| YOUR ASSET PROTECTION PLAN
WHAT ARE THESE ENEMIES? 1. DEVASTATING LAWSUITS Don’t Let This
YOUR DEFENSIVE WEAPONS ARE THE FOLLOWING: A. Land Trust Each separate parcel of your real estate will be conveyed to a Land Trust. First, though, an Agreement and Declaration of Trust is signed between you and the person who will be your Trustee. This Agreement remains a private document and is not placed in the public records. Remember, only the deed to the Trustee is recorded. The powers and duties of the Trustee are outlined in the Agreement, as are the rights of the Trustee and the Beneficiary (you). Remember, the legal interest to the real property will be held by the Trustee. That is - - the right to buy, sell or mortgage the title to the property on the public records. Therefore, be sure your Trustee is someone you do trust and who fully understands your wishes about how you want your real estate managed. Otherwise, the Trustee is only the ornament on the hood. The beneficial interest in the real estate belongs to you. The duties to manage, maintain, pay the costs of insurance and other bills also belong to you. Even though someone else is out in front of the public as Trustee, you have the real substance of ownership. 1. Why Have Your Real Estate Titled In A Land Trust? Let us assume that you have been involved in a serious automobile accident and it was your fault. We all know that it is responsible to carry liability insurance and you did. However, the plaintiff's attorney may not be satisfied with the limits of your policy and he may want to go after and take everything you have spent your entire life working for. First of all, the plaintiff's attorney will want to know whether or not it is worth his efforts to sue you. He will search the public records to find out how much real estate you own. These records are indexed under the names of the owners. If your real estate is in Land Trusts, the name of the
Trustee (never your name, as Beneficiary) will appear on the index
at the recorder's office. You want to keep a low profile. The use of the Land Trust is an excellent way to do it. Of course, property which has been in your name and is later conveyed to a Land Trust can easily be traced by anyone. That can't be helped. But, as you buy new properties and take title in Land Trusts, there is simply no record of your ownership in the public records. As for the properties you are now conveying to the various
Land Trusts, your interest will be protected anyway. The beneficial
interests of your Land Trusts will be assigned to one or more Limited
Liability Companies where they will be safe. Read on. B. Limited Liability Companies
The Limited Liability Company (LLC) consists of members rather than partners or corporal officers. All the members can work at the business of the LLC. If the LLC is sued, the liability of each member is limited to that member's capital contribution. In other words, if an LLC were sued, the members' personal financial holdings are not in jeopardy. 1. Establishing Your Limited Liability Company LLC's are created by the members entering into an Operating Agreement. Articles of Organization are filed with the Secretary of State. In many states, the LLC does not exist until the Secretary of State assigns it a charter number. 2. Taxation of Your Limited Liability Company For income tax reporting, the LLC returns can be like those of a partnership or a corporation. The overwhelming majority of LLC members want partnership taxation. Net income or loss of the LLC flows to the individual members to be dealt with on Form 1040 thus avoiding the double taxation sometimes associated with corporations. The LLC files a 1065, just like a partnership does. Each member receives a K-1 showing net earnings or losses in proportion to that member's percentage of ownership. The LLC is not a taxpayer, but only reports. One person LLC's are valid in Ohio, but are not a good idea. 3. An Example of Usefulness One of the good uses of the LLC is that of an operating company. For example, if you wanted to get together with someone else to buy a piece of real estate to rehab and flip, the LLC would be ideal. Both of you could work on the project, share expenses as well as profits, all without fear of personal liability in the event of a suit against the LLC. This is in sharp contrast to a General Partnership in which all the partners are in jeopardy if the partnership is sued. 4. Forms In the forms library are examples of the Operating Agreement to form an LLC and the Articles of Organization to be filed with the Secretary of State. Form 1065 reports net income or loss of the LLC and the K-1 allocates that loss or income to each member. Each state has slightly different statutes. Be sure to check with your own state's statute to be sure that each step is in compliance with your state law. The LLC is a valuable tool for real estate investors and should be a part of everyone's asset protection plan. Read on! 5. Classes of Ownership The Limited Liability Company has two classes of ownership - - Regular Member Interests and Managing Member Interests. The Managing Member (you) has 100% of control over the entire Limited Liability Company with maybe 2% of ownership, if that is how the organization is established. The passive ownership of most units is in the Regular Members. These can also be you, as well as your spouse, children, your Living Trust, a corporation, or anyone else of your choosing. The law of most states says that you can be both a Managing Member and a Regular Member at the same time. 6. The LLC and the Land Trust To keep up the flow of your asset protection plan, we'll talk about what goes into your Limited Liability Company next. More about the nature of Limited Liability Companies later on. The beneficial interests of your Land Trusts are placed in one or more LLC's. This is done by making a simple, private assignment. Why have we done this? Why have we tucked the beneficial interests of your Land Trusts into one or more LLC's? 7. A Real-Life Illustration Let's go back to the automobile accident again and now assume that the plaintiff's attorney decided to sue you anyway, even though all of your real estate is in Land Trusts. The attorney looked in the public records and found that, in your newly established asset protection plan you transferred title from your name to the Trustee of these Land Trusts. At this point, this attorney thinks that you still own the beneficial interests. What you have done privately - and quite legally and morally by the way - is to have transferred the beneficial interests of the Land Trusts to one or more LLC's. The lawsuit then progresses to a judgment against you for much more than your insurance coverage. Now, the plaintiff's attorney wants to collect on the judgment. He will soon discover that your real wealth is inside LLC's. He has a serious problem at that point. There is a law in the LLC Statute of most states which provides that the portion of LLC property belonging to a debtor as a member cannot be forced out of the LLC. For example, if your beneficial interests in several parcels of real estate were inside an LLC, the LLC would not be forced to give that property to the creditor. The creditor's recourse is to obtain what is called a "charging order" against the LLC. A charging order usually says that if a distribution of LLC income were made to you as an individual, the distribution must go instead to the creditor. If you or a close family member were Managing Member, would you ever make such a distribution if you have a choice? (Say No!) You do have that choice. You can keep that property safely inside the LLC for up to thirty (30) years if you want. But how could you enjoy the use of the property, money and income from the LLC? How about having the LLC buy the nice Jeep Cherokee Limited for the use of the LLC management? (Who is the management? - - you are). Or, why not hire your spouse at a reasonable salary to conduct LLC business? It doesn't take much imagination to realize that the Managing Member has many ways to avoid paying these creditors and still having assets available for family use. An LLC is not a taxpayer. It is only a tax reporter.
Net income or loss is attributed to the Members according to their
percentage of ownership and paid individually by each. Assume that you own 40% of the LLC Units and that the net income of the LLC is $100,000.00. Your share is $40,000.00. No distributions are made. Instead, the LLC retained the income and you didn't actually receive a check for $40,000.00. However, your creditor has a charging order on that
$40,000.00. Even though the creditor will not receive the money, he
will be forced to pay income tax on it. Why? Because the IRS and the
Income Tax Code say so. This is called "phantom income"
to the creditor and is an excellent reason why few charging orders
are obtained by knowledgeable attorneys. Wouldn't it be hard for an
attorney to explain to his creditor client that even though the creditor
never receives any of the LLC income he would get to pay the tax on
that phantom income year after year?! There are many, many other advantages of Land Trusts and Limited Liability Companies that are not covered in this short memo. As we go along through the various phases of your plan, these advantages will be addressed. One question often arises, and that is why you can't
just buy a set of tapes and some forms and create your own asset protection
and estate plan. You can, but do be careful that you have all the
knowledge you need. Order Your Complete Asset Protection System Today |
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