knight-3091521_1280-1024x682

The Castle Keep – Asset Protection Strategies

By Garrett Sutton, Esq.

Throughout history, kings and nobles have sought to protect and defend their valuable real estate. Castles were once the preferred method of keeping marauders at bay. In today’s world, with lawyers and governments now leading the attacks, protection is no less important. In my latest book, Loopholes of Real Estate, we compare castle fortifications and asset protection, as they are quite similar in history and purpose.

But for today, without the expense and zoning issues of actually building a castle, what is the best way for you to hold real estate? There are several scenarios for real estate investors with varying asset protection options, so let’s look at a new client of mine who uses a few of the different options himself.

Sammy is an astute real estate investor. He had started out as a carpenter working for a company that both built homes and filled in their time with remodeling jobs. He soon realized that the clients who spent $10,000 with the company to remodel a property were turning around and making $50,000 when they later sold the property.

Sammy liked his job, but even more so, he liked to make money. So he started by buying a run-down property at a discount that he could fix in his spare time. While he experienced a few setbacks and some learning pains, when the remodeling and painting was completed, Sammy had a $20,000 profit after the sale.

That was enough to launch Sammy into his new career. Since then, Sammy has been buying distressed properties, fixing them up and selling them. In the last six years, Sammy has also been fixing up duplexes and 4 plexes and keeping them for his own portfolio. To further his real estate options Sammy has also started building spec houses for sale and profit.

Sammy has assembled a good team of professionals. He has learned from his CPA and attorney that each of his three real estate activities – remodeling for quick sales, holding and keeping, and building homes for speculation, or spec home sales – require a different legal strategy and a different means of taking title. His strategy is as follows:

  1. Remodel for quick sales. This is the strategy Sammy had first started with and it continues to constitute a significant portion of his profits. Still, as more new investors are getting into “fixing and flipping,” the sale prices for distressed real estate are increasing. Sammy knows what his margins are and won’t bid on dilapidated yet overpriced properties as others have done. Nevertheless, there have been plenty of good fixer-uppers in his area to acquire.

Because Sammy has been flipping several properties a year, he is subject to ordinary income taxation. Since flipping properties is his business, it is how he earns his salary. This means he has to pay a 39.6% tax (the highest federal income tax rate) on all his flips instead of only a 20% capital gain tax rate for his long term holds (with a 3.8% Obamacare surtax on income above $250,000 for married couples). Sammy definitely needs a CPA on his team for all the new rules.

This brings us to the best way to take title for Sammy’s (and for your) flipping activities.

While in a large majority of cases, you will want to take title to your real estate in an LLC, for flipping you will consider using an LLC taxed as an S corporation. The reason for this, as with so many other things in life, has to do with taxes. Because flipping constitutes ordinary income, with the S corporation tax rules we can minimize payroll taxes (that darn 15.3% extra tax we’ll never get back as it falls into the dark hole of Social Security promises). Pay yourself a reasonable salary (and pay payroll taxes on that amount) and flow the rest through to you as a distribution (without payroll taxes). Be sure to work with your CPA on this to make sure you are taxed appropriately on your real estate endeavors.

  1. Hold and keep. As Sammy analyzes each new property, he always asks himself whether it was one to flip or keep.

While he knows how to accelerate the return on his money by quickly flipping properties, he also knows that his long-term retirement needs would be in part satisfied by rental real estate income. Typically, his ideal candidate is a duplex or 4-plex that needs some repair. In such cases he can buy below market and perform improvements over time at his convenience. When he doesn’t have a quick flip to work on, he keeps his crew busy on his hold and keep properties.

Sammy always holds his hold and keep properties in separate LLCs. He values the asset protection benefits of keeping his properties in separate entities, especially after suffering two lawsuits early in his career. The first lawsuit arose when he operated his construction business as a sole proprietor and held his first investment property, a duplex, in his individual name. A client had sued Sammy over some very careless work a subcontractor had performed. The plumber had gone out of business and left the state, leaving Sammy holding the bag. A judgment was rendered whereby Sammy’s sole proprietorship was held liable for the significant damages. Since the sole proprietorship offered no asset protection whatsoever, all of Sammy’s personal assets were fair game for collection. And because Sammy hadn’t used a protective entity to hold title to his duplex, the property was completely exposed to the claims of the judgment creditor.

As a result, Sammy lost all of his sole proprietorship assets, his trucks and equipment, as well as the duplex. All lost to satisfy the claims for damages he did not cause. It was a bitter experience Sammy vowed would never happen again.

Sammy immediately started operating his construction business for flipping properties through an LLC taxed as an S corporation. He began acquiring hold properties with a vengeance, putting them all into one LLC. Before long, he had three 4-plexes and one triplex in his one LLC.

Then the second lawsuit was filed.

A tenant had fallen at the triplex.  Sammy’s insurance company used a loophole to avoid paying the claim. As the chart below indicates, the tenant prevailed in a lawsuit brought against the LLC that owned the triplex.

The good news was that Sammy’s construction business and personal assets were not exposed to the claim. The bad news was that the judgment allowed the tenant to proceed against all of the assets in Sammy’s Real Estate LLC. Two of the 4-plexes were owned free and clear. The tenant’s attorney was able to easily attach the 4-plexes and sell them to satisfy the claim.

It was after this experience that Sammy came to appreciate that one did not want to own too many properties in one LLC or LP. By holding four properties in one LLC, a tenant with a claim involving one of the properties can reach the equity in all four properties.

Sammy decided that in the future, only one property would be held in each LLC. Putting too many properties in one LLC created an attractive target for the professional litigants of the world.

  1. Spec home sales. Whether building one home for speculative sale purposes or building a subdivision full of identical tract homes, Sammy knew that a unique protection strategy was needed when he started in spec home sales. This was because more and more lawyers across the country were bringing lawsuits alleging damage from mistakes during construction, known as construction defect litigation. Plaintiff’s lawyers were filing lawsuits on behalf of homeowners alleging monetary damages due to settling, cracks, improper construction practices, and the like. These suits were especially prevalent in California and Nevada, where a ten year statute of limitations allowed suits to be brought a decade after a house was built.

Each time Sammy builds a spec home he uses a new entity. Again, because of its asset protection benefits and efficient flow-through taxation of income, Sammy uses a separate LLC for each custom home he builds. In California, because of the extra state taxes on LLCs, he uses an LP with a corporate general partner as his developer entity.

The key to Sammy’s strategy is to keep each entity active after the house had been sold. This is to thwart the aggrieved homeowners and their lawyers who have ten years to bring a construction defect claim. Too many builders believe that by having tail insurance they can dissolve the construction entity. But insurance doesn’t cover every claim, and dissolving the entity leaves you personally responsible. By keeping the entity alive during the ten-year statute of limitations period, any claim would be brought against the LLC or LP, not personally against the owners.

But isn’t it expensive to keep an entity alive for ten years? What about all the filing fees and tax returns? As Sammy knows, it isn’t a burden if done the right way.

As far as tax returns are concerned, once each house is sold a final tax return for the entity is prepared. The LLC or LP stays alive but has no activity and thus does not have to file an ongoing return. In terms of annual filing fees, some states are more expensive than others. In California it is $800 per year per entity. Including a $125 annual resident agent fee, the ten-year cost per entity is $9,250.

But what if your California entity was originally formed in a low-cost state such as Wyoming? That is Sammy’s money-saving strategy. The developer entity is formed in Wyoming and qualified to do business in California. Qualifying in California is required since the house is being constructed in California. But once the house is sold, the entity no longer conducts any California business. It is free to stop paying California fees and only has to pay the minimal Wyoming fees of $50 per year. Assuming the same $125 annual resident agent fee, the cost of maintaining a Wyoming entity for 10 years is only $1,750 versus $9,250 for California. By forming the entity in Wyoming, qualifying in California for only as long as necessary and then keeping the entity alive in Wyoming until the ten-year statute of limitations runs out, Sammy is able to affordably protect himself and his other assets.

Sammy’s three strategies for remodels, holdings, and spec home developments serve him well and he has prospered without any further devastating litigation. His modern day castle keep are properly formed and properly maintained LLCs and LPs.

For more information on this and other title matters, please read my book Loopholes of Real Estate or visit CorporateDirect.com

Links:

Loopholes of Real Estate: http://www.corporatedirect.com/loopholes-of-real-estate/

Corporate Direct:  http://www.corporatedirect.com/


 

Garrett Sutton

Garrett Sutton is an attorney, speaker and best selling author. As part of Robert Kiyosaki’s Rich Dad’s Advisor group he has written six books which have been translated into 11 languages. Garrett focuses on corporate and asset protection law and speaks to audiences on the importance of asset protection. His advice is pertinent, timely and valuable.

Garrett received his Juris Doctor Law Degree in 1978 from Hastings College of the Law, the University of California’s law school in San Francisco. He received a B.S. in Business Administration from the University of California, Berkeley, in 1975. He is licensed to practice in Nevada and California.

 

partners-1024x500

Empire Industries, LLC…Your Partner in Investing Success

By Kevin Davidson

After his job was threatened by the aftermath of 9/11, Steve Rozenberg, co-founder of Empire Industries, LLC realized that obtaining financial freedom through investing in property is a much surer way of building wealth than working for someone else.

“I’m an airline pilot by trade,” said Steve. “I fly for a commercial airline, and so after 9/11 hit, I was on the verge of being out of a job. That’s when I realized that I needed to do something else to earn money because that secure job didn’t look quite as secure as I’d thought.”

“So what I did is, I started learning everything I could about real estate. I started trying to understand it. I read a book a week on real estate and I devoured as much information as I could so I could figure out this new society…this new language that I was engulfed in.”

“Then I started buying some houses. I sold a few houses then ended up buying an apartment complex.  I sold the apartment complex and started buying a bunch of low income property, which is probably my biggest mistake.”

Steve met Pete in 2005 and the two began flipping houses together before switching to a buy and hold strategy. Then, after buying twenty low income houses within a year and a half, the two realized they’d made a mistake.

“We realized why we shouldn’t have done that. All of a sudden we had a huge waterfall of problems attacking us from all angles so we did what any normal male would do, we turned around and bought another 15 properties to try to fix the problem, which really just ended up being like gasoline on the fire for us. It just ended up making our problems ten times worse!”

The solution they created for their problem became Empire Industries, LLC.

“So to solve the problem we’d gotten ourselves into, we had to create a management company of our own, just to manage our own properties.”

“This is how the management company got started. We started it out of necessity, from the result of making our own mistakes of buying the wrong properties, but also figuring solutions out for that.”

Investor solution

Today, Empire Industries, LLC is the fastest growing single family management company in Texas. They manage about 750 properties in Houston and Dallas, and have a client base that spans the globe. Investors from California to Japan use Empire Industries for their property management needs.

“We’re the number one referred management company by realtors,” said Steve. “We give referral fees to our agents and we make them look good. At the end of the day, what an investor wants is a property that is going to make them money and not give them a headache.”

“Empire Industries is a full service property management company. Our services run the gamut, from helping people find properties to managing their investments, we do it all from an investor’s perspective. Because we’re active investors ourselves, we’re looking at the market from that mindset. We are in the business of helping investors find properties that match their goals.”

“Often, beginning investors fail to see results because they don’t have policies, procedures and structures in place…they run it off of emotions, not a business model.”

“What I always tell people is that when it comes to owning a rental property you own a business. Whether you have one or fifty properties, you run a business. Fair housing, discrimination…all of these laws that dictate what you do as a landlord say that you’re a business and the only one that does not realize they’re a business is the owner.”

Investors choose Empire Industries, LLC because they’re more than a property management company. As active investors, the founders are in “the heat of battle of owning properties.”

“We look at it from an investor’s perspective,” said Steve, “as a partner, not as just a customer/client relationship. This means our goal is to help them be successful and to reach their financial goals, whatever those goals may be.”

Investor education

From hundreds of free videos to free ebooks, investors have access to a huge resource of information…for free…from the team at Empire Industries, LLC.

Ask any savvy investor and they’ll tell you…learning as much as possible about investing in property is key to achieving success.

“Most importantly, have a plan,” said Steve. “If you don’t have a plan and you don’t have goals you need to talk to someone like myself and figure out what your goals are so that when you’re trying to find a deal you can know what that deal is, based on your goals.”

 

protectassets-1024x682

Armor8TM LLC Protection Uses Overlooked Legal Code For Your Benefit

By Garrett Sutton

Holding LLC Certificates in Wyoming for Superior Asset Protection

You want the best protection possible for your assets. You want to use the strongest LLC entity available. But if you live in a weak asset protection state (like California) and set up your LLCs in a strong state (such as Wyoming) which state law applies? In an outside attack where a car wreck victim has won in court and is seeking to collect, the old standard lawyer answer is: It depends.

If you live in California and hold your Wyoming LLC membership interest (your certificate representing ownership) in California, that certificate is your personal property in California. Your Wyoming LLC can then be subject to the jurisdiction of a California court. In such a case California’s weaker laws will apply.

However, with some careful planning and by actually holding the physical Wyoming LLC certificates in Wyoming, the stronger asset protection of Wyoming law can apply. (Please note that we will use California and Wyoming in our discussion but any weak state/strong state scenario will apply.)

A membership interest in an LLC may be held in two ways: (1) as a certificated security; or (2) as an uncertificated security. A certificated certificated security is a declared ownership interest (like a corporation’s stock certificate) represented by a properly prepared and held certificate. An uncertificated security is an ownership that is not represented by a properly prepared certificate. See, UCC 8-102(4), (18).

  1. Uncertificated Security.

Most membership interests in LLCs are held as uncertificated securities. Indeed, a membership interest in an LLC is not a security, unless its terms expressly so provide. See, UCC 8-103(c).

One downside to holding an LLC as an uncertificated security is that it usually is considered by the courts to be a “general intangible.” The courts see the LLC ownership as accompanying the owner of the uncertificated security. A court has jurisdiction over an individual if they live in the court’s district. Personal jurisdiction means the court has the ability to assert orders against the individual. Thus, if a court in California has personal jurisdiction over a judgement debtor (someone who lost in court and for purposes of example we will call “Bob”), then the court in California also may have in rem (property) jurisdiction over Bob’s Wyoming LLC. This is true even though his LLC was formed in Wyoming. Bob’s LLC membership interest is deemed to be “intangible personal property” that accompanies him in California. In this way, an uncertificated security representing a Wyoming LLC membership interest can be subject to California’s weak laws. When Bob is served in a California collection case, a California court not only acquires personal jurisdiction over Bob but all of his California holdings as well, including uncertificated securities even if his LLCs were formed in Wyoming.

Neither Bob nor you wants this result. Let’s consider a better alternative.

  1. Certificated Security

There are distinct advantages to holding a membership interest in an LLC as a certificated security.

One definite advantage is that Bob’s interest in a certificated security may be reached by a judgment creditor only by actual seizure of the security certificate by the officer making the attachment or levy. See, UCC 8-112 (a). Thus, in dealing with certificated securities, possession of the securities is the vital matter. Placing them in a Wyoming safety deposit box, a service we provide, puts the certificates out of the easy reach of a California (or other state) court.

Furthermore, the local law of the jurisdiction in which a security certificate is located at the time of delivery governs whether an adverse claim can be asserted against a person to whom the security certificate is delivered. See, UCC 8-110 (c). Delivery of a certificated security occurs when the purchaser acquires possession of the security certificate. See, 8-301 (a)(1).

Therefore, if Bob acquires possession of a security certificate in Wyoming, then delivery of the security certificate occurs in Wyoming. As such, the law of Wyoming (the jurisdiction in which the security certificate was located at the time of delivery) governs whether an adverse claim can be asserted against Bob. In this way, even if Bob is served with process in California, the California court may apply only those stronger remedies against Bob’s Wyoming LLC membership interest that exist in Wyoming, and not those weaker remedies that exist in California.

Thus, if a charging order against Bob’s LLC membership interest is the exclusive remedy in Wyoming, a California court must apply Wyoming’s superior law to the case.

Our firm has developed a method for certificating LLC securities in Wyoming to be governed by article 8 of the UCC so that Wyoming law applies. We call it “Armor 8”. We add specific jurisdictional Article 8 language to the Operating Agreement and the membership certificates. We hold the membership certificates in a safe deposit box at a Wyoming bank. Your certificates are physically located in Wyoming and governed by Wyoming law. We have not had a case challenging this procedure and can make no guarantees as to how any one court would rule. But by taking the extra steps here you are in a much better position to argue the applicability of Wyoming law, to your greater protection.

The cost of our Armor 8 service is very affordable. The setup fee is $95 and annual holding fee for 1 to 7 certificates is $75. To get your certificate out of the Wyoming safe deposit box and returned to you (for reissue or any other reason) the fee is $50. To place the certificates back in the safe deposit box the fee is also $50.

If you start a new Wyoming LLC and want our special ‘Article 8’ language included in your Operating Agreement and on your membership certificate there is no extra cost if you are using our certificate service.

If you want to amend your Operating Agreement and LLC membership certificates to include the Article 8 language so you can start using our service the minimum fee is $295. Prices may be higher due to the complexity of the Operating Agreement and the number of certificates to be reissued.

Now you can better protect your LLC by keeping ownership certificates in Wyoming. Call Corporate Direct at 1-800-600-1760 to get started with your Armor8TM protection.


 

Garrett Sutton

Garrett Sutton is an attorney, speaker and best selling author. As part of Robert Kiyosaki’s Rich Dad’s Advisor group he has written six books which have been translated into 11 languages. Garrett focuses on corporate and asset protection law and speaks to audiences on the importance of asset protection. His advice is pertinent, timely and valuable.

Garrett received his Juris Doctor Law Degree in 1978 from Hastings College of the Law, the University of California’s law school in San Francisco. He received a B.S. in Business Administration from the University of California, Berkeley, in 1975. He is licensed to practice in Nevada and California.

Website: http://www.corporatedirect.com/

gdpr-3178218-1024x778

Should You Foreclose After a Charging Order?

By Garrett Sutton

The charging order is a key to LLC asset protection. If you are sued in a car wreck and the victim wants to get at your assets, the charging order (n many states, including Wyoming and Nevada) is the victim’s only relief. It provides for a lien on distributions, meaning the victim can only get what is distributed to you from the LLC.

But in some states (including California and Utah), if not enough money is forthcoming to pay off the claim, the victim can foreclose on your LLC interest. To do so, they go back to court and argue that the charging order is not enough. They aren’t satisfied with distributions. They want the LLC interest itself.

IS IT A GOOD IDEA TO FORECLOSE ON AN LLC INTEREST?

If a judgment creditor (the car wreck victim) successfully forecloses upon the LLC membership interest of a judgment debtor, then the judgment creditor acquires a permanent (as opposed to a temporary) right to receive all distributions made by the LLC to the judgment debtor, including any liquidating distributions when the LLC is dissolved. In other words, prior to foreclosure, the judgment creditor has only a temporary right to receive distributions until the judgment is satisfied. After a foreclosure, however, the judgment creditor has a permanent right to receive all distributions irrespective of whether the judgment is satisfied.

With a single member (one owner) LLC, this may be a suitable outcome. You get it all. But in a multiple owner LLC, you should definitely think twice about foreclosing. Consider that:

  1. There are cogent tax reasons why a judgment creditor should not foreclose upon the membership interest of an LLC member. If a judgment creditor only has a charging order against the membership interest of an LLC member, then for tax purposes, the judgment creditor is merely the holder of a lien, and does not receive a K-1Form from the LLC. See, Revenue Ruling 77-137 and IRS General Counsel Memorandum 36960 (1977). On the other hand, if the judgment creditor elects to foreclose upon the membership interest of an LLC member, the judgment creditor becomes a transferee of a transferrable interest, and, as such, is potentially liable for the distributive share of the LLC member. Thus, as a transferee of a transferrable interest, the judgment creditor who forecloses upon the membership interest of an LLC member runs the risk that income from the LLC may be passed through to the judgment creditor on a Form K-1 from the LLC (on which taxes must be paid), irrespective of whether the LLC distributes any cash to the judgment creditor to pay the taxes.
  2. A judgment creditor generally stands to gain very little by foreclosing. The judgment creditor already has a charging order against the interest of the LLC member. If the LLC is making distributions to the judgment creditor, then the judgment creditor will have little incentive to foreclose. On the other hand, if the LLC is not making distributions to the judgment creditor, then an auction of the interest of the LLC member will not draw much interest, and will incur attorney’s fees and costs.
  3. If the underlying purpose of obtaining the charging order was to prevent the LLC member from obtaining distributions, then there is little need to foreclose upon the interest of the LLC member, because the charging order will already serve much the same purpose.

Even in the minority of states where a judgment creditor can ask the court to foreclose upon the LLC membership interest of a judgment debtor member of the LLC, the judgment creditor should think twice before doing so, at least with multiple member LLCs, because there is very little to gain, and much to lose, by doing so.


 

Garrett Sutton

Garrett Sutton is an attorney, speaker and best selling author. As part of Robert Kiyosaki’s Rich Dad’s Advisor group he has written six books which have been translated into 11 languages. Garrett focuses on corporate and asset protection law and speaks to audiences on the importance of asset protection. His advice is pertinent, timely and valuable.

Garrett received his Juris Doctor Law Degree in 1978 from Hastings College of the Law, the University of California’s law school in San Francisco. He received a B.S. in Business Administration from the University of California, Berkeley, in 1975. He is licensed to practice in Nevada and California.

Website: http://www.corporatedirect.com/