anonymous LLC product apply only to Traditional LLCs, or are there options for anonymizing Series LLCs too? If you really need a Series LLC, even an Anonymous LLC won’t be identical. It may be preferable to the common version, but you want to be sure you’re getting the entity you really want and need.
Is the law firm transparent about how they achieve anonymity? Some may use the tactics on this list, and that’s great. We’ve listed these methods because we know they work.

If you’re willing and able to ask these questions, you can shop around and find the right offering for you. Don’t be afraid to look beyond your home state, either, particularly if you live in one that only offers the Traditional LLC. You may be able to solve two or more problems, like creating an out-of-state entity for real estate and managing multiple properties, with the Series LLC—an entity available in under 20 states.

Even if yours isn’t on the list of states currently offering Series LLCs, the good news is that REIs can select any state as “home base” for business. This is true no matter what kind of company you form. Learn more about the best states for forming LLCs or Series LLCs if you are considering making this type of move. You may also be interested in our article, Anonymity & The LLC: States Where Business Owners Love The Laws.

Bottom Line: Preserve Your Anonymity to Decrease Your Odds of Lawsuits

Let’s not lose sight of why anonymity is so important. An ideal asset protection plan must contain anonymity because personal anonymity is the easiest way to maintain legal distance from the liabilities associated with your real estate assets. Whether you achieve anonymity through vigilance about online conduct and information security, via anonymous land trusts, or by forming an anonymous LLC with an attorney’s help, you’ll find the peace of mind you get when you live free of worry is well worth the effort of creating your protections.

Solo 401(k): What To Know About Your Eligibility, Rules & Regulations

The solo 401(k) or self-directed 401(k)—or what the IRS calls a one-participant 401(k)—is an increasingly popular way to save for retirement, diversify retirement assets, and protect them from creditors. Fortunately for us savvy savers, the rules about eligibility and what you can do with your account are right there in black in white. Back in 1978 when the IRS under the Carter administration amended the Tax Code to allow for Solo 401(k)s, the eligibility criteria and defining features of the structure was set in ink and have changed little since.

Are You Eligible For a Solo 401(k)? Find Out Now

The Solo 401(k) has clear eligibility criteria. You must have two things:

“The presence of self-employment activity.” Our friendly Legalese Translator wants everyone to take note of the wording here because it’s about to become important. Note that it doesn’t say “100% of income derived from self-employment.” But people make these assumptions.
“The absence of full-time employees.” Again, the wording matters. You, of course, may work for yourself. You can even have independent contractors.

Partners, fortunately, may be included in your plan as well, but typically, the Solo-K is just that: a one-person affair. Fortunately,

The Solo 401(k) Rules Every Saver Should Know: The Real Deal on Prohibited Transactions

Although we’ve taken a deep dive into prohibited transactions before, questions about this issue are perennial. Although the reality is there are many possible iterations of what a prohibited transaction could look like, there are some general guidelines you can use to help you remember the basics. Broadly speaking, these are the kinds of transactions a Solo 401(k) can never engage in without running the risk of penalties:

Self-dealing transactions. Your Solo-K can’t do business with you or any businesses you own. Doing so, or attempting to, is called “self-dealing.” It’s against the rules because of the many obvious opportunities one would have for corruption if doing business with yourself weren’t prohibited. Investors especially are already known for bending the rules, and prohibited transaction principles against self-dealing prevent plenty of scandalous possibilities.
Transactions with disqualified persons. Disqualified persons is a term coined by the Department of Labor, which makes these rules. They have a lengthy list, but the idea is people particularly close to you transacting with the plan are also against the rules. Your Solo-K or Self-Directed IRA can’t do business with, say, your spouse, children, other relatives, and even certain business partners. If you’re unsure if someone or their business is disqualified, talk to an attorney or CPA before making the transaction.

In fact, as a general rule, it’s better to be safe than sorry when it comes to prohibited transactions. Because you can’t just be granted absolution: usually prohibited transaction penalties are unavoidable after the fact. The best thing to do if you have any doubt in your mind about whether a transaction is against the rules is to ask an expert, or at the very least, someone more familiar with the subject than yourself. Prohibited transactions are best when avoided altogether.

How to Keep Your Solo 401(k) Compliant

Anyone with a Solo 401(k) should be aware of compliance requirements. You have to keep your plan compliant and avoid making transactions you’re not allowed to (known as prohibited transactions) if you want to avoid costly penalties. It’s yet another responsibility that comes with the freedom you get to enjoy with a Solo-K. Self-directed investing can make your retirement dollars work far harder for you, but only to the degree, you manage it properly.

A professional can be helpful here, but some of the basic things to concern yourself with about 401(k) compliance are things you can learn and do now. Here are just a few of the issues you need to be aware of:

Make sure you keep Uncle Sam in the loop. The IRS requires you to update your plan formally every six years.
Keep excellent books so all income is reported correctly.
Avoid prohibited transactions at all costs.
Keep up with your paperwork, which includes filing a 5500 or 5500-EZ with the Department of Labor. Fun fact: the DOL is the agency that also gifted us the prohibited transaction rules.
Separate 401(k) funds from other plans and participants in your life. For optimal asset protection, keep things compartmentalized.

There are other considerations, and remember, since you’re flying custodian-free, it’s all on you. For this reason, many investors choose to get professional help with 401(k) compliance, and you can find full-service law firms and 401(k) specialists. Be sure to vet the credentials of anyone you entrust with your retirement finances. You want someone with real experience or easily verified licensing (lawyers and CPAs, for example, are easy to check up on).

Bottom Line: Knowledge is Power with the Solo 401(k)

The more you know about your Solo K responsibilities and obligations, the more likely you are to leverage this vehicle successfully. Enjoy harnessing the unique benefits, and don’t be afraid to call upon your investing network or a pro if you’re lost. It’s okay to not know everything. Fortunately for us all, these rules and laws are well documented and easy to access on the Department of Labor and IRS websites. Now that you know what to watch out for and how to comply, you can start developing a wealth-building strategy to diversify your retirement dollars and maximize them into your golden years. Happy saving.

Solo 401k: Understanding The How, Why & The Basics

The self-directed 401(k), affectionately known as the Solo 401(k) or Solo-K, is an impressive vehicle for both asset protection and saving for retirement. If you’re an investor, entrepreneur, or anyone with an independent contractor or self-employment gig like Uber driving or your own business, you can’t afford not to know about the Solo-K. Here are the basics of what smart savers should know about the Solo 401(k), including how to get one and why you’d want to.

Why Using a Solo 401(k) is Smart, Especially for Investors

The Solo 401(k) has many great perks, and we have many other pieces diving into the details of self-directed investing benefits. So, let’s stick to the biggest reasons investors are attracted to this vehicle.

The asset protection strength of this vehicle lies largely in the fact that no creditor can come after plan-owned assets. So, any money you place in your Solo 401(k) cannot be seized to satisfy a debt, a feature known as creditor protection.

Solo 401(k)s also allow you to invest in far more than a Traditional 401(k) counterpart. Traditional plans are often limited to the financial products offered by the financial institution you get the plan from. While many savers are content to use traditional plans, investors actually have an edge with self-directed accounts.

The beauty of having so many choices is that you can go with what you know. If you’re like our clients and are into REI, you can actually use your Solo 401(k) to purchase real estate and hold profits in savings. Your knowledge of your asset class gives you the ability to out earn “safer” plans. But such freedom of course comes with responsibilities.

What Real Estate Investors Should Know Before Opening a Solo 401(k)

The biggest factors predicting self-directed accounts’ success will be your personal investing success, followed by experience and willingness to listen to advice. Your knowledge of your market and asset class, smart strategy, and due diligence dictates how much your Solo 401(k) helps you.

Investors who make foolish decisions, like betting the farm on a risky fad investment, can definitely lose money. People who lack any experience with investing are actually better off with a custodian and Traditional plan. They need this support.

We usually find that investors tend to make more money with these plans, because investing abilities and habits directly influence how well the 401(k) performs. Without a custodian running the show, you’re without a safety net but also free of the confines of traditional plans with narrow investment options.

Your plan is backed by investments of your choosing, so choose wisely. For REIs, it’s equally crucial to diversify a Solo 401(k)’s investments to protect against the inevitable deal that doesn’t go, as well as planned.

How to Use a Solo 401(k) to Build and Protect Retirement Savings

The process for opening a Solo 401(k) is fortunately very straightforward. First, you’ll need to find a firm or custodian who offers a Solo 401(k) with Checkbook Control (more below on how to find the right fit for you, so stay tuned). This detail is important, as Checkbook Control is the feature that gives you the power to invest your retirement dollars in non-traditional assets. It’s essential for exploiting the full benefits of the Solo 401(k)’s diversification powers.

From there, you simply need to make an intelligent plan about where you want to stick your retirement dollars. Many conventional financial planners recommend and 80-20 split for self-directed investing. That means spending 80% of your investment dollars on areas you know well. For those of us in real estate, there’s a reason the Brits call a sure bet “safe as houses.” If you’re successful in this area, this would be in your 80%.

As for the 20%, that’s the “play” with. For instance, if you bought Bitcoin to capitalize on currency fluctuation out of curiosity, that’s “playing.” Crypto’s a popular 20% choice as most investors aren’t experts in this area, but you can pick from any asset class in the world.

Forming Your Solo 401(k): The Basics

Forming your solo 401(k) starts with making the decision. All you need to do is decide whose assistance you trust well. Certain groups sell these products from a financial planning perspective. Account-hawking firms are usually barred from giving tax and personal financial advice if their role is narrowly defined. If you need more support, an attorney skilled in using these accounts for investors may be a better option.

Regardless, when you pick the professional or custodian, you’re using to create your plan, here are some things to keep in mind:

Good pros ask and answer lots of questions. This is a reason to consider using a real estate attorney because that’s the first thing any of us do: ask you what’s up. A financial firm that sells these accounts only may be just as attentive, or cheaper options may put more control in your hands.
A custodian who pushes a product is a red flag. If your custodian’s pushing a product before you even tell them a thing about your situation, that’s a bad sign. Usually, it means that’s their lucrative product. At best, you may end up with a less-than-ideal account for you. At worst, you’ll get one from a custodian who only cares about making sales, or intentionally leaves out critical details like your 401(k) compliance obligations.
Don’t forget compliance. It’s a huge deal, and our primer on eligibility is worth a glance for any 401(k) owner.

We hope you get to experience the financial freedom of the 401(k). Take your self-employment savings to the next level, all while enjoying your plan’s asset protection powers. Need assistance getting your Solo 401(k) set up? Take our financial freedom quiz to get started. Upon completing the quiz you will have the opportunity to book a consultation.

Solo 401k: The FAQs

The Solo 401(k) can certainly stir up some confusion. In fact, the whole world of self-directed investing can. So in the interest of saving your precious time, and helping you maximize every single one of your retirement dollars, we’re collecting our FAQs about the plan to answer more of your questions in one place. Let’s look at some of our most common ones.

FAQ #1: Why Is The Solo 401(k) Better Than a Normal Traditional 401(k)?

First of all, it isn’t always. The Solo 401(k) is only better for some people, namely the people that qualify because of self-employment income. So if that doesn’t apply to you at all even through your investments, you’re both ineligible for the Solo 401(k) and unlikely to benefit. But because you’re here reading through the Royal Legal Library (Thanks, by the way! Stay as long as you like and learn all you want for free here!), we’ll assume you’re either an ass-kicking entrepreneur or real estate investor like our clients, or someone who got here because you need this info. Or maybe you just want to be the smartest investor at the room at your next meet-up or have a pal who could use this down the line. So here’s why the Solo 401(k) is better for some investors.

Note From Your Friendly Legalese Translator: We’ve actually got a hack real estate investors can use to structure REI income for a Solo 401(k) eligibility. FAQ #5 below spells out details. But for now, understand that us asset protection pros create structures and help you understand the legal narrative around your plan. The legal narrative matters for you and explaining your structure to someone like, say, Uncle Sam. That’s the only person, other than your own paid helpers, you EVER should have to explain to other than a Judge. If you (against sane legal advice) volunteer info to others, you at least want to tell the same story that you tell the Taxman. Your legal structures do most of the work, but understanding the legal narrative, or the story we tell about these structures in simple terms helps you really understand and exploit them. Knowing the story matters for your Solo-K or any legal tool.

The solo 401 (k) certainly is better for self-employed people and many investors. If you’re among them, you can confirm personal suitability with your attorney, CPA, or other financial advisor. But the most basic reason it’s “better” for these folks is it gives them an option at all. In the bad old days, there wasn’t a good vehicle for stashing retirement savings.

But things got really awesome for investors when some regulations relaxed in the 2000s, even though the Solo 401(k) was created under the Carter Administration. You know, the one you may remember from not remembering much of if you’re a Millennial, or if you’re more experienced, you may think of him as that unfortunate peanut farmer from Georgia who was trying to hammer out the Iranian Hostage Crisis while you were getting your ass-kicking real estate business going. You can thank that Southern-accented, now nearly 100-year-old peanut farmer’s staff for the Solo-K, no matter what you think of the man himself. Carter’s people made this kind of investing a possibility, and one of his Presidential predecessors even the Millennials like our Legalese Translator remember allowed regulations to loosen further. Between them both, and just for the record, each was of a different party, all of us can now enjoy Solo-K’s with Checkbook Control based just on having a real estate portfolio and appropriately arranged structure.

FAQ #2: What’s Checkbook Control?

You’ll see mention of Checkbook Control neatly scattered throughout virtually anything you read about the Solo 401(k). Of course, not everyone neatly explains the details as we do here in Royal Legal Land. Checkbook control isn’t just an ad keyword or some kind of marketing term, it’s actually the feature linked to the account’s most obvious benefit: the ability to go beyond the world of traditional financial products.

Checkbook control is the feature that enables you to enjoy the full liberties of a self-directed account. These words can be confusing, because they evoke the image of an actual checkbook, so think of “checkbook” as shorthand for “your entire account.” Checkbook control actually refers to the power you get to make nontraditional investments restricted only by Tax or Labor Code law. So you may find it easier to remember like this: it’s called checkbook control because you get to control your investments yourself. Self-directed 401(k)s come with Checkbook Control usually, but you want to be sure. A plan without checkbook control would be extremely limited. Note that you can also get this feature on other types of accounts like the self-directed IRA and its Roth version.

FAQ #3: How Do I Use My Real Estate Business for Solo 401(k) Eligibility?

Here’s the hack we’ve been teasing. You really can structure your real estate business accounts to justify Solo 401(k) eligibility. Remember, the accounts for businesses with sole owners. If that’s not how your REI assets are currently structured, it’s surprisingly easy to do. Most investors with LLCs or unused Series are able to tweak these structures, or you can create an entirely new business with an attorney’s help to ensure you’re complying with the requirements.

But yes, it’s possible to arrange your REI assets and flow of income from these investments to qualify for a Solo-K. And we haven’t even gotten into the details of how you make even more money for your portfolio by using your Solo 401(k) to make real estate investments, but this dream’s real too.

Now, this trick won’t work if, say, you need to own a corporation for your business or MUST have full-time employees (see our piece on eligibility if you’re unclear why: it’s one of the two main criteria). But for those without such complications, the Solo-K can be the easiest qualified retirement plan to form as well as one with the most perks just for REIs.

FAQ #4: How Much Can I Contribute to My Solo 401(k), and Can I Exceed These Limits?

As of 2019, the time of this writing, contribution maxes are higher than ever. Savers under 50 years old can contribute $56,000 for the year. Those above 50 may make an additional $6,000 in catch-up contributions or a total of $62,000 for Tax Year 2019.

You generally can’t go beyond the limits because there are provisions for catch-ups, which the Taxman sees as a “good reason” to let someone stash an extra 6k (for now). That person 51 or older is nearing the end of their career and gets to squirrel away some more. The spirit of the catchup contribution is also to help those folks who didn’t start saving early enough: they may be earning more and can “catch up” at the end of their working lives. We encourage everyone to start saving as young as possible and make sure our top ten retirement savings tips for any age are free to you.

Just to compare the Solo-K to its more common employer-sponsored sister, the Solo-K tops the Traditional in terms of your contribution abilities. For Tax Year 2019, a Traditional 401(k) account’s contribution limits sit firmly at $19,000 for savers under fifty. Those 51 and over get the wiggle room for catch-ups just like the Solo-K holder. That’s nearly ⅓ of the Solo-K’s capacity, and remember that’s an annual figure. A Solo-K alone can hold enough for most of us to retire with everything we need if not in style.

You may have noticed we’re hung up on the year, but that isn’t because maximums go up automatically or anything. They may not change at all, but if they’re going to, it will be for the new tax year. Maximum contributions for the 401(k) tend to rise over time in fairly small increments of $5,000-$6,500 (though that’s still way higher than limits for IRAs or their increased amounts). All retirement savers can remember these rules update annually and make a habit of checking for the “new” numbers around the first of the year. That way, you can save all year long, squeezing every ounce of power out of that Solo-K.

FAQ #5: Should I Max Out Solo 401(k) Contributions? Can I Max Out More Than One Retirement Plan?

We encourage retirement planners to max out their plans when possible. Whether it’s possible for you depends on your other expenses and personal details. Maxing out isn’t necessarily in everyone’s best interest, but it is best to max out contributions to any accounts you can afford to. A retirement penny saved can turn into a retirement dollar earned when you fully leverage every fraction of that cent with a Solo 401(k).

And if you have multiple accounts? You may indeed max them all out. We have some investors who just pick the order of importance in case they ever need to scale back savings, too. For example “If there’s an emergency, I’ll prioritize my Solo-K, then my self-directed Roth IRA, than my Traditional IRA, then my spouse’s plans.” We do recommend coming up with emergency plans of this kind just in case.

Heck, even if you need to scale savings down for a month or two because of a real deal crisis, at least you’ll know your plan and not compromise the diversified portfolio if you know which accounts are most beneficial. In the example, the accounts were prioritized in order of freedom and max contribution amounts, so feel free to borrow that template for your own use.

Investors Love The Solo 401k: Here's Why

The self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k)—isn’t all that different from a "regular" 401(k) on paper.

Its name actually derives from the fact that it is a “one participant" retirement plan. But solo 401(k)s offer a whole new level of freedom as far as investing your retirement dollars goes. The seasoned investor can use their knowledge to get an edge. He or she may develop a diverse retirement portfolio that includes nontraditional assets, including real estate.

Our clients love the solo 401(k) for many reasons, but these are some of our favorites.

Sweet Freedom: Invest Where Your Expertise Lies

The solo 401(k) with checkbook control has the ability to break free of the world of traditional investing. You can diversify your retirement dollars across almost anything when you use this type of account. In fact, the IRS only prohibits three specific types of investments:

S-Corporation Stock
Collectibles
Life insurance policies

Beyond these three things, the sky’s the limit. So you’ll have to find another place to stash your classic cars (may we recommend an asset-holding structure such as the series LLC?). But aside from these three off-limits categories, that leaves literally everything else on the planet that one can invest in.

So if you’re a commodities or crypto genius, maybe this is the plan for you. You can invest in these nontraditional assets only with self-directed accounts. The checkbook control feature of such plans gives you this liberty.

The fact that you can invest in real estate with a solo 401(k) is a major draw of this self-directed account for our real estate investor clients. Whether you’re just starting out or have been in the game for a long time, many investors and entrepreneurs who are solo 401(k) eligible use the plan to make real estate investments.

Here’s an educational resource you can use to learn more about the benefit of buying real estate with a self-directed 401(k).

The Solo 401(k)’s Tax Benefits: Just The Highlights

There are a host of benefits exclusive to the 401(k), and tax perks make up the bulk of them. Savvy investors can use their knowledge of the plans tax benefits to purchase tax-advantaged real estate, defer income.

Deferred income benefits. Your solo 401(k)can’t do business with you or any businesses you own. Doing so, or attempting to, is called “self-dealing.” It’s against the rules because of the many obvious opportunities one would have for corruption if doing business with yourself weren’t prohibited. Investors especially are already known for bending the rules, and prohibited transaction principles against self-dealing prevent plenty of scandalous possibilities.
Access for self-employed people. Prior to one-participant accounts, self-employed people didn’t have many options for retirement savings at all.
Viable for real estate business profit savings
Capital gains deferrals. Prohibited transaction penalties are something to look out for.
Tax benefits for contributions. There are many possible ways the solo 401k can reduce your taxable income, but you’re also eligible for other perks like the easy Savers Credit. Learn more about how you can save on your self-directed 401(k) come Tax Season.

Savings Benefits: Sky High Contribution Limits

Unlike the self-directed IRA, the solo 401(k) has remarkably high contribution limits. While at the time of this writing IRA contributions max out at $5,500 (or $6,500 for workers at the eligible age for catch-up contributions), you can contribute up $60,000 to your solo 401(k) if you’re under fifty. If you’re over, you get an extra $6,000 allowance for catch-up contributions.

Flexible Lending Options

While 401(k) and asset protection experts may debate the wisdom of taking advantage of this feature, you can indeed borrow up to 50% of your 401(k) for essentially any reason. Many real estate investors use this perk as a way to finance their investments.

The reason actually borrowing from your 401(k) is a dice-roll is if you do make a bad deal, your retirement account is what really suffers. Recovering isn’t always easy, and real estate investors can mismanage funds by say, over-investing in a single property, neglecting due diligence with their 401(k) investments, or failing to request the proper professional help before making moves with their plans. Don’t be one of them.

The smart investor, on the other hand, can use this feature for a tax-friendly, easy loan: the self-directed 401(k) loan. Applied wisely, it can multiply your funds. The outcome really depends on your investing ability, which is both a blessing and a curse with self-directed investing. But hey, that’s the price of freedom.

Using Corporations to Manage Real Estate LLCs: The REI's Basic Guide

It’s important to set up your real estate LLCs the right way.

Improperly established, noncompliant or mismanaged LLCs are pointless at best and costly at worst. Your entire asset protection can be undermined by one poorly structured or managed entity, because the entity is such a crucial piece of any asset protection plan.

No matter what kind of real estate LLC you use—Traditional LLC, Series LLC, a combination of both, a special variation like a married couple LLC, or even multiple LLCs with other structures on top—you must ensure your business choices are clearly conveyed in your paperwork. This includes your Operating Agreement, which can be amended, but functions as your LLC’s Bible. So, it’s actually best to get your agreements with any partners, rules, expectations, and plans for dividing profits and losses in lockstep and recorded in ink accurately from the moment you form the company.

It’s equally critical that you know who is going to manage the LLC and how. After all, you do get to make this decision. All too often, members of multi-member LLCs don’t understand the depth of their options, but you’re not going to be one of them.

Here’s the straight dope on using a corporation to manage an LLC, what alternatives you have, and how to decide if corporate LLC management is right for you.

Can a Corporation Manage an LLC?

Usually people ask if a corporation can own an LLC, but this is an example of someone asking the wrong question for the information they seek. Of course a company can buy an LLC, but we’re referring to using a corporation in lieu of a single human manager.

So yes, a corporation can manage an LLC. But it’s far from the most common type of LLC management.

Ways You Can Manage Your Real Estate LLC

To know if going the corporation management route is right for your LLC, you’re going to have to consider the other ways investors manage their companies. Most people go with one of two options:

Member-managed LLCs. These are by far the majority. Power tends to be divided equitably among the members. A single-member LLC is essentially managed this way by default.
Manager-managed LLCs. We’ve talked about manager-management concerns and tools here on the RLS blog before and encourage you to learn more. But essentially, an LLC that appoints a manager will legally give that manager certain powers. Doing so is essential so the manager can do their job of running the LLC’s daily operations. Managers may buy or sell assets, hire and fire employees, and take other actions that directly impact members. Members must have confidence in their manager and protect themselves with a well-crafted Operating Agreement.

Investors usually choose their management style. If you have a great person in mind and nobody on your team will rise to the occasion, a manager’s a great way to go. If each member has confidence the manager is trustworthy, and all ensure that the Operating Agreement of the LLC accurately reflects their desires, then a manager can be a great thing for a real estate LLC.

When a corporation manages your LLC, you can think of the corporation as standing in for a human manager. There’s actually a long history in American law of treating corporations as people, a concept known as corporate personhood in legalese. Depending on the type of corporation you form, you may have several individuals collectively making decisions about your daily operations. Note that your corporation can actually have an unlimited number of managers internally.

Check out our article, Manager-Managed LLCs vs. Member-Managed LLCs: What’s Best for Real Estate Investors?

How Do You Form a Corporation to Manage Real Estate Investments?

Forming a corporation is easy. All you really need to form one is the help of a business or real estate attorney.

But first, are you sure you need a corporation? For many investors, using a corporation is overkill. Most are just fine with cheaper entities.

You need to have an idea of what you want to do. You also need to be clear on what a corporation actually is. First of all, we’ve got two options: the C-Corporation and S-Corporation. Of the two, the S-Corporation is far more popular.

Corporations require many more legal steps than LLCs, including:

Naming a board of directors.
Mandatory meetings (complete with required minutes).
Maintaining corporate compliance (which is far more challenging than with alternative entities, almost always requiring some form of professional legal or financial help).
Tax, legal, and regulatory compliance concerns.

Some businesses need the benefits of corporations, so the regulations are simply the price of admission.

A corporation only helps protect your assets if it’s in lock-step with your business plans. For this reason, many investors choose to form their own. That way they can be sure the corporation is friendly to the LLC.

As I said, using a corporation is overkill for many real estate investors. Most are just fine with cheaper entities.

A Happy Medium: The LLC Taxed as an S-Corporation

The most obvious alternative to a corporation is using a more traditional management style for your LLC: member-managed or manager-managed. But you’ve got creative entity options, too. We’ve talked about some LLC and Series LLC perks already, but did you know that your LLC can be taxed as an S-Corp?

Real estate investors opt for this choice because:

LLCs taxed as S-corps receive pass-through benefits and can possibly save some investors thousands in taxes, just as an S-Corp can
LLCs are easier to set up.
It’s cheaper. One filing fee, one Operating Agreement, no meetings or minutes or boards to handle or worry about paying.
Asset protection for active businesses is ideal for this structure. House flippers or vacation renters are examples of “active” real estate businesses. S-Corp structures are ideal for these, but the LLC taxed as an S-Corp is a cheaper alternative if an S-Corporation isn’t practical.
It’s easier. Most of the time, LLCs are hands-down quicker and simpler to form than a permanent corporation. Try using a Joint Venture agreement alongside this entity to test out a new potential S-Corporation set-up.
Corporations are best suited to larger businesses. By “large,” we mean the kind where a C-level executive team, board of directors, and stock options aren’t just givens but important details.

Now that you’ve gotten the basics down, consider the details of your jurisdiction. In many states, including Texas where Royal Legal Solutions is based, you can convert an LLC into a Corporation. This detail may be helpful to ask your attorney about if you’d like to use an existing corporation. In states that permit such conversions, an investor with an unused LLC may be able to save some major cash by converting into rather than forming a corporation. That said, always check with your personal counsel to be sure this is true for you.

Making the Choice: Is A Corporation-Managed LLC Right for Me?

Determining whether corporate management is the best move for you will depend on several personal factors. You may first consider whether such management is necessary. Small businesses may find that a corporation is more trouble than it’s worth, and that an LLC or two-company Series LLC and shell corporation structure is more effective. Professional help from a qualified real estate lawyer will be a necessity regardless of your entity choices.

While the vast majority of investors decide against managing their real estate LLCs with corporations, your situation may call for such a structure. Learn what you can about your alternatives such as taxing an LLC as an S-Corporation, as well as using other structures or management styles.

We believe it’s best to assess your members’ basic needs and study corporation management before making this judgment call. So keep reading. Finishing this article’s a great start. But we hope you’ll continue learning the best strategies for managing your business.

Manager-Managed LLCs vs. Member-Managed LLCs: What's Best for Real Estate Investors?

When you establish an LLC, you must plan for its management. LLCs may divide decision-making powers among members or select a manager. If your LLC is single-member, you assume managerial powers, but multi-member LLCs must decide. To make the best choice, check out our breakdown of member-managed LLCs, manager-managed LLCs, their differences, and how to address concerns around manager-managed LLCs.

Member-Managed LLCs vs. Manager-Managed LLCs: The Key Differences

Every LLC must decide between a member-managed or manager-managed structure. A member-managed LLC is the norm. These function like democracies, as power is equitably divided among the members. A manager-managed LLC, however, designates one person for managerial powers. Manager-management can help particularly large companies make decisions.

Whether the manager’s a “professional” or picked from the LLC’s members, the critical thing to know is that they have power over the entire LLC. Consider these company-wide powers delegated to managers:

Ability to enter the LLC into contracts
Hiring and firing powers over LLC employees
Authority to conduct daily business, including handling debts, writing checks for employees, and more
Borrowing or investing company funds
Buying and selling company assets

If you’re appointing a manager, read your LLC’s paperwork carefully before signing to ensure power is limited and manager responsibilities are clear. Even LLCs using managers don’t surrender these member powers:

Replacing the manager
Amending the operating agreement
Selling or dissolving the business
Other “major business decisions” defined by state law

Managers of LLCs must meet more compliance criteria than members. Managers have to play by both the rules of the company and the law.

Making the Choice: Does Your LLC Need a Manager?

The manager holds a specific legal role. You may select a “professional” manager, as some multi-member LLCs do, or select a manager from among your members. But here are the key issues to be aware of should you choose this route:

Authority issues. Managers in these types of LLC hold a great deal of authority, often disproportionate to members.
Daily Operations. A perk of using a manager is having a designated person to handle day-to-day operations: collecting payments, hiring contractors/employees, paying debts and taxes, etc. If you can perform these duties, you may consider volunteering to manage if your LLC collectively prefers a manager structure.
Asset concerns. The ability of managers to buy and sell major assets may prove problematic for real estate investing.

The good news is this: for every concern you have, there are ways to address it.

Using a Manager-Managed LLC: Tips for Mitigating Risks

A beautiful thing about the LLC is you have choices. Once you’ve made decisions, they’ll be in plain black-and-white ink for anyone to read in the form of your Operating Agreement. This is your LLC’s Bible.

For instance, some of the concerns about abuse of power are easily prevented by addressing these possibilities and creating checks (like requiring a member vote) in your Operating Agreement. You may choose to make amending the Operating Agreement more difficult or bar managers from making certain calls without member consent. In fact, any matter you’d like member consent on can be accounted for before LLC formation.

The best way to control for problems is in your Operating Agreement prior to forming your LLC. Of course, LLC members truly worried about hierarchy can side-step the entire issue easily by simply forming a member-managed LLC.

Series LLC For Real Estate Investors In West Virginia

Aside from getting to live in “almost heaven,” West Virginia investors really do have something special. And we’re not just talking about the local real estate markets. From an asset protection standpoint, West Virginia investors also have more options. For instance, did you know that you can use an in-state Series LLC as a component of your asset protection plan? You can also use one from a different state if you choose. So yes, West Virginia investors can have it all when it comes to Series LLCs and asset protection. Learn more now.

Is There a West Virginia Series LLC?

West Virginia joined the club of states permitting Series LLCs fairly early on. They’ve offered an in-state option that’s a decent investment vehicle. At the very least, it’s better for investors with multiple properties or those who intend to acquire more than one property. The West Virginia Series LLC is one way you can compartmentalize assets in-state. But it’s far from your only option.

You Said West Virginia Investors Can Shop in Other States. How Does That Work?

That’s correct, you can. And it’s pretty easy. Basically, all you do is a little bit of research. You can use some of our favorite states as a starting point

Texas. Zero state income tax, strong asset protection laws, ultra-cheap formation fees.
Delaware. The state that originated the Series LLC craze is still popular for it’s famously pro-business legal system and simply being the pioneer in this area of asset protection.
Arizona. Arizona’s benefits are similar to Texas’, though at the time of this writing, slightly more expensive to form.
Wyoming. This new kid on the Series LLC block is proving effective and cheap, with low fees attracting investors from around the country.

The reality is that you can form your Series LLC anywhere, and it doesn’t have to have anything to do with West Virginia. If you love your state’s offering, go ahead and take it. But don’t forget to also research these other options thoroughly if you’re really trying to establish long-term lawsuit prevention strategies and effective asset protection.

What Else Should West Virginia Investors Know About Series LLCs?

Aside from your freedom of choice, West Virginia real estate investors should know that the Series LLC is great regardless of where you form it. It allows you to scale up easily, add new “child” Series from the comfort of home, and simplify your real estate business’s books and taxes. You can also learn more about how to strengthen your Series LLC with other legal protections such as Anonymous Land Trusts. The strength of this entity make shock you, but when used correctly, you can also count on it to cover your assets and keep you out of court

Series LLC For Real Estate Investors In Washington

Whether you’re in the big city of Seattle, overlooking the Puget sound, enjoying the highest quality-of-life in America on Bainbridge Island, walking past the wildflowers of Burien, or somewhere else amidst the greenery, there’s no shortage of beautiful views and beautiful homes in Washington State. So the Washington investor is often a sophisticated, intelligent one--the kind of investor who not only knows they need asset protection, but is pretty sure they need a Series LLC. It’s safe to say you’re highly intelligent folks, and we’ll address you as such. So Washington investors, please enjoy your personal guide to using the Series LLC for real estate investing.

Does Washington State Have a Series LLC?

Washington is not yet among the states to adopt Series LLC legislation. That means there’s no such thing as a Washington Series LLC. The state does, of course, have Traditional LLCs available if you’re determined to get a local entity. But if you want to get a Series LLC, you’ll have to play by the laws of a different state. But don’t worry, we’ll show you how.

How Should Washingtonian Investors Defend Real Estate Assets?

No matter where you live, asset protection strategy stays the same. You need to compartmentalize your assets and maintain your anonymity, and you can use a variety of legal tools as a means to this end. The ideal asset protection plan accomplishes both of these goals.

The Series LLC is a critical component of such a plan because it allows the investor to compartmentalize and grow without extra expense. The good news, Washington investor, is that you get to take your pick of any of these great states for forming LLCs:

Texas. Come on down to Texas for low formation fees, no state income tax, and rock solid asset protection laws.
Delaware. If you’re committed to staying in the North, Delaware did originate the Series LLC. It’s pricier than TX to maintain, but you do have advantages like the special Chancery courts, which are presided over by business law expert judges. It’s a pro-business state, for sure.
Wyoming. As of Summer 2019, Wyoming’s one of the newest Series LLCs that just happens to be among the cheapest. Its laws are modeled after other states with strong asset protection legislation.

Really, you can pick any state. But we recommend Texas above the rest, because that’s the place to go if you want to send this message: don’t mess with my assets. The Texas Series LLC is a great solution for the Washington investor with multiple properties, or even aspirations of owning multiple valuable assets. Other businesses may also be placed within your Series LLC structure to protect you from liability issues.

How Do Washington Investors Pick a Series LLC?

You can establish your Series LLC easily. Get in touch with an attorney who has experience forming these entities, let them know exactly what you want, and a competent attorney can lead the way from there. Welcome to the club of real estate investors who can sleep easier at night, never worrying about bogus lawsuits threatening their assets.

Series LLC For Real Estate Investors In Utah

Utah has scenery that we can confidently call serenity embodied. Whether you reside (or invest) in the bigger cities, near the brilliant Great Salt Lake, or in one of the state’s many tranquil rural areas, we absolutely understand the appeal of the Beehive State. Investors in Utah have multiple options when it comes to protecting their real estate assets, including their in-state Series LLC. Those of you who want a Series LLC often want to know if the Utah Series LLC is always best for Utah investors. The answer is “not necessarily,” because it depends on the investor. Utah investors aren’t forced to use Utah Series LLCs. Learn all about picking Series LLCs for Utah investors in this quick explainer.

How Does Utah’s Series LLC Compare to Other States?

The Series LLC is an entity you can form in over a dozen places, including Utah. What nobody tells you is that you have the freedom to travel wherever you like to form a company. And you don’t even have to physically travel to your destination state, so long as your signature on paperwork does. It can help to seek legal counsel with a presence in your state-of-formation--but an attorney in Utah may still help you form Series LLCs in other states. If one lawyer won’t or can’t, another can and will.

You can even ask your attorney their opinion on our favorite states for forming the Series LLC. In order, we’re big fans of:

Texas.
Delaware.
Wyoming.
Arizona.

These are our top four picks as of Summer 2019, although investors should recognize that the law is always evolving. Changes in law can add more states to the pool of selections, change how a state’s Series LLC works, and cause many other rapid developments that change the legal landscape. It’s always best to check with someone qualified and aware of your personal situation before establishing any company for asset protection. Even if you don’t have a lawyer, you can get a consultation with one.

How Can Investors Pick the Best Series LLC?

Picking the best series LLC will depend on you doing several basic things:

Performing good research. Of the above four options, can you think of your personal pros and cons for each? If not, keep digging for more information about these Series LLC choices.
Getting professional help. Only a lawyer can establish a Series LLC for asest protection, assist you with the necessary paperwork and property transfers, and give you personalized advice. If you want your Series LLC to do its job, an attorney’s your best bet.
Making good judgments. What does your business need most? If you save loads by skipping on state income taxes, focus on states like Texas that lack it. Strong asset protection laws are also found in Texas and the other states above, but of course they vary. Which protections matter most, and where do you think your business should be based out of? Essentially, you’re going to pick which rules you’d like to follow.

If you do those three things, you are ready to move on to establishing your Series LLC. The same is true if your attorney says it is, because above all, that’s your point person on Series LLCs for real estate asset protection. When in doubt, ask for help. Until then, enjoy your new Series LLC and the freedom from worry about lawsuits. Life is calmer once you’re protected.