A proper asset protection strategy lets you sleep easy at night even if you are sued. Below, I will share with you the secrets that will let you go about your business as usual even if you’re threatened by a lawsuit. With asset protection on your side, you’ll barely even worry about the fears that are giving other investors grey hair overnight. After implementing a proper strategy, lawsuits will never even get filed and the problem is gone before it even starts. Asset Protection for real estate investors is premised on two parts:Isolating the assets for liability purposes inside of a Holding Company andHiding the assets from being connected to you or the Holding Company.Additionally, the company structure we use is scaleable at no additional costs or fees, streamlines your taxes, can be used in conjunction with traditional financing, and allows for the traditional recording keeping you are likely already using. After it is set up, you won’t even notice it’s there in your normal course of business.Which Type of Company Should I Use to Hold My Real Estate Investments?The best holding company for real estate asset protection is the Series LLC. You can think about the Series LLC as a Parent-Child relationship. The Series LLC is the Parent, and it can have as many children as it wants. Each child is known as a ‘Series.’ Even though the Series LLC is technically one company with one state filing and one tax return, each child Series is treated as if it were its own LLC for liability purposes.Each Series is typically designated with its own letter, beginning with Series A. The picture below can help you understand the structure. This means that if a lawsuit is filed against Series A, it cannot impact Series B, Series C, etc. A lawsuit against Series A can only affect the assets held in Series A. In the diagram above, the LLC has three Series. Each Series holds only one property. REI Asset Holding LLC – Series A owns a single asset, a piece of Real Property located at 123 Main st. If someone filed a suit over that property, it would not jeopardize the properties located at 456 Main st. or 789 Main st.Moreover, if there was a lawsuit against the owner of the parent LLC, that lawsuit could only collect against the assets of the owner – not against the assets of the LLC. Lawsuit against the owners of LLCs structured this way can only impact the owner’s personal property. We recommend never holding property in your own name. This way, if a lawsuit is directed at you personally, it cannot affect your assets. They are secured inside the Series LLC structure.How To Stop a REI Lawsuit Before It Even StartsThe Series LLC limits our downside risk in the event of a lawsuit since it limits the maximum amount we can lose, which is only the amount held in the Series. However, limiting the amount of the lawsuit is our last resort. What we want is a protection system is that stops the lawsuits before they are ever filed. This can be accomplished in three simple steps.Step One: Understand What Motivates Real Estate LawsuitsTo stop a lawsuit before it is filed you have to take out one of the three essential pillars of a lawsuit. The essential pillars of a lawsuit, or what attorneys need to make a case worthwhile, are:The law,The facts, andThe recovery. The law and the facts are generally easy to fabricate, and any decent lawyer can find a basis for a lawsuit that will survive summary judgment. The asset protection system we put in my place for our clients attacks the third leg, the recovery.Step Two: Attack the Recovery PhaseRecovery is the ability to seize assets and get paid after winning a judgment. A judgment is worthless on its own: it’s only a piece of paper. Judgments are only as valuable as the assets that can be seized with it. So, before a case is filed, an attorney will always research whether there are assets to can seize from the defendant after victory in court. If it appears that the defendant has very little or no assets, then the lawsuit isn’t worth the attorney’s time and effort.The vast majority of the time, this piece of the asset protection plan alone stops the suit dead in its tracks. There are rare exceptions, such as when the client coming for your assets is angry enough to spend thousands simply to satisfy personal self-righteous spite. But in the real world, most people aren’t willing to drop that kind of cash on rage alone. The wheels of justice really do rind slowly. Lawsuits take months, sometimes even years, to unfold. Anger tends to burn off far quicker.Step Three: Make The Other Attorney Lose All Hope of Recovery With Anonymous TrustsTo show the opposing side that there will be no recovery from the lawsuit, we hide the assets using Anonymous Trusts. These Anonymous Trusts can own the LLC itself as well as serve as Title Holding Trusts for the real estate asset. The LLC typically must disclose the members of the LLC on the filing instruments called the Articles of Incorporation. However, the member listed on the filing can be an Anonymous Trust. Since the Anonymous Trust is a private document and it is not filed with the state, anybody researching the Owner or Beneficiary of the Trust will be unable to find that information in the public records. Additionally, anyone researching the owner of the real estate asset by searching the County Clerk records will only find the name of the Anonymous Land Trust. Typically, the property owner’s name is listed on the County Clerk’s records, but in this case the owner of the property would be listed as the 123 Main St. Trust. Since the owner of Trust and the beneficiary is not registered with the state, they cannot find out that the Series LLC is the beneficiary of that Trust. For more clarity, I refer to the Anonymous Trust used for filing the LLC itself as the “Filing Agent Trust” and the Trust used for holding the real property as the “Anonymous Land Trust”. The Filing Agent Trust in the below example is the actual owner of the Series LLC. Bottom Line: A properly implemented Anonymous Trust and Series LLC structure can give you total anonymity. Your name won’t appear anywhere, making even filing a lawsuit incredibly difficult.What Should I Expect For Tax Planning?The tax structure with the above entity is typically done in one of two ways depending on the number and type of owners. If the owner is a single individual or a married couple, then the entire structure is a pass-through entity. In these cases, you (and possibly your spouse) simply report the income on your personal income tax return under Schedule E. In cases of unmarried investor-owners, the LLC will need to file a partnership tax return. Financing inside of a company structure should only be done once traditional personal financing is exhausted. Traditional financing typically has better, cheaper terms than the commercial financing required if the property is purchased directly in the name of the LLC. Once the property is purchased in your personal name, the property will need to be deeded into the company structure. Deeding the property into the company structure will violate the Due On Sale clause located in the mortgage. However, we have not seen a bank foreclose based upon the Due On Sale clause since before 1960 as long as the payments are made. I hear of lots of threats, but I have not seen any banks actually do it.How Do I Keep Records and Make Sure My LLC Will Not Be “Pierced?”There are several things you must do to keep an LLC from being pierced. These include filing franchise tax, having an operating agreement, and managing the money correctly. Where I see most of my clients drop the ball is on the money management and record keeping. The recording keeping for the structure is likely very similar to what you already do for your basic accounting of the investment. For any investment, you need to know the profitability of the particular asset purchased, so you need to have records which reflect the amount of capital invested into the asset, the amount earned buy it, etc. The Series LLC structure above will require you to maintain the records of each Series separately just as if they were separate companies. In many cases, all this requires is for you to “tag” the entries in Quickbooks so that the entry is shown in correlation to the specific company. If you do not use Quickbooks, you can get the job done with an Excel spreadsheet. But be sure to add a new entry any time you add or withdraw money from the bank account for the company. If you forget to do this a few times, it’s not the end of the world. You can always go back after and “catch up” on the accounting. Court will allow this as long as it is “reasonable.” Nobody expects you to be perfect, but don’t abuse it.