If you are in a position to invest in real estate, congratulations! Your hard work, saving and diligent money management will pay off.
Now's not the time to ignore asset protection. This means structuring your business in such a way to ensure the maximum legal protections. Let's make sure your hard-earned money is kept as safe as possible.
Owning properties makes you a target for lawsuits. However, properly structuring the way you own properties makes lawsuits against your assets not worth anyone's time. Reliable asset protection kills lawsuits before they can begin. It makes legal actions against you so complicated and bound up in red tape that any would-be litigant will quickly run out of money and motivation to come after you in court. Instead of a pot of gold at the end of your rainbow, they'll find nothing but headaches and legal fees.
Whether you are new to investing in real estate or simply looking to restructure your existing investment portfolio, this article is intended to introduce you to a fundamental concept of asset protection: control without ownership.
You might think that being rich means owning lots of assets. The truly wealthy don't on squat. Being rich really means controlling assets instead. So it follows that the underlying principle behind intelligent investing means transferring ownership of your investments to a legal entity, which in turn is controlled by you.
If you are looking to create such a legal entity, here are three options to consider: land trusts, an LLC, or a shell corporation.
Anonymous and easy to create, a land trust is one of the most effective legal entities to transfer your property to. Now you may be thinking, “why do I need to be anonymous?” The simple answer is that anonymity is a necessary layer of protection against lawsuits—if people don’t know what you own then they won’t bother suing you!
Setting up an anonymous trust can be extra powerful as an investment strategy if combined with an LLC. Listing your trust as a member in the LLC, you establish two levels of separation from yourself and the assets you control.
The beauty of LLCs is that you are protected from the liabilities of ownership. The LLC itself is protected from any personal liability you face or judgements against you. Thanks to this in-built protection, LLCs should be part of every asset protection strategy. For protecting several properties, you can set up a Series LLC so each asset is separate from you and one another. While it can be complex to set up, with a competent lawyer, you should have no problems transferring your investments to an LLC controlled by you.
The idea behind a shell company is to have a vehicle for business negotiations and management that is separate from your asset-holding legal entities and yourself personally. An LLC can be a great choice for your shell corporation.
While shell corporations, LLCs, and trusts are ways of hiding your ownership, equity stripping is a legal way to make your investments seem less valuable than they are. Essentially, equity stripping is when you saddle your asset with harmless debts, liens, and any other tool that lowers the perceived value of the equity in the asset. It is a common method of protecting assets and works as a way of changing perceptions to avoid being a target of lawsuits.
There's no need to run off and try to implement all of these strategies at once—that would be a complicated asset protection approach that would be overkill for most investors. First of all, make sure to get competent and trustworthy legal advice before considering any of these options. And secondly, you need to consider all potential downsides. These downsides include the costs and tax consequences of these "control without ownership" strategies.
If you engage in equity stripping, for example, taxes can be minimized with the help of a knowledgeable CPA. But you should tread lightly; taking on debt, is just that—debt, which generally is a negative thing. Extreme care must be taken so that it your approach is completely above board—otherwise you risk exposing your assets (or worse).
You don't have a lot of time to spend on this stuff, right? Or maybe you are trying to save money. Either way, it may be tempting to half-ass your approach. This might creating one LLC and transferring all your assets to it. While this will separate you from your assets, it simply makes your LLC the new target for lawsuits. Also, if you forget to include an element of anonymity and pile your assets into a single company, you risk having that company being considered your "alter ego" and all those assets becoming vulnerable.
A job worth doing is worth doing well. You must consider how to best make your business unattractive for anyone to sue. This can only be done by fully outlining an asset protection structure which may involve multiple separate legal entities.
Remember: different states need different structures due to their state laws. Don't rely on online legal forms and advice that isn't specific to your needs (and that includes what you read here). You may end up with unnecessary fees and taxes without really getting the asset protection benefits you hope for.
It is not too much of an exaggeration to say that taking shortcuts and the easy route puts you in a position as if you hadn’t bothered at all!
It is a no-brainer that if you have assets, you need to think about asset protection. As such, it is worth investing the time and effort into making sure your asset protection structure is suitable for your state, that it protects your anonymity, and that it makes suing for your assets untenable.
The primary principle is that you need to transfer ownership of your assets to a legal entity that you control. Should something go wrong, there will be no clear target for a lawsuit.
While you may consider trying to do this yourself, many law firms will have experience setting up asset protection and know exactly the right structure for your circumstances. It is recommended to take advantage of this so that you can control property the smart way, the way the truly wealthy do. Own nothing.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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