Custom Asset Protection: Investing in Texas Vs. California

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

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

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

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

So you ask.

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

Would that comfort you at all? Of course not.

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

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

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

The Importance of a Customized Asset Protection Strategy

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

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

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

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

Case Study: A Tale of Two Investors

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

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

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

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

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

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

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

Can you guess what it is?

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

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

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

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

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

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