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

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

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

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

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

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

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

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

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

How to Keep Your Solo 401(k) Compliant

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

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

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

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

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

Solo 401k: The FAQs

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

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

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

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

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

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

FAQ #2: What’s Checkbook Control?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Investors Love The Solo 401k: Here's Why

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

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

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

Sweet Freedom: Invest Where Your Expertise Lies

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

  1. S-Corporation Stock
  2. Collectibles
  3. Life insurance policies

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

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

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

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

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

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

Savings Benefits: Sky High Contribution Limits

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

Flexible Lending Options

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

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

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

Land Trust: What To Know About Your Eligibility, Rules & Regulations

We get frequent questions about rules and regulations of all legal tools used for asset protection. Land trust eligibility is no different. 

Let’s just be clear that you don’t have to pass any eligibility requirements beyond being of legal age to get a land trust. That said, there are some issues to be aware of.

Are Land Trusts Available in Every State?

Regardless of where you live, you (as an investor or business owner) can enjoy the benefits of the land trust. But not all states offer land trusts--in fact, only these six have local options:

But any investor can have a land trust or its equivalent--the only possible exception being those living in Louisiana, who may wish to use other types of trust or asset protection options.

Fun fact for the legal eagles in the crowd: Louisiana is “special” from a legal standpoint because they rely on Napoleonic law, more based in older French legal systems, than the rest of U.S. states which are more closely related to British common law. As a result, Louisiana REIs who wish to keep their business and entities in-state are likely to need attorneys familiar with state-specific tools and laws. The rest of us in the other 49 states (and D.C.--by the way, fantastic City Flag you guys have there!) have things a little easier.

Even states lacking land trusts have similar options by different names, “Title-holding trust” is common, but each state will have its own lingo.

Even if your state doesn’t offer a local option, it likely will default to the laws of Indiana’s land trust, which have set the tone for land trust legislation and regulation nationwide. 

As with entities, you aren’t required to form your land trust in-state. At RLS we always tell our clients: if you don’t like your jurisdiction’s rules, change jurisdictions. It really is that easy. Many of our, say, Alaska investors decide to form Texas Series LLCs because they like Texas’ costs and laws better. You can do the same thing with land trusts. 

What Rules and Regulations Should My Land Trust Follow?

As far as legal vehicles go, the land trust is not particularly heavily regulated. Anyone can have one, and there aren’t many restrictions at all. But not everyone will use the land trust in the same way, and there are some limits and rules-of-thumb to keep in mind.

The most obvious limitation of all land trusts is the fact that they aren’t incredibly useful beyond the realm of real estate law. The land trust, often simply called the title holding trust, can’t hold just any asset--it must be a real estate asset. If you have cash to stash, consider your off-shore banking options. As for other assets, different strategies will work for them.

The best you can do to “play by the rules” is ensure your land trust conforms to all local laws. Next, ensure your use is appropriate and lawful.  If you need help determining your compliance, understanding how trust properties are taxed, or learning how your land trust works in the context of your asset protection plan, check with an attorney, CPA, or even both. Other investors can help you get ideas for using your land trust, but ultimately, counting on pros hip to your personal situation when it comes to matters of legal compliance is the smartest move.

Land Trust Best Practices

When you deed a property to a land trust, you’re removing it from your personal possession. This makes some investors nervous, but it need not, since you still receive your funds as the beneficiary. Here are a few best practices to keep in mind when using land trusts to protect real estate assets:

This last point is one we should stress: land trusts offer anonymity, while entities offer compartmentalization, and the ideal plan has both. Select the best liability-limiting entities for you, whether that’s a Traditional LLC, Series LLC, or both.

Bottom Land: With Few Limitations, Most Investors Can Benefit from Land Trusts

While the land trust has limits, so does every tool. Even non-legal tools are only good for their intended jobs. Try screwing anything in with a hammer if you don’t believe us. As for land trusts, they’re excellent for their designed purposes. To get the most out of the land trust, use it appropriately for your situation and get advice if you’re unsure what role it should play in your asset protection plan.

Land Trust: Basics for Real Estate Investors to Know

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.

You’re almost always better off controlling an asset than owning it in your name outright.

And that’s where the land trust really gets to strut its stuff. After all, 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. But you still get to stay in control of any property associated with your trust, and of course, any earnings the real estate investment generates. Let’s take a closer look at land trust basics you should know.

What is a Land Trust and How Does it Work? 

The land trust is an asset protection tool that doesn’t get a lot of respect. There is surprisingly little buzz around this real estate tool, though it can save your assets from unnecessary legal risk. 

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

When you establish a land trust, you’re using its trustee-beneficiary structure. Your trustee may then provide for you as a beneficiary of the trust. Lawyers make great trustees because of attorney-client privilege, but you get to choose. This is how you maintain control and enjoy the benefits of property ownership while sidestepping its liabilities. It’s a pretty cool thing, in our opinion.

Why are Land Trusts Helpful for Real Estate Investors?

There are many ways land trusts can help out real estate investors. Let’s just consider some of these common uses of the land trust:

How Land Trusts Best Protect Real Estate Assets

As previously mentioned, a land trust is a great tool but can be limited if used alone. It’s not intended to be your entire asset protection strategy, but rather a piece of it. Recall that properties in LLCs are generally ‘pooled’ legally, unless you use a Series LLC of course. 

We’ve found that asset protection works best in layers. A land trust is a great first layer of anonymity. If your land-trust-owned property is also owned by an LLC or a Series within a Series LLC, that’s another layer. From there, attorneys and CPAs can pile on even more layers such as enhanced anonymity, the addition of a shell corporation, and plenty of other legal and tax tricks.

What Do I Do to Form a Land Trust?

Land trust eligibility isn't the same in all states. The only universal pieces of the land trust formation process are these:

Your lawyer will be able to give personalized advice upon agreeing to help you. Thanks for learning about the benefits of land trusts with us today, and please leave any questions you still have in the comments if they aren’t addressed in our Land Trust FAQ.

Land Trust: The FAQs

If you’ve started learning about the land trust recently, questions are common. We’ve gone ahead and made some primers on what a land trust is and the benefits of the structure, but today, we’re going to answer your most Frequently Asked Questions about the land trust. The inboxes here at Royal Legal HQ are regularly flooded with the same questions--so we plan to start with those. If you have more, just let us know, because we’re always happy to answer your questions--in email or blog format. Let’s dive in.

Land Trust FAQ #1: I Heard Land Trusts Can “Get Around” the Due-on-Sale Clause for Easy LLC Transfers. Is it True?

Yes. Really. We have clients use land trusts for this purpose regularly: to obtain better financing  for an investment property. We’ve outlined the basic method before, but here are the broad strokes:

  1. Let your lawyer know what you’re up to.
  2. Buy in your own name for optimal loan terms.
  3. Transfer your property into a land trust.
  4. If desired, move the property from your anonymous land trust to the LLC of your choosing
  5. Enjoy the sweet relief of never worrying about the DoS again.

It really is that simple. We’ve never known someone who got in “trouble” because the worst thing that can happen with this method is receiving a love note from the bank. If this happens, your property can revert back to your name. You know, where it was in the first place. 

If you still want to protect the asset, it’s likely you made a misstep the first time. When executed with professional help, few investors ever get a letter from their bank because the bank is none the wiser. Breathe. Due-on-sale violations aren’t punishable by hard labor It’s not a crime to get better deals, and each piece of this plan is perfectly legal.

Land Trust FAQ #2: Do I Need Separate Land Trusts For Each Property?

Ideally, yes. While one land trust is better than none, the optimal strategy is to use one per property. That way, you can really enjoy each land trust benefit for each and every property, whether the benefit you want is:

Land Trust FAQ #3: Some Blogger Said Land Trusts Aren’t the Same Thing As Asset Protection? WTF? 

Regular readers now wondering if we’ve been lying about everything all along like scorned spouses, slow your roll. Actually, anyone with this question can slow their roll. First of all, was Some Blogger a credentialed asset protection attorney? If not, exactly what makes them an expert on the topic? You can look up our credentials, read our reviews, etc. Do the same and check your source. 

Considering the Source of Legal Opinions

You’re looking to see if their opinion on asset protection is any more valuable than say, our opinion on the best color for your living room we’ve never seen (Coral. Totally go with coral). 

See the problem there? We don’t know what we’re matching to, what you like, or anything about you. Also, we’re lawyers, not interior decorators. Our lead attorney Scott Smith freely admits lacking interior decorating expertise--perhaps it was this lack of talent that forced him to turn to law, which he’s pretty darn good at. Remember, he used a land trust to offset law school costs. Did Some Blogger?

Scott’s opinion is the same as everyone else’s at RLS’s. Land trusts are a valuable component of an asset protection plan. That’s it.

By the way, even if Some Blogger is or claims to be a lawyer, remember this: no blog should create some kind of surprise attorney-client relationship. So, they aren’t your lawyer even if they are a lawyer. And just for the record, that same concept applies to this blog, even if you think our pearls of wisdom are awesome. That doesn’t make you a client; it makes you a passionate reader. We love both at RLS.

Bottom line: land trusts alone won’t always protect assets, but an asset is better protected in an land trust than in your own name. Land trusts aren’t an entire asset protection plan, but rather part of one.

Land Trust FAQ #4: Same Thing As Asset Protection? WTF? 

This ties back into #3. Land trusts aren’t a complete asset protection plan, but they have their place. What role the land trust will play in your plan is a professional’s place to help you decide. Regardless, this lesser-known tool can help most investors achieve their goals.

Land Trust: The Benefits Of The Structure

As we continue our series on the land trust, it’s time to turn our attention toward the major benefits of this structure. Whether you are old friends with this time-tested real estate tool or have never heard of it in your life, the land trust or title-holding trust can truly be the real estate investor’s best friend. Let’s get right into the three most essential benefits of the land trust, an under appreciated yet powerful legal tool.

Benefit #1: Land Trusts Protect Your Anonymity

If most intelligent people are given the choice between anonymity and oversharing, they tend to like the former. Anonymity makes lawsuits a serious pain, and can actually prevent them if the other party isn’t particularly motivated. Learn more about the inherent benefits of anonymity for asset protection. Or, learn how to get even better protection from the next tip.

Benefit #2: Land Trusts Make Lawsuits Against You Harder

The land trust’s anonymity powers help it prevent lawsuits. Anonymity alone is rarely a good asset protection plan. But by the same logic, it’s impossible to have a highly effective, what we like to call “judgment-proof” package.

Trusts are more difficult to sue than individuals. Trusts paired with entities are even more difficult, and we’re about to explain why in detail. Pay attention if you’re looking for an ironclad asset protection strategy that stops suits before they start at all.

Benefit #3: Land Trusts Kick Ass at Preventing Lawsuits When Paired With Entities.

Of course the asset protection folks save the asset protection benefits for last. But think about it: anonymity is something you need, and the land trust removes property from your own name. It doesn’t have to stay there, though. You can reduce your chances of a lawsuit against you to almost “none” by simply pairing the land trust with an appropriate entity. We’ll give you the play-by-play of both why you need to do this and how.

To build  a high quality asset protection system, pair the humble land trust with a liability-limiting entity. This is a highly intelligent, easy-to-manage, cost-effective way to approach a basic asset protection strategy. Here are the very broad strokes of real estate investors effectively pairing entities and land trusts actually looks like.

Protecting Assets With One-Property-Per-LLC Strategy

First, think of one of your investments. If you don’t have one, imagine your dream spot--maybe in a place you’d like to vacation to. Now, we don’t want anyone coming after that badass property in court. So you might stick it in a Traditional LLC. An ideal strategy is compartmentalized as well as anonymous. 

Compartmentalization is the second key of your plan, and it’s your entity’s main job. One Traditional LLC can protect one asset completely as a holding company, or you may choose to use it as a shell company to assume operations for a Series LLC.

Series LLCs are ideal for the investor or multi-property owner because you can have as many “compartments” (Series, miniature liability-protected companies) as you like. Learn more from our educational Series LLC content on this structure’s benefits, uses, and FAQs. But for now, just understand that the Series LLC achieves perfect compartmentalization, with each of your assets snugly secured inside its own Series.

Compartmentalization compliments anonymity brilliantly, and is indeed what we call one of the pillars of asset protection. If your assets aren’t connected to you, and nobody can figure out who the hell you are, you because a righteous pain to sue.

Bottom Line: Land Trusts Have Many Benefits for Real Estate Investors

The list above is far from exhaustive. There are many more nuances and benefits to land trusts, some of which may apply only in certain situations. For instance, some married couples love them because they allow for a legal ownership method known as tenancy-by-the-entireties. Land trusts can be used like savings accounts backed by appreciating assets, as estate planning tools, for executing transfers around the due-on-sale clause, and many more cool legal tricks.

Just know that using this tool can get you all sorts of perks, and don’t overlook land trusts when constructing your asset protection strategy. You’d just be cheating yourself.

Asset Protection: The Frequently Asked Questions

There’s always something new that investors can learn about defending themselves with the tools and strategies of asset protection. We also understand though, that this area of law is less commonly understood. Heck, there are even solid business attorneys even who know about asset protection tools but still have fundamental misunderstandings about actually practicing this legal art. In the interest of clearing away some of the mystique that surrounds our growing field, we wanted to begin answering some of the most common questions that we get from our real-life clients. Let us know in the comments section if you learned something new today, or what FAQ you think needs to be on our next list.

Which Asset Protection Tools are Right for Me?

Woah, we’re just getting to know each other. In all seriousness, we can’t tell you what’s best for you without knowing more about you, your goals, and of course, your business and major plans.

In fact, if anyone tells you they can divine the ideal tool set for you without knowing much or anything about you, your B.S. Detector should ding. There is no one-size-fits-all asset protection solution, and in fact, our circumstances are all so vastly different that there can’t be.

There are, however, some common basics. Most of us in the real estate world will need an entity as the foundation of our asset protection system. Limited Liability Companies are great choices, as they offer an easy way to both organize your business and have inbuilt mechanisms that prevent lawsuits. Your entity can also be used alongside anonymity tools like land trusts, and other legal work including strong contracts.

Full service firms like ours can even use retirement and estate planning tools to strengthen your asset protection plan. If you really want to learn about the best tools for you,  schedule a consultation with an asset protection expert.

The Entity I Want Isn’t in My State! What Can I Do?

Since the Traditional LLC is in all 50 states, we’re guessing you might be talking about our good friend, the Series LLC. This entity is indeed great for investors in most states, yet it isn’t offered in every state. Daily, we get emails and social media messages from investors scattered across the country lamenting that their state doesn’t have a Series LLC option.

It’s okay if your state hasn’t yet been hit by the Clue Train. You can always form a Series LLC in another state. For instance, many Royal Legal Solutions clients use Texas Series LLCs but haven’t even been to, let alone owned property, in Texas. Some leverage our presence here, cost-reducing flat fee offerings, and ability to serve as the Registered Agent for more effective Series LLCs than their home-state would ever offer.

Isn’t The Series LLC Structure Too New to Rely On?

We get this question and variations all the time. Perhaps a little history lesson will help. The first Series LLC was born in Delaware back in 1996--over 20 years ago. Let’s compare that to the Traditional LLC, which Wyoming pioneered not even 20 years earlier in 1977. Not so new after all, right?

So, the reality is that the Traditional LLC, so often hailed as long-established institution,  isn’t much older than the Series LLC. It’s not a huge departure legally speaking either, but simply an offering with more nuance and possible uses for the savvy investor to exploit.

Some criticize the Series LLC as “untested,” but this is also untrue. It’s simply harder to document the structure’s “wins” because of its defensive nature. You can see plenty of Traditional LLC court cases where the structure was “tested”--and lost. The absence of a reliable way for attorneys to pierce the properly-established (S)LLC structure is a huge point in its favor. It’s hard to count how many lawsuits didn’t happen. But this structure effectively stops them before filing.

Is Using Trusts to Disguise Company or Property Ownership Legal and Ethical?

If you’re using Anonymous Land Trusts correctly, meaning under an experienced attorney’s guidance, there’s nothing illegal about using them for asset protection purposes.

For the ethically concerned, consider that you are using tools that anyone can. Anyone with a wifi connection can read this article and others like it to learn about the power of trusts. So, you’re not getting an unfair edge. In fact, these tools were once so cost-prohibitive that only the exquisitely rich could use them. Why shouldn’t you? But some investors also mistakenly believe, or at least fear, that anonymity is only necessary for those with something to hide. Well, that’s just plain false.

Thinking privacy is just a shield for wrong-doing is a huge mistake. You want your privacy as a real estate investor, above all else, to protect yourself. The more difficult you are to connect to your valuable assets, the more difficult you are to sue: end of story.

Further, asset protection tools aren’t designed to help someone who’s up to no good or breaking the law. Your lawyer actually can’t help you break the law on purpose. These tools are all about preserving the wealth you’ve already built.

What Should I Look For in an Asset Protection Attorney?

Specific, tangible asset protection experience. Those like us at Royal Legal Solutions who are investors ourselves will also bring that experience to you. You can verify your attorney’s credentials with their state Bar, and your attorney ca

Asset Protection Structures: 3 Benefits (Plus The Best Entities For REI)

The following is a discussion of both the most common perks of an asset protection strategy as well as the benefits that you can start enjoying at any time. Your customized plan will depend on the asset protection structures that you and your team of qualified professionals decide are best for you.             

3 Benefits of Asset Protection Structures

Your "structure" (or your business entity and how you set it up) typically conveys several benefits at once. The most common asset protection structures we recommend for our clients are the series LLC, a Delaware Statutory Trust for the Californian investor, or a network of a traditional LLC and an asset-holding company. All of these structures give you some unique freedoms and avenues for defending your assets.

asset protection structures: house frame

#1 They Organize Your Business

Operating your real estate business as a sole proprietor has tons of disadvantages. As asset protection professionals, the first threat we think of is the threat of lawsuits. The easiest way to make yourself a target and your property vulnerable is to own investment property in your own name.  

Using an entity can streamline your real estate investments, or truly, any business that you choose to operate with these structures. Some have legal requirements that require organization, but in general, we find that the entities used for asset protection also make running a business easier.

#2 They Compartmentalize Your Asset Protection Plan

Ideally our assets are compartmentalized, meaning that they are separated legally from one another and you personally. Your entity is typically your best tool for compartmentalizing assets.

The optimal way to protect assets is with Limited Liability Companies that “stand in” as the owner of the property. Of course, you control the company. The beauty of LLCs is you can form as many as you like, preferably with each holding a single asset. Both the the series LLC  and Delaware Statutory Trust for California investors make compartmentalization easy. In the case of the series LLC, each asset simply goes into its own series.

Unlike the traditional LLC, investors can leverage the series LLC’s scalability to minimize the cost of compartmentalization. At Royal Legal Solutions, we love teaching investors how easy it is to create a new Series Document from home. Many of our clients have been empowered to create their own series at any time, on their schedule, from the comfort of their homes.

#3 They Limit Your Asset Liability

You may be wondering why there’s so much talk of types of limited liability companies in the asset protection world. These types of companies, including the series LLC variation, are designed to remove your personal liability. Because of their legal protections, LLCs offer an elegant solution for basic lawsuit prevention for real estate investors. From a legal perspective, if an opposing attorney can’t make a good case for “piercing” your corporation (a possibility we can anticipate and prevent by deploying certain tools and tactics in the set-up phase of an asset protection strategy), your assets are safe from seizure.

Why? Because for your assets to be seized, an opposing lawyer would need to secure a judgment against you. For that to even be a possibility, that hypothetical attorney must connect you to the property and the liabilities to the property. Our asset protection plans can thwart every step in this process, to the point that we can make it nearly impossible for the lawsuit to even be filed at all.

Enjoy Real Privacy: The Value of Anonymous Structures

The best asset protection plans take advantage of every opportunity to secure an investor’s anonymity. Attorneys can use tools like the anonymous land trust to ensure your name is nowhere to be found on public records.

In addition to fortifying your asset protection plan by helping prevent lawsuits, preserving your anonymity is also a reliable way to protect yourself from the threat of identity theft. In the digital era where all of our information is easily stolen, it is critical that investors and high earners protect themselves—and their personal information. Be cautious of who you give information to online. Many scammers have convincing, professional-looking sites designed exclusively for stealing private information.

The Relief of Being Truly Judgment-proof

A properly configured asset protection plan can make suing you nearly impossible. That is part of your attorney’s job: to get you the structures you need to never worry about lawsuits again.

The only way to design the perfect plan for you is to work with a reputable real estate asset protection attorney. Your lawyer should take your entire personal situation into account, get to know you and your investments, and make a tailored plan for your circumstances. After all, what works for one investor may be useless to another.

What we know from talking to our clients is that the peace of mind of not living in fear of a life-ruining lawsuit is worth it.  Lawsuits are among the most stressful life events a person can experience, right up there with death and divorce. But unlike the latter two unfortunate realities, lawsuits can be prevented.

The smart play is to be proactive, and create your asset protection plan before there is ever even a potential threat. Take action now, and you might never have to see the inside of a courtroom.

Series LLC: The FAQs

Since the Series LLC is a lesser-known entity compared to its Traditional LLC counterpart, it is only natural that real estate investors have questions about the structure. So you can better understand the Series LLC, we have collected some of the FAQs here.

Is There a Cost Advantage to Using the Series LLC?

Absolutely, particularly if you compare the Series LLC with an equivalent amount of Traditional LLCs. Optimal asset protection is achieved by maintaining a single asset per LLC. For owners of multiple properties, the Series LLC is a no-brainer. The Series LLC requires only a single filing fee, and you receive a single EIN to make matters easier come Tax Season. Traditional LLCs, on the other hand, require a fee for each LLC created. When you can simply create a Series for free with a Series LLC, it makes no sense to fumble around with multiple LLCs and all of the record-keeping required to maintain them.

Will I Need to Do Complicated Banking or Change My Bookkeeping?

Fortunately, the answer to both of these questions is “no.” But allow us to elaborate on why. Contrary to some of the misinformation out there about the Series LLC, there are ways to bank effectively with a Series LLC that will only require a single bank account and card. Similarly, the Series LLC is an entity that easily lends itself to traditional bookkeeping. If you are already using traditional bookkeeping methods, fantastic! You won’t have to change anything. We have seen clients effectively keep records for their Series LLC by using an Excel sheet with multiple tabs--one for each Series.

Is the Series LLC The Only Asset Protection Tool I Need?

The answer to this question depends on the level of protection you want. Some investors are comfortable using the Series LLC as an asset-holding company alone, then doing any business that requires contact with the outside world personally. Examples of business that involves the public include collecting rental payments, hiring contractors, etc.

Investors seeking a higher level of protection may opt to use a shell company. A shell company is typically a Traditional LLC. This company would be responsible for any operations, but would not actually own anything. In fact, if someone does decide to sue you, this is the company we want them to sue. You can think of it as the “fall guy.” If a lawyer researches your shell company, he or she will realize suing you is a waste of time because it does not own any assets to seize upon judgment.

For an even greater level of protection, you have the option of incorporating Anonymous Land Trusts. Learn more about the Land Trust and Series LLC asset protection strategy from this previous article on the subject.

Do I Need to Take Any Special Considerations With Naming My Series LLC?

One of the main benefits of the Series LLC is that it makes maintaining your anonymity much easier. Anonymity is crucial to preventing lawsuits. Anyone looking to sue you will hire a lawyer pretty much immediately. The first thing that attorney will do is look to see who owns the property. By having the name of an entity like a Series LLC recorded as the owner of your property rather than using your own name personally, you become a much less attractive target.

But that benefit can be undermined if you fail to name your Series LLC in such a way that preserves your anonymity. To best preserve your anonymity, we suggest that you avoid using any version of your first and last name, business names already well associated with your name, or any other information that clearly links you to the property. To foil the business end of the lawsuit industry, we want an entity that is difficult to tie to you personally. The only other naming concern to take into consideration is whether the name you want is already in use by another business. We have found that a little bit of internet research and creativity can address this concern, as can having your attorney check for you when you form your entity.

Royal Legal Solutions Can Help With Series LLCs

The Series LLC is our bread and butter, and we have been known to sing its praises here and in other corners of the internet. If you are ready to learn firsthand how the Series LLC can protect your real estate investments, contact Royal Legal Solutions with any questions you may have. If you believe the Series LLC may be the entity for you, feel free to  schedule your personalized asset protection consultation today. Our experts will review your personal situation and make recommendations about the best legal tools for defending your real estate investments, allowing you to focus on growing your business.