Lawsuits Are A Plague On Small Businesses—Here’s What You Can Do

Small business owners take a lot of risks to be successful. Nothing ventured, nothing gained, right?

But risks can create stress. Dealing with difficult customers, and worrying about employees all contribute to the headaches. Even a self-employed real estate investor who doesn't have "customers" or "employees" has a ton of problems to keep him or her awake at night.

The threat of litigation is another major concern for business owners. About three-quarters of all owners worry about this on a daily basis.

Lawsuits Are The Scourge of the Small Business Community

Over half of all civil lawsuits involve small businesses. A company with $1 million in earnings wastes about $20,000 per year on lawsuits. In sum, small businesses pay $20 million of their own money to settle tort liability claims or satisfy jury awards.

While major corporations have the resources to devote to both the time and costs of lawsuits, as an owner of a small real estate investment business, you do not. Therefore, you must protect your assets and give potential plaintiffs no incentive to sue you.

Insurance Is Not the Answer

Most diligent business owners turn to general liability insurance and similar coverages to protect their assets. While well-intentioned and a necessary step for any company, small business insurance is not enough. That’s because insurance companies are businesses as well. They readily accept your premiums and may even be helpful for minor issues like a slip-and-fall case.

But things turn sour when you file a big claim. You may get dropped and have to go through the hassle of suing the insurance provider to honor your claim. Instead of helping, the insurer will blame you or manufacture exceptions to your policy that void the claim.

Protecting Your Small Business Assets

So you can’t rely on insurance when you face a major lawsuit targeting your real estate assets. Instead, you must rely on another asset protection strategy. This involves two components—anonymity and series LLCs.

Anonymity

The prospect of lucrative settlements or significant jury awards drives lawsuits. In other words, a small real estate investment business must have substantial assets to be worth suing. If you can hide your assets from plaintiff lawyers, you take away their incentive to sue.

The way to hide assets is through anonymous trusts. These own your real estate properties instead of you.

Here’s how they work. You have real estate investments. Each piece of property is owned by an anonymous trust, and the business holding entity is an LLC. This makes it difficult for a plaintiff’s attorney to trace the property back to you. That’s because when the LLC is filed, the anonymous trust is listed as its member.

When the plaintiff’s attorney researches county records to find the owner of your property, they will simply see the trust listed as the owner. However, trusts are private documents not filed with the state or county. Therefore, the lawyer runs into a brick wall.

Series LLCs

This structure is a great way to protect real estate assets. It works like this. Assume you own three properties in a city, located at:

100 North St.
100 South Blvd.
100 East Rd.

You create a parent LLC, called the series LLC. Then you form a separate LLC for each piece of property. For the three properties here, you would have the parent LLC and three subordinate LLCs. One owns the 100 North St. property, another the 100 South Blvd. property, and the third owns the 100 East Rd. asset.

This structure has several advantages. The main one is that if a plaintiff’s lawyer wants to file a lawsuit against you for something that happened at the 100 North St. property, they will face two major hurdles. First, because of the anonymous trust, they will have a hard time pinning down the actual owner. Second, the only asset impacted by the lawsuit is the 100 North St. property. The other two properties, at 100 South Blvd. and 100 East Rd., are untouchable. So are all your other business assets unrelated to these properties.

In addition to making suing difficult and unproductive for plaintiffs’ lawyers, series LLCs have several other advantages:

Low startup costs. Your lawyer can easily and inexpensively set up the parent and subordinate LLCs.
Less complexity. A series LLC, with its multiple LLCs, is a much simpler business structure than a similar setup with a parent corporation and subsidiary corporations. Also, the documentation and requirements are easier for an LLC than a corporation.
Lower sales tax. While rules vary from state to state, you may be able to avoid any rent paid by one LLC to another.
Taxation. In most states, only the parent LLC files a tax return. This simplifies an already complex tax filing.

The Series LLC Experts

The attorneys at Royal Legal Solutions focus on protecting our small business clients’ real estate investments and minimizing taxation. Part of this protection may involve the use of anonymous trusts and series LLCs. With this asset protection strategy, you can stop worrying so much about lawsuits and concentrate your time on real estate investments.

When Real Estate Investors Hire Registered Agent Services For Their LLCs

As alluring as owning a real estate investment company may seem, those beautiful profits always come with a few risks.

To minimize those risks, you have to set up a limited liability company (LLC). These corporate structures, paired with the right legal tools, give your business a basic level of personal liability protection, asset protection and tax benefits.

And the logical thing would be to set up an LLC in your home state, right?

Maybe. But what if you happen to live in a state that isn’t friendly to small business?

The quick and easy solution is to form an LLC in another state, one where the tax laws are a little more favorable to what you're wanting to accomplish. This strategy can work brilliantly, and it’s 100 percent legal and even commonplace.

In fact, it’s something we help our clients do every day, every year.

But it comes with a caveat:

To remain on the right side of the law, you are required to name a person (or company) to act as your registered agent. This is the person who is responsible for sending and receiving all of your company’s legal correspondence.

If you have an out-of-state LLC, your registered agent is your point person for business matters in the state where your company is formed. This agent will be legally responsible for maintaining your LLC’s legal and tax documents and for sending and receiving all of your company’s legal correspondence.

A Professional Registered Agent Means You Sleep Easy

Your registered agent serves as your LLC’s “face.” Think of this person as your brand ambassador, but the duties go beyond simply making you look cool on Instagram. Your agent bears the responsibility for your legal and tax documents.

To have the peace of mind of knowing you are meeting the business requirements of the state where you incorporate, you need someone to assist you. Designating a registered agent for your LLC is one thing, but a registered agent service for LLCs will give you this peace of mind.

Can I be my own registered agent?

Some investors wonder if they can also serve as their LL's registered agent. Sure you can! However, you need to know this may be tedious. Will you be able to properly keep track of your LLC's documents?

Unless you’re an attorney or a CPA, you probably don’t want to serve as your LLC's registered agent. Residency can be difficult, even if you’re splitting your time between states. You must be able to perform the registered agent’s role competently throughout the life of your business. For this reason, the vast majority of successful real estate investors do not serve as their own registered agents—and they’re better off for it.

Be sure to check out our article: Do I Need A Registered Agent In Every State?

Should I get a registered agent service for my LLC?

Ideally, it is best to have a qualified professional as your registered agent. There are law firms, CPAs and other professionals who can act as registered agent for real estate investors. A qualified legal practitioner will always be aware of changes in the law. He/she has enough knowledge in matters of law.

Every state is different, but here are three common rules of thumb when hiring a registered agent for your LLC.

He/She must be a resident of the state.
He/She must have a physical address in the state.
He/She must operate during normal hours from Monday through Friday.

How Can a Professional registered agent service help?

Remember, to remain within the law, you are required to name a person (or company) to act as your registered agent.

Many real estate investors form an LLC in another state (at Royal Legal Solutions, we recommend the Texas LLC). This strategy can work brilliantly, but to remain within the law, you are required to name a person (or company) to act as your registered agent. As mentioned, this is the person who is responsible for sending and receiving all of your company’s legal correspondence. He or she will be legally responsible for maintaining your LLC’s legal and tax documents.

Registered agent services for LLCs come with a few other perks:

Peace of mind that comes with knowing someone for your LLC registered agent is is handling all legal issues
You get informed about important information and legal changes; your registered agent has everything covered.
Anyone can forget things, but your registered agent service will take note of every deadline and never miss out.

Conclusion

Each state has different rules for having a registered agent. You must retain registered agent services n the state where your LLC was created or does business.

Not designating a registered agent for your LLC is downright reckless. If you get caught, you can expect a legal backlash that may include anything from fines to exclusion from the court system, which will make it very difficult (and illegal) to run your business. Some states may even pursue criminal charges.

Knowing this, would you really risk prison time to save the $45 to $95 it’ll cost you to hire a registered agent service for your LLC? This tax-deductible fee should be regarded more as a small investment in asset protection than a shrewd cost-cutting opportunity.

A professional agent can help you focus your efforts where they belong: on your business.

Equity Stripping for Real Estate Investors

Make yourself an unattractive target for lawsuits and creditors with equity stripping.

As real estate investors, one key issue for protecting our assets is making sure we have very little or no equity exposed to the world. Why? Quite simply, the equity in a property is what can be seized and sold off in the event of a successful lawsuit and judgment against you. So what’s the smart investor to do?

Fortunately, this is where equity stripping comes into play.

What is Equity Stripping?

Equity stripping is any process that will reduce the value of a given real estate asset. It is a classic among asset protection strategies, well known for being a tried-and-true method of creditor protection. Equity stripping may be used to protect your home or an investment.

Wait. I want to look poorer than I am?

Yes, you do. It’s the smart play. You can invest and earn all you like yet still appear to qualify for food stamps. The illusion that you own little to nothing makes initiating a lawsuit incredibly difficult for the other side.

Is Equity Stripping legal?

Equity stripping makes you less desirable to sue because you appear to have less than you actually do. Some investors wonder if this is ethical or even legal. The answer is yes, provided you set everything up before a creditor or lawsuit comes your way. Be proactive!

We Simplify Equity Stripping For Real Estate Investors

Don’t attempt equity stripping alone. There are some tasks that require a professional’s oversight, and this is one of them. Fortunately, the pros at Royal Legal Solutions are happy to help you out.

Who Needs Equity Stripping?

Equity stripping is a viable solution for many types of real estate investors and even ordinary homeowners. Therefore the answer to what type of person needs this service can be varied and diverse.

For instance, not all laws protect the equity in a homestead equally across the United States. For those who have paid off more on their home than is statutorily protected, equity stripping is one legal method for protecting that homestead.

DOMESTIC EQUITY STRIPPING
There are many methods for equity stripping. Anything that encumbers an asset on purpose, or moves it from a position of exposure to safety, could be considered a form of equity stripping.

For most of our clients, we recommend domestic equity stripping. To employ this tactic, you use one of Royal Legal Solutions’ Traditional LLC structures. You can then use the LLC to strategically issue notes on the properties you own.

Which of these options is most appropriate for you?

That will depend on your needs and the advice of your attorney.

FOREIGN AND OFFSHORE METHODS
Offshore equity stripping is legally similar but has a key difference. With this method, you would need an offshore trust to issues notes on your properties. This type of offshore trust, also known as a bridge trust, offers additional benefits. However, while the offshore option is highly secure, there is a price trade-off. Bridge trusts can cost thousands to establish.

CREATING YOUR OWN MORTGAGE COMPANY
Another means of harmless debt creation we have used is instructing investors like you on the less conventional, although far easier-than-it-sounds, tactic of creating your own mortgage company. And there are even more ways to get the job done.

The Personal Property Trust: An Often-Overlooked Asset Protection Tool

Asset protection is a crucial component of financial planning for any real estate investor. There are many tools you can use to keep your property out of the clutches of creditors and would-be-litigants, and we’ve talked about some of them a lot on this site.

While Land Trusts, Series LLCs, and anonymous trusts are some of my favorite tried-and-true asset protection methods, a financial planning tool that doesn’t get as much attention as it should is the personal property trust.

With this article, we're going to change that!

What Is A Personal Property Trust?

In general, a trust is a type of legal arrangement where a trustee holds title to specific property and manages it for the benefit of the trust’s beneficiaries. Trusts can be revocable, which means the trust can be altered or canceled at any time while the person establishing the trust is still alive. They can also be irrevocable, which means they cannot be modified or revoked.

Like a Land Trust or living trust, a personal property trust is a type of revocable trust. Whereas the Land Trust is used to hold real property, the personal property trust is used to hold title to personal property assets such as vehicles, boats and mobile homes.

Whenever an asset needs to be registered and included in public records, you can use a personal property trust to keep your ownership information private.

Since trustees must manage the trust assets as directed by the trust instrument, you can use a trust to transfer legal ownership and protect your identity while essentially maintaining complete control over the trust property. Generally, the sale of trust property requires approval from the beneficial owner, and the trustee cannot make the decision alone. Naming yourself as the beneficiary of a personal property trust can keep you in control of your assets.

What Are The Benefits Of Putting Your Property In A Trust?

The primary benefit of using a personal property trust is privacy. When you place your assets in a personal property trust, public record registrations will show the trust as the owner instead of listing your name. If you choose a privacy-protecting name for your trust, there will be no indications in the public record that you own the property.

A few additional benefits of using a personal property trust include:

Protecting your assets from lawsuits and other creditors
Avoiding the expensive probate process when leaving assets to trust beneficiaries
Flexibility in the types of personal property that can be placed in a personal property trust
The ability to retain control over trust property
The option to add and remove property from the trust

When Should You Use a Personal Property Trust?

As a real estate investor, there are several ways you can take advantage of the protections offered by a personal property trust. Here are a few of the most beneficial ways to use personal property trusts to help keep your real estate investments safe and private.

Mortgages

One of the most common uses of personal property trusts is to hold mortgages, since the ownership information for this type of asset can be found through a public records search. As a real estate investor, you may want to consider creating a separate personal property trust for each property for which you have a mortgage. This strategy will allow you to keep your ownership information private and avoid links between your various properties.

LLCs

Savvy real estate investors often use an LLC to own real estate directly or name an LLC as the beneficiary of a Land Trust. To add another layer of separation and anonymity to your asset protection strategy, you can use a personal property trust to hold your membership interest in the LLC.

If you use an LLC as part of your real estate asset protection plan, it’s important to remember that, in most states, LLC membership is included as part of the public record. One way to keep your LLC interests private is to list a personal property trust as the LLC member and name yourself as the trust beneficiary.

Vehicles

Any vehicle—including cars, trucks, and motor homes—that must be registered with the Department of Motor Vehicles is generally part of the public record, which can make your personal data open to public search. You can avoid this by titling your automobiles to a personal property trust.

Given its various uses, a personal property trust can be a valuable tool for real estate investors, as well as people who haven’t caught the real estate bug (yet). No matter how you use your personal property trust, it is a practical but often-overlooked component of a successful asset protection plan. When deciding what financial planning tools are best for your real estate investment plan, it’s vital that you seek the input of an experienced asset protection attorney.

What Is Passthrough LLC Income for Tax Purposes?

There are two short answers to the title question: yes, and hell yes.

But don't just take our word for it. Passthrough LLC income is a hot topic in the investment community. If you're not sure what that means, you're not alone. Read on to learn about what exactly passthrough income is, how it impacts your LLC, and what benefits you will reap from it.

What is 'Passthrough' Income?

Passthrough LLCs allow you to collect the profits from your business as part of your personal income tax. The LLC itself is not taxed, but its owners are. This allows you to save substantially, simplify filing, and enjoy more of your hard-earned profits.

Businesses love this feature so much that at the time of this writing, roughly 90% of entities take advantage of passthrough income. While this access used to be primarily the domain of giant corporations, even the smallest business can also take advantage.

How Does a Passthrough LLC Benefit Me?

The most obvious benefit of passthrough entities is that it saves you tremendously on taxes. Opting out of passthrough benefits would mean you would essentially have to pay taxes on your income twice--both on your personal and your business tax returns. Few among us have the means or desire to pay the taxman twice. Fortunately, businesses don't have to if they take advantage of passthrough taxation. This is available for any type of LLC, including our personal favorite, the Series LLC.

What About the Taxman?

While passthrough has always had the benefits discussed above, there are even more perks you can take advantage of when Tax Season rolls around. Below are some of our favorite perks, along with a little update about the 2018 Tax Bill.

Taxes Are Assessed At Your Individual Rate. This is much cheaper for the average investor than paying corporate taxes, especially if you're in the early stages of developing your real estate empire.
New Law Allows For Deductions. The 2018 Tax Bill shows even more love to small businesses and investors by allowing for additional deductions for passthrough entities. Business owners (that means you, even if you're the sole owner of an LLC) can now deduct up to 23% of the business's income on their personal returns, allowing for even greater savings.
Taxes are Streamlined and Simplified. One return means a lot less math for you. But of course, if you're struggling, are new to investing, or have a brand new entity, seek the help of a qualified attorney and CPA to ensure you're on the up and up.

Can I Get Passthrough Treatment for Other Entities?

You bet! S-Corps, Limited Partnerships, and many other types of entities are eligible for passthrough taxation. Of course, we recommend the Series LLC for real estate investors. All of the information above applies to the Series LLC the same as it would to its Traditional counterpart.

That's all for our discussion of passthrough income for LLCs and Series LLCs. That wasn't too painful now, was it? You learned the basics in under ten minutes, but please feel free to reach out for personalized recommendations by taking our Tax Discovery Quiz below.

Keep more of your money with a Royal Tax Review

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

Which Type of Business Entity Needs an Employer Identification Number (EIN)?

Businesses pay taxes. It is a truth as old as time. However, how a business entity pays taxes vary. For many, the Internal Revenue Service (IRS) requires them to file for an employer identification number (EIN).

The EIN, also referred to as a taxpayer identification number (TIN), is a unique number assigned by the IRS that allows it to monitor any payments, wages, or other financial transactions that occur through your daily business activities.

Furthermore, if you plan to open a business bank account, an EIN will help you establish one that is independent of your own personal account.

Does a general partnership need an EIN? What about an LLC taxed as a corporation? To find whether or not your business entity requires an EIN, keep reading.

Business Entities that Do Require an EIN

C Corporations: C corporations are those considered to be your “standard” ones. These entities are required to file a Form 1120 (Corporate Tax Return) and pay corporate-level taxes.
S Corporations: S corporations, defined by Subchapter S of the Internal Revenue Code, are pass-through entities. S corporations are required to have an EIN, but they file a Form 1120S (Informal Federal Return). Unlike the C corporations, any profits or losses incurred by the S corporation are filed along with the owner’s personal returns.
General Partnerships: General partnerships are required to have an EIN for taxation purposes. In a general partnership, all partners must report profits and losses on a Schedule K-1 on their personal income taxes.
Limited Partnerships: For taxation purposes, a limited partnership operates much the same as a general one and will need an EIN. A limited partnership typically has a general partner who manages the business and limited partners who act more as investors. The general partner must file a Return of Partnership Income Form 1065 that includes any losses, profits, and distributions issues to the limited partners. The other partners will then receive their Schedule K-1 from the general partner.
Multi-Member LLCs: The IRS treats multi-member limited liability companies (LLCs) much as they do a partnership. The LLC must submit a Form 1065; a Schedule K-1 with any allocated distributions must also be filed. Members will also be required to file a Form 1040 for their share of the LLC as well. This is true whether the LLC hires employees or not.
LLCs Taxed as Corporations: As with C and S corporations, if you opt to have your LLC taxed as a corporation, you must obtain an EIN.
Single Member LLCs with Employees: If you plan on hiring employees within 12 months, or already have employees, your LLC must have an EIN. The IRS may provide you with two EINs, however. Any employment taxes that are paid, must be reported through the use of an LLC-specific EIN. However, any finances passed to an LLC member must be reported under a member EIN instead.
Sole-Proprietorships with Employees: As with the LLC with employees, a sole-proprietor who hires employees with need to obtain and EIN too.

Business Entities that Do Not Require an EIN

Single-Member LLCs without Employees: Most single-member LLCs that do not hire employees will not need to obtain an EIN. A personal social security number (SSN) will suffice. However, if the LLC has a Keogh plan or transports anything that will incur a federal excise tax, an EIN will likely be needed.
Sole-Proprietorships without Employees: Sole proprietorships without employees can use their SSN as well. It is important to remember, however, that some lenders may not provide a loan without an EIN.

Business Taxes

The nuances of the tax world can be confusing and hard to understand. If you run a business and would like to discuss taxes with a professional, call Royal Legal Solutions today to set up a consultation. Our professionals have years of experience helping clients make the most of their business while remaining in compliance with all laws and regulations.

Interested in learning more? Read How to Get an Employer Identification Number (EIN) for a Foreign Entity and When Does a Sole Proprietor Need an EIN?

2021 Is A Critical Year for Estate Planning—A Trust Is A Great Start

Real estate investors were thrown a few curveballs last year, to say the least.

The stress and uncertainty of 2020 motivated a lot of you to stop procrastinating and get your financial affairs in order. Trust me ... Financial planners and asset protection attorneys have been working overtime.

On top of an unprecedented global pandemic, another election cycle brought the prospect of legislation that could change how our businesses (and our estates) are taxed.

With the current estate credit set to end in 2025, proactive business owners were calling us before COVID spread throughout the globe. But the events of 2020 have even more of you thinking about the gloomy prospects for recession, disability or death.

Whatever happens with the pandemic and the fallout for landlords, 2021 is shaping up as a critical year for estate planning because of President Joe Biden's proposal to lower estate tax exemptions. Biden proposals include limits to the gift, estate, and GST exemption amounts a taxpayer can take. According to The National Law Review, it is now more important than ever to create an estate plan or review the terms of an existing one.

Worried yet?

Don't be. As with many things in life, a little preparation goes a long way. You have a lot of options.

For example: Setting up a trust, which allows a third party—or trustee—to hold assets on behalf of your beneficiaries, can offer you valuable peace of mind. With a trust in place, your heirs will not have to go through the time and expense of probate. A trust also allows you to protect your assets, maintain privacy, and reduce estate and gift taxes.

Even if you have an estate plan in place, it is critical to update it each year to allow for life’s many changes, including births, deaths, weddings, divorces, illnesses, and children reaching the age of majority.

In this article, we'll examine one of the primary components of estate planning—selecting who will serve as your personal trustee. But first, let's look at the changes that 2021 could be bringing to the way estate planning attorneys like me handle our clients' affairs.

What Estate Law Changes Will 2021 Bring?

Changes that impact the way we leave assets to our families are afoot. These include:

When he was running for president last year, Biden proposed raising the top rate for the estate tax to 45%. Currently, the first $11.58 million of an estate is exempt from federal estate taxes (a cap set to expire in 2025). Candidate Biden proposed reducing the exemption to $3.5 million per individual ($7 million for a married couple)—a change that would subject more estates to higher taxes.
The new Biden administration may also eliminate a current tax policy called "stepped-up basis," where a person who sells an inherited asset has to pay capital gains tax on its appreciation only from the date of the estate owner’s death—not from the time it was originally purchased.
Although Biden's proposals would only apply to those making $400,000 (Biden pledged not to raise taxes on people making less than that), the changes will strip away a big benefit to those who inherit real estate.

The world is changing. Your family and your needs are changing. Estate plans should be updated every year to reflect these shifts, to give you peace of mind and preserve your wealth for your loved ones.

Creating a Trust Is A Great Start

Updating your estate plan for 2021 means finding ways to control where your assets will go should you die or become otherwise incapacitated. Establishing a land trust or another kind of trust can do exactly that.

Determining who will serve as your trustee is a key step. This individual acts as a fiduciary, overseeing the management of property owned by the trust. The person (or persons) you choose must have a clear understanding of the role. The primary expectations of a personal trustee include:

acting in honestly and in good faith
working with due care, skill, and diligence in the best interests of beneficiaries
avoiding conflicts of interest
not profiting from the trust

While those duties align with moral responsibilities, the position also comes with distinct hands-on tasks such as paying bills, reporting taxes, fulfilling obligations to beneficiaries, and following all compliance requirements. Making investments may also be part of the job.

Particularly with large estates, the trustee may be exposed to legal action by the beneficiaries of the trust. As you can see, the position or the offer of the position should not be taken lightly. You'll want to make sure the person fully understands the responsibilities and isn't blindsided with them after your death.

In addition to being a trusted friend or family member, a trustee can be a professional (such as your attorney) or an institution (like a bank). You also can to have an individual and an institution serve as co-trustees. A professional trustee can help shift the legal liability of the position away from the personal trustee while keeping them informed and part of critical decision-making.

How is a trustee compensated for their time?

Choosing who will serve as your personal trustee is an important decision. It should be someone who knows you well and who gets along with your family members. It's more than an honor; it's a serious commitment to you and your heirs.

Both personal and professional trustees are entitled to payment for their work. As you might expect, the compensation depends on the size of the estate and the amount of work the position requires.

There is no set fee for a trustee, and most trust documents and state laws state that trustees should earn a "reasonable" amount for the work. What is a reasonable amount? Here are some guidelines:

Check your state's rules on executor compensation. Since a trustee's work is similar to that of an executor, state rules can serve as a guideline. Typically, fees are determined as a percentage of the total value of the trust's assets or a percentage of the actual transactions made.

Choose an appropriate flat or hourly rate. If it is hourly compensation, the trustee should keep a careful log of the time spent handling trust business. And keep in mind that most individuals should not charge the same rate as lawyers or financial advisors.

In some cases, a trustee may not want to receive financial compensation for their work. One consideration is that a trustee's remuneration is taxable as income. But family relationships also can enter into the picture.

For example, a relative may choose to forego payment for their time as a trustee because they view the position as a family responsibility. Others may think that accepting payment could cause friction or strain within the family.

The Takeaway

With the rate of COVID vaccination increasing, many of us are looking forward to returning to some semblance of normal life in 2021. However, we would be wise not to ignore the wake-up call that the pandemic has given us to get our affairs in order. And thanks to legislative changes, investors are faced with a whole new ball game going forward.

None of us knows what the future holds. No matter the size of your estate, you'll gain valuable peace of mind when you create or update your estate plan in 2021.

Should Rental Property Be in an LLC or Trust?

Should rental property be in an LLC or trust? Unfortunately, the answer is not as straightforward as you might think.

Whether you’re planning your will or setting up a company to manage your growing real estate portfolio, you need to know exactly what type of entity you should use to shield your properties from legal trouble. If you make the wrong decision, you could potentially expose your holdings to unnecessary risk, costing you hundreds of thousands of dollars down the road (or, at the very least, giving you a big headache).

So, first, let’s start with a basic definition of "LLC" and "Trust" as they apply to real estate investing.

(If you just want the pros and cons of each option, feel free to scroll down to the bottom of this article).

Why Use an LLC to Hold Your Rental Properties?

An LLC is a limited liability company.

It’s one of the most popular legal entities that a person can set up to operate their business. You don’t need any employees or a board of directors, and you can use it to separate your business assets from your personal finances. That way, if you ever find yourself on the losing side of a lawsuit, the only assets you’ll be forced to give up are those assets held within the LLC (in this case, your rental properties).

If someone sues you and wins, they can’t take away your personally-owned assets (like your car, primary residence, and your kid’s college fund).

Sounds like a pretty sweet deal, right? You could theoretically make some risky moves with the assets you put under an LLC and then dissolve that LLC in case you get into any trouble. The only risk is the asset, right?

Well, not so fast. There are some instances when your personal assets might be at risk, and you definitely shouldn’t start an LLC for the sole purpose of doing something nefarious.

When Does an LLC Fail to Protect Your Personal Assets from Lawsuits?

There are a few instances when, if you use an LLC to hold your rental properties, you’d be putting both your rental properties and personal belongings at risk. Those instances include:

You make a personal guarantee on a debt. When you sign a contract for certain loans, including, in some cases, mortgages and home equity loans, you might have to make a personal guarantee to pay it back. That means that you’re on the hook to pay down the debt even if your business doesn’t perform. Lenders will often require you to make a personal guarantee if your LLC doesn’t have a long-established credit history or cash flow.
You sign a contract with your name, rather than your title with the LLC. Always sign contracts as “John Doe, CEO of Rental Properties LLC,” never just “John Doe.”
You mix up your personal finances with your business finances, or you fail to observe the requirements of your LLC in your state. Keep separate bank accounts and credit cards for your business and personal finances. As soon as you use your business credit card to buy groceries, a lawyer is going to make the argument that you’re using your LLC to protect your personal assets.

Furthermore, an LLC can create a kind of avalanche effect. As soon as one property is attacked under an LLC that holds multiple rental properties, your entire portfolio can take a hit.

Why Use a Trust to Hold Your Rental Properties?

You’ve probably heard about trusts as they relate to estate planning. By putting certain assets in a trust, you can guarantee exactly how and when they’re distributed. This way you can avoid a solid chunk of estate taxes, since the assets in a trust aren’t considered your personal property, or even protect your assets from heirs that are likely to mismanage them.

One solution is putting all of your properties under separate trusts. There are a few different types of trusts: revocable, irrevocable, pay-on-death (POD), and living trusts. For our purposes, we’re just going to focus on revocable and irrevocable trusts.

Revocable trusts allow you to control the assets during your lifetime. These are still considered personal assets, and they’ll be included in your estate taxes.
Irrevocable trusts transfer legal ownership to a trustee, who then oversees the exact details of how the asset should be treated according to the trustors’ will. Since this is no longer technically part of the trustor’s property, it isn’t considered in estate taxes.

What are the Benefits to Using a Trust Versus an LLC?

What are the benefits to putting your rental properties in a trust rather than an LLC?

Just like an LLC, putting your property in a trust can separate your personal assets from your business, so that if you run into legal trouble, you won’t have to forfeit your personal belongings.
It can cut down on estate taxes.
It can distribute liability. If you set up an LLC, you’ll definitely need to buy liability insurance on top of it. Even then, you could potentially lose all of your properties in a single lawsuit. If you put the properties in individual trusts, you spread out that liability.

Should You Put Rental Property in an LLC or Trust?

So, to review, what are the pros and cons of each option?

Putting Rental Property in an LLC Pros

One of the most popular ways to form a corporation. Therefore, it should be easy to file the requisite paperwork and even find guides online to help you with the specifics.
Separates your personal assets from your business assets.

Putting Rental Property in an LLC Cons

You could potentially lose all of your properties in a single lawsuit.
If you don’t follow the requirements for incorporating an LLC (like holding annual meetings and keeping your personal finances completely separate from your business finances), you could open up a lawyer to “pierce the corporate veil.” If this happens, they’ll be able to prove that you’re just using the LLC as a protection from liability while treating it like personal property.
In short, you could open up not only your rental property to potential issues, but your personal property as well.

Putting Rental Property in a Trust Pros

Effectively separate your personal property from your business assets.
By putting each property in its own trust, you can disperse liability.

Putting Rental Property in a Trust Cons

Might require more time and resources.
Less straightforward than simply setting up an LLC.

How To Name A Trust

In this article, we’ll talk about how to name a trust. It’s an often overlooked—but important—part of setting up a trust.

Think of trust as a set of directions for how to handle certain assets. You can control when, where, and to whom they’re distributed. A trustee, an individual or institution, typically handles the distribution of those assets to your beneficiaries.

We’ve gone over the benefits of setting up your rental property in land trusts in past articles. They help protect you from liability in a way that no LLC really can, but if you mess up the name, you could open yourself up to a host of other issues.

Why Do You Need to Know How to Name a Trust?

Why does the name of the trust matter at all? Couldn’t it be anything you want it to be, as long as the directives of the trust are carried out?

Knowing how to name a trust is important to real estate investors for a few reasons:

In order to hold assets, a trust needs to be able to be identified. Without naming your trust, you don’t actually have a trust.
A good trust name can better help banks properly process your loans and other required paperwork.
The typical manner of naming a trust (“full legal name” + “Trust”) can cause you to unnecessarily sacrifice your privacy. Lazy advisors will often guide you in this direction. It’s even worse if you use your full address. The point of a trust is to protect your personal life, your privacy and belongings, from your business dealings. Why would you make it easier for bad actors to know exactly who you are and where you live?

Basic Guidelines for Naming a Trust

So, if you shouldn’t go with the typical way to name a trust (by naming it after your family name or address), what should you do, instead?

Get Creative (But Not Too Creative)

Come up with a list of creative trust names. We recommend that you name your land trust to sound like a fictional company. The only exception, though, is that you typically aren’t allowed to make your trust sound like a lender or other financial institution. You also need to avoid naming your trust after anyone else’s existing LLC.

But it’s important that you don’t get too creative, because you still want banks to be able to correctly categorize your trust based on its name alone. Some attorneys have even talked about clients naming their trusts after their dogs. You want to walk the line between clarity and anonymity.

Try To Keep It On The Shorter Side

When you name a trust, that name will be included when you name any asset in the trust. You can probably imagine how this could quickly spiral out of control if you choose a trust name that’s too long.

Pretend You’re a Celebrity

Celebrities work closely with attorneys to find ways that they can protect their anonymity from the public. This is a good idea for you, too. Land trust rental property should be used to shield you from possible litigation. As we mentioned in that article, no one wants to sue a ghost. The more obstacles you can set up, the more illusive you can be, the better.

Don’t Overthink It

At the end of the day, the best way to choose a trust name is to make sure that it protects your anonymity. If you’re having trouble coming up with a name that both suggests what the trust was set up to do and one that protects your anonymity, either consult with a professional or ask yourself which value is most important to you.

Most of the time, people would prefer to protect their privacy. Having documents clear through banks faster is simply a perk, and not something that you’re necessarily focused on when you’re setting up a trust. Liability and privacy, on the other hand? Those are essential.

Conclusion: How to Name a Trust

What are the main points you need to know before naming a trust?

Try to stay away from the typical. Most advisors, out of nothing but pure laziness, will tell you to name your trust after your last name or address. The whole point of a trust is to shield you and your family from possible litigation. The easier you make it for people to pursue litigation, the more likely it is to happen. Don’t make the mistake of naming your trust in this manner. Come up with something creative instead.
And, with that said, you still want banks to be able to clearly identify what the trust is for in order to clear paperwork as quickly as possible. So, you want to be creative but not too creative. However, this isn’t a hard-and-fast rule. It’s better to stay on the safe side and keep your privacy.
Make it shorter. Every asset in your trust is going to start with the name of that trust. If it’s seven words long and you put multiple assets under that trust, it’s that much harder to differentiate which asset is which.
If you’re still lost, you have two options: consult with a professional ... or just pick something unique.

Do I Need a Medical Power of Attorney?

It is said that change is the only constant thing in life. And while this saying has fallen into the realm of overuse, it remains true today.

So how does this affect your estate planning? When planning, it will do you well to account for all eventualities that may occur. One of the ways to do that is via power of attorney.

Here is a checklist for estate planning you can use to get started. This article covers one aspect of the checklist—the medical power of attorney and how you can use it to protect yourself.

What Is a Power of Attorney?

Hold on, what is a power of attorney? To some, it might sound like something a fairy godmother does to magically transform you into a lawyer. Pumpkins and all. But hold your horses. Even though that might be great to see, a power of attorney is a document that confers specific powers on someone, and we’re not talking about superpowers.

A power of attorney (POA) gives one person (called the attorney-in-fact or agent) the authority to make decisions on behalf of another (called the principal). These powers come into play when the principal is incapacitated and can no longer make those decisions themselves. A POA can be of utmost importance to a real estate investor for the following reasons:

They ensure that even when they are incapacitated or absent, they can participate in important decisions that affect them.
They can help make sure their investments don’t wither away from neglect.

There are several types of POAs. For this post, we will concern ourselves with two of them; the medical POA and the durable POA. Each serves a slightly different purpose, as we will see.

Durable Power of Attorney

A durable POA is one that confers the decision-making power on the agent after the principal gets incapacitated. The POA grants decision-making powers for financial, legal, and property matters. It is called a durable power of attorney because it needs to be explicitly revoked once the principal is available to make decisions once again.

The durable POA does not give the attorney-in-fact authority to make decisions regarding health matters of the principal, except for paying health bills. A medical POA is created to give someone authority to make health-related decisions on your behalf.

Medical Powers of Attorney

A medical power of attorney gives the agent authority to make health-related decisions on behalf of the principal. The medical POA springs into action only after the principal’s doctor says they are unable to make critical decisions themselves. The medical POA is sometimes called an advance directive, a health POA, or an advance healthcare directive.

The requirements for POAs vary from state to state, so if you move, you might want to check with an attorney to verify that your medical POA is still valid in your new home.

How Does A Medical POA Work?

You might be skeptical about ever needing a medical POA. After all, what could ever stop you from talking with your doctors to make your decisions known? Well, a medical POA usually kicks in when the principal:

Falls into a coma
Is unable to speak or communicate properly due to severe illness or dementia
Has mental health issues that prevent them from being of sound mind

Sadly, these situations happen often enough that you should be prepared. Better to have it and not need it than otherwise. If you eventually need it, then the POA works to make your decisions known through your agent.

How To Select An Agent/Attorney-In-Fact

Your life is literally in your agent’s hands in a medical POA. This means that you should try as much as possible to appoint an agent that is trustworthy, reliable, mentally capable, isn’t your healthcare provider (most states have this requirement), has discussed your wishes with you, and understands what you want to be done is specific scenarios.

Here are some of the decisions your agent has authority over:

What tests to run
Which facilities/doctors to work with
When and if to have surgery
What drug treatments to apply
Whether to disconnect life support if you’re in a coma

The gravity of these decisions suggests you want to select the best possible person to be your agent.

As Scott discusses in the video above, the healthcare power of attorney and durable power of attorney let people help you when you become incapacitated. All the operational pieces can be done in your home to allow others to make health decisions for you when you aren't able to do so on your own behalf.

Should You Get One?

With all the information we’ve put at your disposal, the decision is still yours. However, we think it is better for you to be prepared for any eventualities and to streamline the decision-making process as much as possible when you’re not available to make them yourself.

Interested in learning more? Check out our articles Do I Need a Durable Power of Attorney? and Using a Power of Attorney With a Land Trust.

Do I Need a Durable Power of Attorney?

Life is unpredictable. But it’s not for nothing that the cliché says: if you fail to plan, you plan to fail.

One of the best things you can do to safeguard your assets is to prepare for the worst, including death and debilitating illness. You should also plan for a scenario where you’re not able to be physically present when business decisions have to be made.

Here is a checklist for estate planning you can use to get started. This article covers one aspect of the checklist—the durable power of attorney and how you can use it to protect yourself.

What Is A Power of Attorney?

A power of attorney (POA) is a legal document that gives someone (called an attorney-in-fact or an agent) the authority to act on behalf of another person (called a principal). A power of attorney is usually used when the principal becomes ill, is disabled, or cannot be physically present to sign legal or financial documents. A POA is especially important to real estate investors because it means your investments are not neglected when you’re indisposed.

Now, there are several types of powers of attorney. What we will concern ourselves with here are two types that are vital in your estate planning journey.

Types of Powers of Attorney

Building on our earlier statement, we will broadly cover two types of power of attorney; durable and medical power of attorney.

Durable Power of Attorney

A durable POA is a type of power of attorney that comes into effect in the event of the incapacitation of the principal. It is called a durable power of attorney because it can last for the entire principal’s lifetime unless it is revoked. The power isn’t activated until the principal is incapacitated, though.

The durable POA only covers legal, property, or financial issues. The agent or attorney-in-fact doesn’t have the power to make decisions concerning the principal’s health except when paying the principal’s health bills. To be able to do that, a medical or healthcare POA is needed.

Medical Power of Attorney

A medical power of attorney gives the attorney-in-fact the power to make decisions regarding the principal’s health. You might also hear it called a health power of attorney, an advance directive, or an advance healthcare directive.

How Do You Prepare a Durable Power of Attorney?

Thanks to LegalZoom and a ton of other online sites, you can download or buy a power of attorney template online. However, because of how the requirements vary by state, we recommend you contact a asset protection attorney to guide you through the process.

While a POA is extremely useful, it doesn’t allow the delegations of a few rights, such as the right to vote, the right to make, amend, or revoke a will, and (in some states) the right to contract a marriage.

While the requirements of a POA vary from state to state, here some general recommendations:

Put it in writing: verbal powers of attorney are acceptable in some regions. However, they can be unreliable and confusing.
Fill it out correctly: you will need to fulfill all the requirements for a power of attorney in your state. Using an attorney is your best bet.
Identify each party: the principal and the agent should be identified in the document.
Delegate the power: the powers should be granted to the agent or attorney-in-fact. The granted powers should be clear, and you should avoid general, sweeping statements.
Specify durability: for a durable power of attorney, this is for as long as the principal remains alive unless it is revoked. For other types of POA, you should explicitly state how long it is going to last.
Notarize the POA: notarizing the POA will save you a lot of hassle down the line, even in states where notarizing powers of attorney isn’t a requirement. Some states require it, though, which means it has to be notarized before it can be considered valid.
Record and file it: while it isn’t a requirement to record a POA in many counties, this is standard practice for estate planning. Filing the document with the courts is the final step that makes it valid.

Choosing an Agent and the Risks Involved

Creating a durable power of attorney can have tremendous advantages: it means you can still be in charge (in a sense) if you are incapacitated. However, in essence, you are signing over your entire financial and legal life to someone else to control. Even though there are means to help make creating a power of attorney safer, such as choosing multiple agents and having them check each other, you should take note of who you select as an agent.

Here are some characteristics you should check for when naming an agent:

Trustworthiness: the agent should be someone you trust to handle your affairs diligently and fairly. Avoid agents with a history of substance abuse, gambling, stealing, and unreliability. You should be able to trust that they will follow your instructions, even over other peoples’ objections.
Competence: your agent should not have a history of irresponsibility with their finances.

Do You Need a POA?

A durable power of attorney document will help safeguard your investments when you’re not able to do so personally. You should take care to select an appropriate agent when creating one, to ensure optimal protection.

Interested in learning more? Check out our articles Using a Power of Attorney With a Land Trust and Do I Need a Medical Power of Attorney?

Selling Property? Protect Yourself With A Robust ‘As-Is’ Clause

Issues regarding liability are common in real estate. There are several risks that can lead to a lawsuit. You can’t ever fully remove the possibility of legal action against you. But there are a few common-sense measures you can take to protect yourself from some of the most common claims, including

Bodily injury
Breach of contract
Breach of duty
Negligence
Property damage
Willful concealment/ misleading clients

One measure you can take is an "as-is" clause. Real estate sellers will often insert an “as is” clause into purchase contracts to avoid liability.

Let's take a closer look.

What Is An 'As-Is' Clause?

An as-is clause is included in a purchase agreement to force the buyer to rely on their own investigation to determine whether or not to purchase the property. Without an as-is clause, the seller’s representation of a property and its condition forms the basis of the buyer’s decision.

The clause protects you (the seller) from litigation stemming from a failure to disclose property defects that you are unaware of. In some cases, the seller will know of a defect but choose not to disclose it to the buyer. In this case, the seller is protected if the problem is discoverable by the buyer should they conduct a reasonable investigation of the property.

Potential Problems That an As-Is Clause May Cover

As-is clauses can protect property sellers from a slew of costly lawsuits. A property with undeclared flaws can land you in hot water for a variety of reasons, including:

#1 Breach Of Duty. It is an agent or broker’s duty to act in the best interest of their client. Dishonesty on the agent or broker’s part can come in a few forms, such as:

Not disclosing land disputes
Choosing not to disclose known property risks such as flooding or faulty construction

If a seller is willingly breaching, they may be guilty of a breach of duty. Of course, agents and brokers aren’t infallible. Honest mistakes happen, and property defects are sometimes hidden to all parties.

#2 Breach Of Contract. A breach of contract is a simple lawsuit. If the buyer feels the contract hasn’t been fulfilled, they may take legal action.

#3 Negligence and Gross Negligence. Negligence implies that the defendant (in this case the seller) caused harm through inaction. However, negligence differs from other allegations through the lack of intent to cause harm. This means the seller failed to do their due diligence or or to handle problems promptly, causing bodily harm as a result.

Gross negligence, on the other hand, is defined as “the failure to exercise even the slightest amount of care" and often involves the deliberate disregard of another person’s safety. A seller who is found guilty of gross negligence knows (or should have known) of the danger involved.

#4 Property Damage. This one is pretty self-explanatory.

#5 Willful Concealment/Misleading Clients. A claim for misleading a client can stem from one of several issues. Normally, when the buyer believes that the seller intentionally hid property defects from them before the sale was complete. For example, sellers are expected to disclose known issues such as flooding before completing the sale.

What “As-Is” Does Not Cover

An as-is clause isn’t a universal get-out-of-jail-free card. It will not protect you from litigation from failing to disclose defects if:

You prevent the buyer from discovering the problems (by hiding them in some way)
You provide a willful, affirmative misrepresentation of the condition of the property
You are aware of a defect that the buyer is not reasonably capable of discovering, and you to disclose the defect

An as-is clause won’t protect you from all allegations. But they offer you a strong layer of protection against a claim regarding an issue you can’t reasonably have been expected to know about.

Interested in learning more? Check out our articles, Did You Know Selling Your Property ‘As Is’ Can Get You Sued? and Selling Real Estate ‘As Is’: Guide For Investors.

The Takeaway

Lawsuits are all-too-common in the U.S. If you’re dealing with enough real estate transactions, you’re bound to end up in a disagreement at some point.

In addition to using an as-is clause, documenting as many details as possible is always recommended. By staying on top of your property’s defects, you can avoid problems and have evidence of your reasonable efforts to provide a well-maintained property to buyers.

You shouldn’t have to suffer when you’ve already done what you can to ensure your property is in good condition. Honest oversights occur.

Consult a professional to make sure your contract provides maximum protection against claims of property fraud. And consider adding an as-is clause to your contracts before selling. It’s a simple, easy step that protects you in many situations where you would otherwise land in hot water.

image via reddit

How To Start A Shell Company

Why risk exposing yourself (and your assets)?

A shell company can streamline your real estate investments while minimizing this exposure.

Your shell company is your face to the world, it’s the one that we want people to come after if there’s ever a lawsuit. Think of it as a legal decoy. It shouldn't offer products or services, hire employees, or generate revenue.

Most investors find the Traditional LLC works just fine for a shell company to perform real estate functions like collecting rent, paying property management, etc. But you’ll also need an asset-holding company for your properties. We recommend the Series LLC if you’ve got more than one property—it's a cost-effective, scalable way to compartmentalize your assets.

When it comes time to set up your asset protection plan, always think: assets on one hand; complete anonymity, separation and operations on the other. The Series LLC is your asset-holding company; your shell company handles operations.

Why Start A Shell Company?

Shell companies are used by large public corporations and everyday mom-and-pop investors. Beyond compartmentalizing assets to help fend off potential lawsuits, shell companies serve a number of other purposes. These include:

Temporarily holding assets or funds
Investing abroad
Protecting assets
Securing better financing arrangements
Creating financial privacy
Hostile takeovers
Access to different real estate markets

Shell companies can give real estate investors access to different kinds of financing and can provide access to jurisdictions with friendlier tax rules. They may also help with a few other niche paperwork challenges. Those kinds of shell companies are sometimes referred to as “mailbox companies” or “letter-box corporations."

One of the biggest advantages of shell companies is that they can be made to be anonymous. It all comes down to knowing how to hide ownership of a company.

You can mask ownership of a shell company by hiring a nominee director to file the paperwork under their own name. This is a simple and highly recommended step if your goal is privacy. You will maintain actual ownership of the company, but their name will appear on all company records.

If you want to take anonymity one step further, you can have the shell company registered as a subsidiary of another shell company. The repeated layering of shell companies can become a hassle, but it will certainly provide greater anonymity and protection.

What You Need To Start A Shell Company

Going offshore to start your own shell company isn’t as hard as you may think. You will typically need to provide:

Applicable fees
Articles of association/incorporation
ID (normally a passport)
Proof of residence
Registration forms

There may be additional items required in your shell company’s jurisdiction.

Shell companies can typically be registered online or by mail, or sometimes by phone. You will have to pay the necessary fees, which normally range from a few hundred to a few thousand dollars.

You may need someone to guide you through the process. Registered agents can help. They will file all the paperwork and send all the fees on behalf of your new company.

You will need to submit personal information to register your shell company. The registered agent and beneficial owner are the parties whose identity must be submitted.

Where To Start A Shell Company

There are many locations where you can set up your shell company. But some jurisdictions make it far easier than others. Some of the most popular locations are:

Bahamas
Bermuda
The British Virgin Islands
Cayman Islands
Luxembourg
Switzerland
USA (States with lax requirements and greater privacy protections)
Delaware
Nevada
Wyoming

Your choice of location may come with its own company naming restrictions. Make sure your company name is in line with local requirements. Note: public records in the Cayman Islands do not even reveal the names of a shell company’s registered agent.

Compliance and Ethical Considerations

There’s nothing inherently illegal about owning a shell company. There are also several great reasons to start one, as we’ve covered.

But shell companies have certainly been used for illegal activities, such as:

Money laundering
Illegal tax evasion
Illicit business activities
Hiding assets from a spouse during divorce proceedings (this may be considered fraud)

If you’re unsure whether a shell company is the right choice for you, it makes sense to talk to a lawyer. A lawyer can help you go over your options and ensure every step is completed in compliance with the law. That way you can quickly and safely have your exact needs met.

Estate Planning for Unmarried Couples

There are many reasons couples decide not to get married. Some choose to live together before getting married, while others see no need to walk down the aisle to make the relationship official. According to a Pew Research study, there is a growing acceptance of cohabitation in America.

The study also revealed that the number of adults in the U.S. who are currently married is down from 58 percent in 1995 to 53 percent today. Over the same period, the number of Americans living with an unmarried partner increased from 3 percent to 7 percent.

In spite of these trends, unmarried couples may not realize that they do not have the same legal rights as marriage partners. This article will explore estate planning for unmarried couples and why it should be a priority for you and your significant other.

Why Unmarried Couples Should Have An Estate Plan

The law protects spouses and children in the absence of a will or an estate plan. However, no such safeguards are in place for surviving unmarried partners.

When you have an estate plan in place, you are able to dictate who gets your assets after your death and who can make decisions for you if you cannot make them for yourself.

Here are two scenarios to illustrate why it is so important that you and your partner create an estate plan.

#1 If you die without an estate plan, your partner will not be entitled to receive your Social Security or other benefits, any notice of probate proceedings, or any homestead rights usually granted to married spouses. Your partner also may not be able to inherit any of your property or belongings.

#2 If you are unconscious or otherwise unable to communicate, your partner will not have the legal authority to make decisions for you or even receive medical information from the doctors.

The good news is that you can take care of these concerns with an estate plan.

9 Steps Unmarried Couples Should Take

Here are nine steps unmarried couples should take to safeguard their future.

#1 Discuss your wishes for your estate with each other. No one likes to talk about what happens to their assets after they die. It is an uncomfortable topic at best. But having a frank discussion now about who you would like to get what can alleviate many problems and concerns later for the surviving partner.

#2 Write a letter of instruction. Especially in today’s digital world, a letter that tells your partner and your estate representatives the details they need to know to manage your estate can be invaluable. This letter might include the following:

- Passwords to your online accounts
- The location of your safe deposit box and its key
- Bills that need to be paid
- Services and subscriptions that need to be canceled
- Whom to notify of your death

#3 Tell family members about your estate plan. To avoid any unpleasant surprises, let your parents, siblings, and children know that you have included your partner in your estate plan.

#4 Own property jointly. You can avoid probate, which can be expensive and time-consuming, by owning property together with your partner. With joint ownership, if one tenant dies, the surviving tenant owns the entire property.

#5 Designate your beneficiaries. An unmarried partner will not have access to your bank accounts, retirement funds, or life insurance unless you have named them as the “pay-on-death” beneficiary. Review these accounts and make any changes that reflect your desires for your estate.

#6 Name a Durable Power of Attorney. As part of this critical step, you can appoint one or more individuals to act on your behalf in legal and financial matters in the event you are unable to manage them yourself. Without a power of attorney document in place, your partner might have to go to court to seek the appointment of a conservator. Not only would this take time and money, but it would cause your partner more stress at an already difficult time.

#7 Appoint a Health Care Proxy. By naming your partner as your health care proxy, you enable them to make medical and end-of-life decisions for you if you cannot make them for yourself. Without this document, your family members may make medical decisions for you without your partner’s knowledge or agreement.

This document will also give your partner access to your medical information. Without it in place, the Health Insurance Portability and Accountability Act (HIPAA) prohibits medical personnel from sharing private information with others.

#8 Write your will. A will is an integral part of an estate plan because it allows you to name guardians for your minor children and to name your personal representative or executor. The executor, who should be someone you trust implicitly, will be responsible for distributing your possessions, paying any remaining bills, filing your last tax return, and closing out all your accounts.

#9 Create a revocable trust. A revocable living trust is a legal entity that holds an individual's or a family's property and other assets. Creating a trust allows you to state how you want your assets handled during your lifetime and after your death. You can name your partner as a trustee to manage and make financial decisions over your assets after your death or if you become incapacitated. The assets placed in the trust would not have to go through probate since their ownership remains unchanged after your death.

The law is definitely on the side of married couples when it comes to asset distribution. By carefully creating an estate plan, you and your partner will gain valuable peace of mind in the event something happens to either one of you. Your attorney can help you create an estate plan that is right for your situation.

Image by Christine Sponchia from Pixabay

What Are The Different LLC Types Used By Real Estate Investors?

LLCs are one of the most popular ways to hold title to a property, providing real estate investors with a number of benefits, including limitation of liability, confidentiality, and asset protection.

Like ice cream, LLCs come in many flavors, and each has its advantages. Here is a short overview of the different LLC types and how they can benefit you.

Single-Member, Husband-And-Wife, And Multi-Member LLCs

Single-member LLC. As suggested by its name, this structure has a single member/owner. These LLCs can be formed quickly and cheaply. A single-member LLC is taxed as a pass-through entity: the owner reports business income or loss on his or her personal tax form while the company doesn't file any taxes.

Husband-and-wife LLC. A married couple LLC includes .... You guessed it ... both spouses as members. Tax treatment can be either pass-through or partnership-type when the LLC is formed in a community state. For more information on the tax treatment of a married couple LLC in community states, check out our article The Different Kinds of LLCs and the Way They Pay Taxes.

Multiple-member LLC. When an LLC has two or more members who are not spouses, each member claims profits and losses on their personal tax returns unless the company elects to be treated as S Corp or C Corp (more on these later).

Member-Managed Vs Manager-Managed LLCs

Many real estate investors take a hands-on approach to LLC management. Others prefer to hire an independent professional to operate the company and represent it in the filings.

Member-managed LLCs. This is a typical structure for a single-member LLC or a company with very few members where the owners are also responsible for the day-to-day operations. It allows each member to have a direct impact on the company's business without limitations.

Manager-managed LLCs. In this scenario, the LLC is managed by a third-party professional manager who leverages his or her expertise in operating the company. This arrangement caters to large LLCs whose operation may become unwieldy if managed directly by members. Manager-managed LLCs offer the members the benefit of passive ownership without the need to take an active role in the business, along with increased privacy.

LLC Tax Classification

LLCs give you flexibility in how you will be taxed. While an LLC is a pass-through entity by default, you may opt for different types of LLC taxation. Here's where things get fun. You stand to save a lot of money, so choose wisely.

Key terms to know:

Disregarded entity. As mentioned, by default, an LLC is a pass-through entity taxed in the same way as a sole proprietorship. In this case, the owner reports income or loss in his or her personal tax forms.
General partnership. LLCs with two or more members will be taxed as a partnership. This applies to husband-and-wife LLCs in community states as well. In this scenario, owners would show their proportional share of partnership income in the personal tax return.
Tax treatment as С Corporation. The owners can also ask the IRS to treat an LLC as either a C Corporation or S Corporation and pay taxes under the corporate tax rate. In this situation, the LLC is responsible for paying taxes on profits while the owners pay taxes on dividends. As this leads to double taxation, a C-Corporation would work for those members who prefer to keep profit in the company.
Tax treatment as S-Corporation. When an LLC is taxed as an S Corporation, the LLC is not subject to corporate income tax. Instead, the members pay the taxes on the allocated share of the income. Forming an S Corp is more work and can attract more scrutiny; some states also have additional requirements to qualify for S Corp status.

Traditional LLCs Vs Series LLCs

The concept of a Series LLC was introduced in Delaware in 1996 and quickly gained popularity. Today, Series LLCs can be established in Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah, and Puerto Rico. While Series LLCs are still not available in other jurisdictions, all states have to recognize LLCs formed in other states.

The Series LLC is different from an LLC in its traditional sense by offering a "parent-child" structure. This lets you create multiple LLCs treated as separate entities for liability purposes while having the same EIN (Tax ID) Number and operating under the "parent" LLC.

Unlike traditional LLCs, which own all assets, Series LLC lets you allocate properties to individual "child series," insulating them from potential claims to other "child series." Meanwhile, the Series LLC is a more cost and tax-efficient structure, allowing to file each one of the "child series" in the same tax return.

LLCs By State

Many real estate investors register LLCs in their home state. Meanwhile, several states have legislation that is particularly friendly towards LLCs, offering numerous benefits in terms of taxation and asset protection. Here is the list of LLC-friendly states where entrepreneurs and investors seeking additional benefits can incorporate (even if they live elsewhere).

Delaware LLC. Traditionally, Delaware provided the most flexible and liberal treatment for entrepreneurs and is a very popular jurisdiction for LLC formation. It was Delaware which has introduced the concept of Series LLC in the United States. Besides tax benefits, ease of LLC maintenance, low annual fees, and chancery court system, Delaware allows LLCs to file privately without mentioning the owners' names in public records.

New Mexico LLC. New Mexico is the only state which provides maximum privacy when forming an LLC. Unlike other states, New Mexico allows those who form an LLC to avoid disclosing their identity to the government, making it fully anonymous.

Nevada LLC. Nevada is another state with a business-friendly environment often chosen by real estate investors for LLC formation. Nevada offers strong privacy protection, doesn't' tax income on the state level, and provides for easy registration.

Wyoming LLC. Being the first US state to allow limited liability companies, Wyoming remains one of the main popular destinations for forming an LLC. With the absence of capital, state, or corporate income tax, Wyoming offers a simple setup procedure with the lowest filing fee of only $50 per year. Wyoming allows creating an LLC without making the owner's name a public record, same as Delaware, New Mexico, and Nevada.

Texas LLC. Texas is famous for its company protection laws. Unlike other states, where bureaucracy is king, the only requirement to ensure an LLC is in good standing in Texas is the "No-Tax Due" filing, which can be done online within minutes. With no annual registration fee, Texas is one the most cost-effective states for LLC formation.

Be sure to check out our article on the tax benefits of an LLC.

Where Do You Begin?

Real estate investors have options for structuring their investments and asset protection. While a traditional single-member pass-through LLC registered in the state of residence continues to be the most popular choice, there are different LLC types that may be better suited for certain situations.

The new structures, such as the Series LLC, provide additional protection by segregating assets among individual child LLCs and further limiting liability. Meanwhile, registering an LLC in one of the most business-friendly states provides for an extra layer of privacy protection, more simple filing, and cost reduction.

Using a Power of Attorney With a Land Trust

Using a power of attorney with a land trust is a good idea.

A power of attorney, or a POA, allows someone to act on your behalf. This is a good thing to have in case you are out of town or you are unable to act when the need arises.

You may think of a power of attorney as something for your elderly family member who cannot do anything for themselves. However, a POA is also good for those who are running a business and who might be out of town when an action is required.

If you have a land trust with someone close to you, you may need a power of attorney in case you are out of town and need someone to sign documents for you or act on your behalf. Generally, a power of attorney is not designated for a trust. However, there could be cases where you want to name the same person as your trustee and as your attorney-in-fact.

Are Land Trusts Still Effective?

Land trusts are often the unsung heroes of the real estate investing world. You can use them to control assets rather than own them yourself. The land trust is also called a “title holding trust” because that’s it’s main job: hold title to the property in your place. You still get to stay in control of any property associated with your trust, and of course, any earnings generated.

Land trusts can form a critical part of your asset protection strategy; in fact, we prefer creating them anonymously. This type of revocable trust takes the critical first step in asset protection: stripping the title out of your name.

If your attorney tells you that land trusts are not as effective as they once were, they are not educated enough on land trusts. Most attorneys don't know enough about land trusts for them to give you advice on using one. They most likely didn't get this education in law school. Land trusts are just as effective as they once were, if not more effective these days.

What States Are Land Trusts Used In?

Land trusts are only used in six states as of now. These states include Illinois, Florida, Virginia, Indiana, Hawaii, and North Dakota. These are the only states that have statutes for land trusts right now. This may be why many attorneys don't know enough or, if anything, about them currently.

Who Should Have Power of Attorney for the Land Trust?

When choosing the best person to use as your power of attorney, trust is what matters. It might be your closest friend or family member. However, if you don't want to use an individual for your land trust, you also have the option to use an institution (which will usually charge you a fee).

So, in short, it is a great idea to use a power of attorney for your land trust in case you need documents signed and you are either unable to do this because you are in the hospital or out of town on a business trip.

Hopefully, these questions and answers helped you learn a little more about land trusts and you are more educated on this effective tool for real estate investors.

Interested in learning more? Check out our articles Do I Need a Durable Power of Attorney? and Do I Need a Medical Power of Attorney?

What is a Partnership Return?

The LLC or Series LLC has the easiest tax returns for a single member. It's a "pass through entity," which means all of the income from the company can be reported on your personal income tax return.

You don't have to pay thousands of dollars to a CPA to file a business return. Great news!

This is also true for your spouse filing jointly. This can make tax preparation a lot easier.

Some states have specific tax rules regarding multi-member LLCs. For example, if you and a partner have an LLC, you may need to file a partnership return. This is a separate return for the business itself. You need a good CPA who knows about real estate investing to help you make sure you're doing it right.

Also note: In some cases, an LLC can be taxed as a corporation. In some cases, it makes sense to have your LLC taxed as an S Corps.

Keep more of your money with a Royal Tax Review

Did You Know Selling Your Property 'As Is' Can Get You Sued?

You might think selling your property “as is” means you're covered if something goes wrong. The reality is that selling a property "as-is" can get you sued. A property with undeclared flaws can land you in hot water for a variety of reasons, including:

Fraudulent inducement
Willful concealment
Breach of contract
Gross negligence

Why the As-Is Clause Alone Doesn't Truly Protect You

It doesn’t matter if you were unaware of the defect(s) that later become issues. The buyer decides whether or not to bring a claim, and if they do, you’ll need to defend yourself in court. The mere allegation of fraud can be enough to warrant a trial by jury.

Don’t assume you can automatically settle out of court. Due to the courts' stance on property fraud, litigators incentivize the plaintiff to drag you through litigation.

The True Cost Of 'As Is Property' Fraud

When it comes to lawsuits, the losers pay for everything. The first expense is your attorney’s fees (~$10,000), followed by the plaintiff’s legal fees (~$10,000). Finally, there are the damages, which tend to range between $5,000 – $15,000 based on average claim costs.

In other words, a run-of-the-mill lawsuit costs up to $35,000. However, a few states allow plaintiffs to take triple damages.

Protect Yourself By Beefing Up Your 'As Is' Contracts

This is why a professional asset protection plan makes economic sense. Attorney’s fees from a single lawsuit can offset the cost of your plan.

If you want to take your chances without a plan, then you need to upgrade your “as is” clause. I add the following text to my contracts. It provides several additional layers of protection against claims of property fraud.

My Bulletproof Protection Clause

THE PROPERTY IS CONVEYED AND ACCEPTED “AS IS,” IN ITS PRESENT PHYSICAL CONDITION, WITH ALL FAULTS AND DEFECTS OF WHATEVER KIND, LATENT OR PATENT, KNOWN OR UNKNOWN, AND WITHOUT REPRESENTATION OR WARRANTIES, EXPRESS OR IMPLIED, EXCEPT FOR WARRANTIES OF TITLE AS MAY BE SET FORTH AND LIMITED HEREIN.

GRANTOR MAKES NO REPRESENTATIONS AS TO THE PRESENT OR FUTURE VALUE OF THE PROPERTY OR ITS PRESENT OR FUTURE SUITABILITY FOR ANY PARTICULAR PURPOSE. FURTHER, GRANTOR HAS NOT MADE, DOES NOT MAKE, AND SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS REGARDING THE ENVIRONMENTAL CONDITION OF THE PROPERTY OR ITS COMPLIANCE WITH ANY ENVIRONMENTAL, POLLUTION, OR LAND USE LAWS AND REGULATIONS, WHETHER FEDERAL, STATE, OR LOCAL. ANY AND ALL PRIOR ORAL OR WRITTEN STATEMENTS CONCERNING THE CONDITION OF THE PROPERTY, WHETHER MADE BY GRANTOR, GRANTOR’S AGENTS, OR THIRD PARTIES, ARE EXPRESSLY DISCLAIMED.

GRANTEE ACCEPTS THIS CONVEYANCE SOLELY ON THE BASIS OF GRANTEE’S DUE DILIGENCE AND EXAMINATION OF THE PROPERTY. THE CONSIDERATION PAID FOR THE PROPERTY REFLECTS THE “AS IS” NATURE OF THIS CONVEYANCE. THIS “AS IS” PROVISION IS A MATERIAL TERM THAT HAS RESULTED FROM SPECIFIC NEGOTIATIONS BETWEEN THE PARTIES. GRANTOR WOULD NOT HAVE BEEN WILLING TO SELL AND CONVEY THE PROPERTY TO GRANTEE UNLESS THE DEED CONTAINED THIS “AS IS” PROVISION. PROVISIONS OF THIS “AS IS” CLAUSE SHALL INDEFINITELY SURVIVE CLOSING AND SHALL NOT MERGE.

IF GRANTEE IS UNCERTAIN ABOUT THE MEANING AND EFFECT OF THIS “AS IS” CLAUSE, THEN GRANTEE SHOULD CONSULT AN ATTORNEY. BUYER’S INITIALS AS TO THIS “AS IS” PROVISION_______

Using this type of language may destroy good will with your buyer, but the alternative is far worse. You shouldn't leave yourself open to a devastating lawsuit just to close a deal. The risk simply isn't worth it.

One of the reasons you want to have an attorney on your side is because you can send tough contract terms and blame it on a third party, leaving your relationship with the buyer in the clear. Don't put your reputation on the line unnecessarily: take action today. Contact us and set up your consultation before you sell your property as-is.

Interested in learning more? Check out our articles, Selling Property? Protect Yourself With A Robust ‘As-Is’ Clause and Selling Real Estate ‘As Is’: Guide For Investors.

How Assumed Names Disguise Your Ownership (And Help Make You Lawsuit-Proof)

Your business may operate under an Assumed Name (also called a fictitious name, trade name, or doing business as (DBA). An Assumed Name is simply any name other than your or your business's legal name.

Value of a DBA/Assumed Name

An "Assumed Name" can help you avoid potential legal pitfalls by giving you a "Doing Business As" name that is different from your company’s official name or personal legal name. It also allows you to have a business bank account even if you're a sole proprietor.

In Texas, we refer to DBA registration as filing an Assumed Name Certificate. Any type of entity structure can file an Assumed Name, whether you are operating as a sole proprietor, a partnership, a corporation, or an LLC.

Public Interest in Disclosure

Public interest in disclosure is the legal principle that a court should have access to relevant information, and that an opposing party (a litigant) should have access to all relevant information to make their case.

Legally speaking, your DBA is the public disclosure associated with the identity of the true party in interest (you) and the location where the party may be served with process (if suit is filed). Public interest in disclosure was created from the belief that is in the public interest to be able to ascertain whom to sue and where exactly the service of process can be performed.

What This Means If You Are Sued

What if your real estate business is taken to court? The potential plaintiffs will be able to benefit from your DBA filing requirements. Each and every day suits are filed against Assumed-Name defendants.

An attorney is probably going to be able to dismiss a suit that is filed against the Assumed Name (usually associated with a corporation or LLC that has a liability barrier). To have a better chance of winning the suit, the plaintiff should refile the case against the true party behind the DBA.

Note: It is not mandatory for a legal entity to have its business headquarters where you conduct business. In fact, requesting an out-of-county service of process gives your legal opponents additional delay and expense. However, this is when many plaintiffs will certainly give up.

What Laws Apply To Assumed Names?

An individual or company may possess as many DBAs as they desire, at the state or county level. A period of ten years can be covered with a single filing. A filing of a particular form may be used to terminate or abandon a DBA.

You should verity the county clerk's website within the county where you have your main headquarters or where you perform your services. Texans can visit the Secretary of State website and fill Form 503 for a state-level filing.

You are required to mention the counties where an Assumed Name will be used in this form. You need to check the box for “All” in case the entity will potentially use its Assumed Name in all counties in Texas.

A notarized DBA filing for people, companies and others is required by the Texas Business and Commerce Code chapter 71. You are required to state the psychical address (location) of your business. In case the county where the company has its main headquarter is different from the proposed county of business, you must file a DBA in both counties.

Let's imagine that you have a California LLC and wish to conduct business under an Assumed Name in Miami. Should you file an Assumed Name certificate in both counties? The answer is YES. Both the domestic and foreign entities within the scope of your business are included in the statute.

State vs. County Filing of DBAs

After you have formed an LLC, you need to get a DBA. However, where should the filing be performed, at the county clerk's office or with the Secretary of State?

The DBA needs to be filed as at both levels, according to the Business and Commerce Code:

"The corporation, limited partnership, limited liability partnership, limited liability Company, or foreign filing entity shall file the certificate in the office of the Secretary of State and in the office or offices of each county clerk as specified by Subsection (b) or (c)."

Even though filing with the Secretary of State is usually neglected by smaller entities who often file just in their local county, you need to consider that the statute says “and” when referring to state and county filings.

The county clerk needs to discover if a proposed DBA is available at the county level. The main thing to consider is that your proposed name should be different from another entity's filed Assumed Name that operates in that county. It is not mandatory to ascertain if a particular name is available, considering the fact that the DBA filing is essentially a notice filing. Simply file Form 503.

There are 254 counties in Texas. Is it important to file in the county where you live when you are obtaining a county-level Assumed Name for daily usage and banking purposes? The answer is no.

You can file for a DBA from El Paso County and the bank will still accept it, regardless if your are operating in Houston.

You should also consider the fact that there is no central data base connecting the Assumed Name records of Texas's 254 counties. You might want to get your company's DBA far from its true base of operations and in a county whose DBA database hasn't entered the online world yet, if asset protection/anonymity is your goal.

What About A Series LLC Doing Business through One of Its Series

Series are viewed as sub-companies, so an individual series has the power to sue and be sued; to contract; and to hold title to real and personal property, according to Business Organizations Code section 101.605.

However, the series has to function or hold title under its own name to fulfill these functions at the series level. This in turn demands that the series obtain an Assumed Name Certificate.

Are there any causes for this situation? Yes there are! First of all, technically speaking, the series is not an independent legal entity. And since it is running under an Assumed Name, is should possess a DBA on file. Additionally, the DBA filing should be conducted both at the state and county levels.

The name of the entity conducting business as an individual series will contain the basic Assumed Name for a Series LLC. As an example: “ABC LLC conducting business as ABD LLC-Series A.” Section 71.103 requires an Assumed Name filing both at the office of the Secretary of State and the county where Series A does business.

Without An Anonymous Trust, Your LLC (And Investments) May Be At Risk

When it comes to protecting your property, you should build a castle, not a fence. This is where an asset protection plan comes into play. Think of an LLC's protection as being on par with a fence. It offers you decent protection, but you could do better.

How? By getting an Anonymous Trust. When you compare a trust to an LLC, it's like comparing a castle to a fence. A trust offers superior asset protection you can't get from an LLC alone.

Protecting your assets is about building legal walls. When you get a trust, you're putting up high walls to defend against an attacking litigation attorney. A trust isolates your assets so even if an attorney files and wins a lawsuit against you or your LLC, they can’t get at the prize assets. Poor guys, all that work for nothing!

Why An LLC Doesn't Completely Protect You

Are you a real estate investor with one or more properties held in an LLC? If so, listen up: There are many tricky ways litigators are able to break into an LLC and get access to all your assets—even when the lawsuit pertains to a single property. The LLC will protect the properties from suits against you individually, but a lawsuit relating to the sale or lease of property will go against the owner (the LLC).

In a landlord/tenant dispute or a dispute relating to the sale of a property, the LLC is liable as the owner. If the opposing party is successful in the lawsuit, they will be able to collect on their judgment against the assets of the LLC (as in ALL of your properties). They will be able to foreclose and auction off your properties at a discount until they have collected enough money to satisfy their judgment.

Poof. There went your years of hard work, into the pocket of an attorney.

Anonymous Trusts Stop Lawsuits Dead

The more walls you have, the harder it is for the other side to recover your hard-earned assets and the more likely it is that they will not even bother filing suit. Lawsuits are a three legged stool, and a trust destroys one of the legs, which causes the lawsuit to crumble. The three stool legs which support a successful lawsuit are:

Legal liability
Injuries
Recovery

In layman's terms it translates respectively to:

The law recognizes liability either by common law or statute,
The facts show that the party suffered money damages because of the defendant's conduct, and
Assuming that previous two are true, there are assets which we can take from the defendant to satisfy the judgement.

A Trust Makes Attorneys Think Twice Before Suing You

An attorney won’t file a lawsuit without all three legs being in place. Using an Anonymous Trust/LLC combination cripples litigation because it makes the pool of assets for recovery, the third leg of our stool, unattractive. Ten properties held in an LLC makes an attorney drool like a hungry dog. That’s a lot of assets, and likely some equity an attorney can get a hold of.

A single property held in trust doesn’t even get an attorney to the keyboard to type out a petition to file suit. There just isn’t enough equity to recover against.

A Trust Is The Castle Protecting Your LLC's Assets

Let's say you have all your property held in an LLC and want to transfer each of those properties into individual trusts.

The first step toward developing your asset protection plan is to establish an irrevocable trust. You can hold property in the name of this trust instead of your LLC or personal name. Now that the trust owns the property, you or your LLC are merely beneficiaries. This entitles you to the income from the property without exposing you to liability.

In a dispute regarding the property, the opposing party will only be able to collect against the asset of the trust, the trust property, which hopefully has limited equity. Why do I hope that the trust property has limited equity? The lawsuit that is filed against the trust is limited to recovery against the trust property.

If the mortgage on the property is close to the value of the property, then there isn’t enough equity in the property to justify a lawsuit. Remember, the litigation attorney only gets paid after he auctions off the property and pays off all the liens including the mortgage. And it just so happens that there are several ways to hide the equity in your property.

An Auction Can Work In Your Favor

The fees for the auction and the costs in litigation to get it to auction are also subtracted from the equity. In the end, there is hopefully little hope that an attorney and his or her client will make any profit. Same goes for the client, who also pays large litigation fees. If neither the attorney nor the client can make money, they won’t file suit.

'Oh My God, I Have Something Worth Protecting!'

When do I need my first LLC? When do I need a Series LLC? Do I need a Delaware Statutory Trust?

When should I implement more advanced (and potentially more costly) options like domestic asset protection trusts or foreign trusts?

It's hard to make the best asset protection decisions without understanding your options. That's why Douglass S. Lodmell says it all starts with education. A lawyer with deep experience in estate planning, taxation and strategic asset protection, Doug got his start by watching his father, a real estate syndicator and lawyer who was one of the first attorneys in the country to use offshore trusts. Doug joined him in 1997 and together they began offering clients seamless asset protection structures that used both the domestic and offshore tools in simple and effective ways.

How Much Risk Can You Handle?

Doug says the first step in helping investors is determining their risk tolerance.

“I have clients that have massive amounts of assets and lots of risk, but their risk tolerance is so high, they’re only semi-motivated to seek asset protection," Doug says. He has other clients who are extremely motivated because their risk tolerance is low.

Helping them understand their options so they can make an educated decision is key.

"I find if you give clients the data and let them make their own decisions, they make good decisions about their own life."

So, as an investor, how do you determine your risk tolerance?

“If you don't know your risk tolerance, then you need to assume that it's low,” Doug says. “It’s just like taking somebody to Vegas for the first time. How much are they comfortable pulling out and losing right now? If it’s a hundred dollars, okay, great—that's your risk tolerance."

While every investor has different needs based on their situation and their risk tolerance, good fundamental planning has elements that are universal. For example, if you're buying a rental property, it needs to go into an LLC.

Douglass S. Lodmell

In fact, if you're in the business of real estate in any capacity, then you need to use LLCs. However, how you use those LLCs will depend on your unique situation. Here’s an example Doug gives in the video linked below:

Say a real estate has 10 properties in her portfolio and the total equity between the 10 properties is $1.5 million. How many LLCs does she need? She may want 10 (one for each property) or she may want a single LLC (with all 10 properties in the same structure).

“How much would she feel comfortable exposing to any one risk, inside of any one basket, out of her $1.5 million? (The answer is) usually somewhere around the $250-400,000 range. So if we broke the $1.5 million up into $400,000 tranches, let's call it four LLCs.

"That's where the risk tolerance conversation comes in," Doug continues. "It's just helping them understand how to maximize the protection but not overkill on the amount of maintenance they're gonna have to do."

What kind of maintenance is involved, exactly? It could be the amount of time it takes to manage the entities, or it could be the associated yearly fees.

"You can do single-member LLCs held by a holding company or series LLCs. So the cost for additional LLCs is minimal. But if you have a group of assets that are fairly low-risk and they're well insured, you don't need a separate LLC for each $100,000 rental home that you have. Why bother? Because even if the costs are minimal and there's no separate tax returns for each LLC, having too many LLCs might be overkill.”

As with many things in life, it's all about balance.

When To Seek Advanced Asset Protection?

“So clearly domestic is the first part you build," Doug says. Once you have enough value in assets, whether it's in one LLC or multiple LLCs, you really should look at a holding company. The holding company concept is powerful because it gets things consolidated."

Even though your CPA is charging you for each tax return, they don't like to do more than necessary. So the LLC with holding company consolidates your tax reporting and simplifies things.

You should start looking at a trust somewhere between a half a million and $1 million worth of net equity—in other words, exposed equity value.

"Once we get to $1 million I really think you should be looking at some type of asset protection trust on top of the holding company and the underlying LLCs. Beyond $1 million I decline to take a client for (setting up an LLC and nothing else), especially if they have 2 or 3 million dollars of total assets and they just want to do an LLC and a holding company. I'll say I just don't feel comfortable because it's not enough protection. Or I'll do it with the very clear caveat that this is not my recommendation and they really need to have the trust on top of the domestic structures. As good as (those structures) are, they're domestic and they're still subject to the U.S. courts and the discretion of a judge. And if you have been around long enough, you'll have seen crazy judgments from crazy judges.

"When you're dealing with someone's entire life's work, messing that up and having them lose their money is not something you want (as their attorney)," Doug continues. "So once they're above that $1 million dollar mark of taxable equity—not total market value but equity (after the mortgages have been deducted and we're really looking at what the asset values are worth)—you really should be looking at the whole thing."

What Do You Have To Lose?

How does Doug help his clients see the value of strategic asset protection?

“You're spending money on some paper that you somebody told you you need," he says. "And now it costs you even more money to maintain, because now your accountant has to file more paper for the paper that you created. Do I really need this stuff?"

The answer is most likely a resounding, "YES."

"I had one client from California who's been doing real estate his entire life," Doug says. "And the way he started was just buying property in his own name. And after 40 years of doing that, he had tens and tens of millions of dollars in real estate in California—all in his own name.

“He did it that way because he didn't know any better. Today that would be insane to start like that because you're effectively risking your entire net worth and hoping that you don't have a bad day.”

"Most people understand the litigious nature of society. The fact is, lawyers are out there trolling for clients with billboards and ads and TV. Your tenants are are being trolled all the time for all sorts of lawsuit opportunities. The cost of you worrying about it is more than the cost of setting it up and maintaining it."

There's a tipping point for most investors where they suddenly see the value in protecting what they have. When they're just starting out, they don't have any money. So they're not worried about losing it.

“Then you buy your first house," Doug says. "You're still not worried because you're in your old mindset. Then you buy your second house, say a fix and flip, and and you say ‘I'm going to keep that as a rental.' The next thing you know you look up it's 10 years later and you've got $2 million worth of properties, you're married, you have two kids and all of a sudden it kind of hits you—'Oh my God I have something worth protecting!'

When you're worried about losing your money, you can't make as much money. Give a kid a piggy bank and teach him to put money in it and he will learn to save. Give the kid money without a piggy bank and he has no awareness; he won't ever focus on putting those coins away for later.

Build A Team—And Rely On Their Expertise

Getting good information is key. Know what experts can do for you. They can filter out information and give you the nuggets of wisdom that help you with your situation. Remember: information nowadays is free; the Internet is full of it. But to get it distilled and curated so that it's valuable to you—that's where experts come in. So use them.

“The most successful people I know have a team of experts around them. They rely heavily on those experts and they make sure they know how to advise them. We distill that information. We give you what you need to know without you having to go to law school and do the research and keep up with all the journals and constantly read the cases. That's our job. If we can be helpful in that then we're doing our job and believe me, it is more than worthwhile for you.”

“I once had a pilot tell me, 'They don't pay me to fly the VIP of these companies $250,000 a year to fly a jet for a two-hour flight. They pay me for the 20,000 hours that I've already flown because that makes me a safe pilot. I know how to handle the emergencies.

"It's the same with your experts. You're not paying for the piece of paper. You can get that piece of paper online at LegalZoom or somewhere else for virtually free. You're paying for the expertise to know if you need that piece of paper and how to use it to protect your assets."

For more information on Asset Protection Planning using The Bridge Trust® visit www.lodmell.com

Everything You Need To Know About IRA & 401k Distributions

Are you ready for the next phase of life? One that leaves the daily grind behind? If you're nearing retirement age, you've been saving for a long time, and now you're getting close to the point where you can start taking distributions (finally).

Let's review everything you need to know about taking a distribution from an IRA or 401(k).

Options For IRA or 401(k) Distributions

When you receive a distribution from a 401(k) or IRA you should weigh the following tax options:

You can report the distribution as ordinary income. Anyone who receives a distribution from a 401k or IRA can choose to pay ordinary income tax on the distribution—unless you have a Roth IRA.
You can roll over the distribution to a traditional IRA or other retirement plan. Rather than paying ordinary income tax on distributions from your retirement account, you can roll over into a traditional IRA or self-directed IRA, also known as a SDIRA or solo IRA. If the funds are distributed directly to you, you have 60 days to deposit them into another plan or an IRA. The portion that is rolled over will continue to be tax deferred and will be subject to all the rules of the new plan or IRA. See our article, How to Take Distributions From Your Self-Directed IRA for more information.
You can take advantage of forward averaging. You are eligible to use forward averaging if you satisfy all of the following:
- You were born before 1936.
- You have not used ten-year averaging on any distribution since 1986.
- You participated in your plan for at least five years.

What Happens When You Take Money Out of Your IRA or 401(k)?

You'd think this would be a no brainer, wouldn't you? You saved up for retirement, now it's time to start receiving it. But it's never simple when the IRS is involved. When you take money out of your IRA or 401(k), the following income tax rules apply.

Your distributions are taxable immediately. All distributions will be taxed in the year they come out of the plan. There is an exception when you roll over your distribution into another retirement plan or a traditional IRA or when your employer transfers the distribution directly into another plan or traditional IRA.
Your basis is not taxable. If you made contributions to an IRA or 401k and you were not permitted to take a tax deduction on your tax return, then you will have what is called "basis" for tax purposes. You will not have to pay taxes on those amounts a second time when you take the money out of your plan. However, if you have a traditional IRA every time you take a distribution, part of it is taxable and part of it is not.
You don't have to withdraw cash. When you take a distribution from an IRA, you may choose the assets you want to withdraw - you are not required to take cash.
You may not claim a loss. You may not claim a loss on your tax return for any loss incurred inside your IRA or 401k. Instead, you pay tax on each distribution based on the cash value or the fair market value of the property on the date it is distributed from the plan.

How Are Distributions From a Traditional IRA Taxed?

Distributions from a traditional IRA are taxed as ordinary income, but if you made non-deductible contributions, not all of the distributions will be taxable.

Internal Revenue Code Section 72(t) imposes a tax equal to 10 percent of certain early distributions from IRAs (exclusive of portions considered a return of non-deductible contributions).

The 10% tax, which must be paid in addition to the regular income tax on the distribution, applies to all IRA distributions except the following:

Qualified first time homebuyer distributions.
Distributions to the estate or beneficiary of an IRA contributor after the contributor's death.
Distributions not exceeding the deduction allowed to the taxpayer for the year for medical expenses.
Distributions to alternate payees under qualified domestic relations orders.
Distributions after the owner's “separation from employment” not exceeding amounts he or she pays for health insurance (assuming the owner has received 12 weeks of unemployment compensation and not been employed for a period of more than 60 days since receiving unemployment compensation.)
Distributions to an IRA contributor after age 59 1/2 or on account of his or her disability.
Distributions not in excess of the owner's “qualified higher education expenses” for the taxable year.
A series of substantially equal periodic payments, regardless of the taxpayer's age when they begin.
A distribution on account of the IRS. (Levies, etc.)

Options For Receiving Distributions Before Retiring

The current retirement plan rules discourage taking distributions before retirement. The following are the options you have when receiving a distribution prior to retirement:

Pay ordinary income tax. (Unless you have a Roth, but there will be some sort of tax still.)
Roll over your distribution: If you have not yet reached age 59 and 1/2 and you receive a distribution from a qualified plan, you can roll over the distribution into a traditional IRA or another retirement plan to continue deferring tax.

As I mentioned above, you can also choose to do forward averaging. But your best bet is to just wait until you reach retirement age.

How Landlords Protect Themselves From Lawsuits

If you are a landlord, you have likely put in a lot of blood, sweat, and tears to get where you are. Still, you have to put in a little bit of extra work to avoid the risk of losing it all in a lawsuit.

Let's look at how landlords protect themselves from lawsuits and limit their liability exposure.

Asset Protection Is A Little Different for Landlords

While it would be improper to cast the landlord/tenant relationship in an adversarial light, the best way to protect yourself and your assets from lawsuits is to be a good landlord.

Don't get defensive; hear me out. This is easier said than done!

After all, no one sets out wanting to be a terrible landlord who will inevitably get sued by an angry tenant. For this reason, getting competent legal advice on how to effectively meet all your obligations as a landlord will be a huge step forward in making sure there is no grounds for any tenant to sue.

You can start by checking out these asset protection articles. As our backlog of articles will show, we're big fans of corporate structures that protect assets—structures like the LLC. As its name implies, a limited liability company (LLC) limits your liability exposure. Furthermore, if you set up an LLCs for each property you own, you can ensure that each property is isolated from the others in the event of legal action.

Beyond creating an anonymous structure to hide away your assets, you might also establish a shell company through which you manage everything. This keeps your assets from being taken from a lawsuit by making your shell company the entity that interacts in legal issues.

But let's not get ahead of ourselves. Let's look at ...

A Landlord’s Legal Duties

One of the most fundamental contractual agreements is that between a landlord and tenant. As such, there is a wealth of legislation and case law establishing the exact nature of that legal relationship. For landlords, it is vital to effectively discharge all legal duties in order to avoid a lawsuit.

These primary duties are:

To provide safe and livable housing
To address maintenance issues in a prompt manner
To adhere to the terms of the lease
To properly handle major concerns

Unless you have a particularly belligerent tenant, lawsuits will be the last resort for most. This means that there will be chances to remedy the situation long before you're facing legal escalation.

That said, it is worth noting the most common reasons a tenant will try to sue. In no particular order, they are:

1. Wrongful Eviction

Although landlords win 90% of all lawful evictions, a wrongful eviction is not good for anybody.

If you need to evict a tenant, seek legal advice so make sure it's done lawfully. You must obtain a court order before simply changing the locks, moving the tenant’s belongings out of the property, or cutting off utilities.

Additionally, a tenant has what is called a right to “quiet enjoyment”, this protects a tenant from harassment and privacy violations. If the tenant is compelled to leave the premises due to a breach of quiet enjoyment then this can be deemed a “constructive eviction” and is subject to be treated as a wrongful eviction.

As the penalties can include everything from legal fees to jail time, a savvy landlord looking to protect themselves will be best to only proceed to evict in a lawful manner.

2. Livability Issues

Another potential opening for a lawsuit is if the property has issues that make the property unlivable. A well-maintained property should not have livability issues. After all, you do want to take care of your investment, right?

Generally, a property will be considered to have livability issues if one of the following is present:

No utilities or sewage disposal
A rodent or insect infestation
Lead paint hazards
Structural damage
Other conditions posing a health and safety (particularly fire) risk

As mentioned, regular maintenance means protecting your investment and rarely having to worry about these potential legal issues. Let's hope you never need it, but be sure to check out our article, When Should a Landlord Hire a Lawyer?

3. Misusing Consumer Reports

It is common for landlords to screen potential tenants by looking at their credit reports or by running criminal background checks. While a wise policy, the Federal Fair Credit Reporting Act has strict compliance rules for how you use the information obtained. If in doubt, seek qualified legal advice.

4. Misusing Security Deposits

If not handled properly, issues around the security deposit can be the most volatile for lawsuits. However, there are key things that can be done to protect against lawsuits:

Require a standard amount and have a move-in inspection
Keep the money separate and keep receipts for any deductions at the end of the lease
Return the balance within the required period to avoid lawsuits from the tenant

Above all, know the requirements imposed by the law regarding security deposits as the risks are severe if these requirements are not fulfilled.

Additional Ways Landlords Can Limit Liability

At the risk of sounding like a broken record, getting a great lawyer to advise on this issue is essential. Every great player needs a coach, and every great landlord needs a competent lawyer to advise on winning strategies to limit liability exposure.

You should also limit your exposure as a landlord by ensuring that you have these forms completed. Here, attention to detail matters; every detail of the lease needs to be spelled out.

Being a landlord is an achievement, and it is well worthwhile putting in the effort to ensure that your asset is protected from lawsuits. Along with being a good landlord, having a great lawyer is key to avoiding those pitfalls of legal exposure.

Lawsuits Are The Scourge of the Small Business Community

Insurance Is Not the Answer

Protecting Your Small Business Assets

Anonymity

Series LLCs

The Series LLC Experts

Can I be my own registered agent?

Should I get a registered agent service for my LLC?

How Can a Professional registered agent service help?

Conclusion

What is Equity Stripping?

Wait. I want to look poorer than I am?

Is Equity Stripping legal?

We Simplify Equity Stripping For Real Estate Investors

Who Needs Equity Stripping?

Which of these options is most appropriate for you?

What Is A Personal Property Trust?

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What Are The Benefits Of Putting Your Property In A Trust?

When Should You Use a Personal Property Trust?

Mortgages

LLCs

Vehicles

What is 'Passthrough' Income?

How Does a Passthrough LLC Benefit Me?

What About the Taxman?

Can I Get Passthrough Treatment for Other Entities?

Keep more of your money with a Royal Tax Review

<img loading="lazy" decoding="async" class="wp-image-3519 alignleft" src="https://royallegalsolutions.com/wp-content/uploads/2018/03/Legal-Solutions-Presentation-57-Social-Image-.jpg" alt="does a general partnership need an ein" width="443" height="206" />Business Entities that Do Require an EIN

Business Entities that Do Not Require an EIN

Business Taxes

<img loading="lazy" decoding="async" class="wp-image-18831 alignleft" src="https://royallegalsolutions.com/wp-content/uploads/2021/03/biden-newspaper.jpg" alt="estate planning: biden changes" width="391" height="233" />What Estate Law Changes Will 2021 Bring?

Creating a Trust Is A Great Start

How is a trustee compensated for their time?

<img loading="lazy" decoding="async" class=" wp-image-18830 alignright" src="https://royallegalsolutions.com/wp-content/uploads/2021/03/estate-plannin-pitcher-baseball.jpg" alt="curve ball" width="236" height="169" />The Takeaway

Why Use an LLC to Hold Your Rental Properties?

When Does an LLC Fail to Protect Your Personal Assets from Lawsuits?

Why Use a Trust to Hold Your Rental Properties?

What are the Benefits to Using a Trust Versus an LLC?

Should You Put Rental Property in an LLC or Trust?

Putting Rental Property in an LLC Pros

Putting Rental Property in an LLC Cons

Putting Rental Property in a Trust Pros

Putting Rental Property in a Trust Cons

Why Do You Need to Know How to Name a Trust?

<img loading="lazy" decoding="async" class=" wp-image-18580 alignright" src="https://royallegalsolutions.com/wp-content/uploads/2021/02/How-To-Name-A-Trust.jpg" alt="How To Name A Trust" width="334" height="274" />Basic Guidelines for Naming a Trust

Get Creative (But Not Too Creative)

Try To Keep It On The Shorter Side

Pretend You’re a Celebrity

Don’t Overthink It

Conclusion: How to Name a Trust

<img loading="lazy" decoding="async" class="wp-image-18554 alignleft" src="https://royallegalsolutions.com/wp-content/uploads/2021/02/Do-I-Need-a-Medical-Power-of-Attorney.jpg" alt="Do I Need a Medical Power of Attorney?" width="402" height="252" />What Is a Power of Attorney?

Durable Power of Attorney

Medical Powers of Attorney

How Does A Medical POA Work?

How To Select An Agent/Attorney-In-Fact

Should You Get One?

What Is A Power of Attorney?

Types of Powers of Attorney

Durable Power of Attorney

Medical Power of Attorney

How Do You Prepare a Durable Power of Attorney?

Choosing an Agent and the Risks Involved

Do You Need a POA?

<img loading="lazy" decoding="async" class=" wp-image-18497 alignleft" src="https://royallegalsolutions.com/wp-content/uploads/2021/02/as-is-clause.jpg" alt="as-is clause" width="424" height="323" />What Is An 'As-Is' Clause?

Potential Problems That an As-Is Clause May Cover

What “As-Is” Does Not Cover

The Takeaway

image via reddit

Why Start A Shell Company?

What You Need To Start A Shell Company

Where To Start A Shell Company

Compliance and Ethical Considerations

9 Steps Unmarried Couples Should Take

Single-Member, Husband-And-Wife, And Multi-Member LLCs

Member-Managed Vs Manager-Managed LLCs

LLC Tax Classification

Traditional LLCs Vs Series LLCs

LLCs By State

Where Do You Begin?

Business Entities that Do Require an EIN

What Estate Law Changes Will 2021 Bring?

The Takeaway

Basic Guidelines for Naming a Trust

What Is a Power of Attorney?

What Is An 'As-Is' Clause?

What States Are Land Trusts Used In?

Public Interest in Disclosure