Outline
Principles of Asset Protection
deterrence of lawsuits and creditor action
exhaustion of your opponent and depletion of his resources
Elements of Asset Protection
advance, preemptive planning
creating legal barriers to personal liability
maximizing anonymity in the group records
utilizing homestead and revenue protections afforded by the Texas Constitution
utilizing homestead and personal property protections in the property Code
asset spreading/compartmentalization
Basic Tools of Asset Protection
limited liability firm (especially the Texas Series Llc)
shell supervision firm (a separate, pass-through entity)
anonymous land trust
assumed name certificates
attorney-client privilege
more exotic devices, along with offshore entities
Introduction
Texas has an established history of protecting debtors. This is a summary of the how the Texas property Code, the Texas firm Organizations Code, and the Texas Constitution make it potential for individuals and businesses to shield revenue and assets (particularly equity in real property). Together, these are the most favorable asset safety laws in the United States. To do better, one would need to step into the realm of offshore entities.
Individual Texans may claim the ample protections afforded by the Texas Constitution and the property Code. The availability of these protections makes Texas uniquely superior to asset protection. They are always ready and commonly do not require any special action, although a sure whole of planning and re-arranging of assets is advisable in order to maximize these protections - especially the conversion of non-exempt items into exempt items if one anticipates being sued.
The next level of safety is achieved by forming a Texas series exiguous liability firm which accomplishes two indispensable goals: it creates a liability shield for the safety of member-owners; and it creates personel "series" or compartments which, when properly implemented, insulate each series from the liabilities related with the other series. (details below).
When properly structured, an asset safety strategy will deter the filing and chase of lawsuits and also make it difficult to collect on a judgment.
Pre-Suit Asset safety Strategies
Asset safety strategies fall into two groups - strategies implemented in improve of collection operation and suit; and strategies that can be put into corollary afterward. It is by far preferable to plan ahead and be prepared, since the range of pre-suit alternatives is much greater. After suit is filed, depending on the circumstances, options are reduced by laws relating to "fraudulent transfers" - i.e., curious assets colse to to defeat the legitimate claims of creditors. After suit is filed, the Texas defendant may be exiguous to converting assets to homestead-exempt items (one's primary residence, cars, etc.), curious depository accounts into cash, and pre-paying sure key items (taxes, attorney's fees, etc.).
The basic in improve asset safety schedule that adequately protects most people is:
(1) establish a Texas Series Llc for investments and businesses;
(2) form a shell supervision firm (Llc) for dealings with the public;
(3) file assumed name certificates (Dba's) for the two Llc's;
(4) transfer properties held in personal names to series Llc;
(5) reduce debt on homestead, personal vehicles, and other exempt items; and
(6) form a living trust for the homestead to avoid probate and get ready a pour-over will.
Remember: "Failing to plan is planning to fail."
Anonymity
Anonymity is an leading aspect of asset protection. An Llc can furnish a sure measure of anonymity depending on the whole of data that is furnished to the Secretary of State when the initial documents (the "Certificate of Formation") is filed. Additional anonymity tools comprise use of land trusts, which should not disclose any personal names in the group records (and that includes the name of the trustee); use of assumed name certificates or "Dba's;" and use of an attorney as registered agent or trustee who has the power to invoke the attorney-client privilege. The goal should be to achieve maximum anonymity combined with the liability barrier created by the series Llc. All of this creates legal and practical obstacles to a potential plaintiff.
A word about the company's registered address: some people go to the trouble of forming an Llc but then list their home as the registered address. This hardly enhances anonymity, nor does it preclude a constable from knocking at your door at 5:30 a.m. To serve a lawsuit. Whether use your office address, if you have a physical office; use your attorney as registered agent of the firm (0 each year charge); or go to a Ups store and collect a box with a road address and suite whole (so the Secretary of State will not reject your filing, since post office boxes are not permitted for the registered agent address). Tenants, vendors, contractors, and the group at large should never have your homestead address.
Post-Suit Strategies
Once litigation is commenced, your actions are subject to scrutiny by the plaintiff and his attorney. This is so because the discovery process (including interrogatories and requests for production of documents) is ready to creditors to inquire into your transactions, and the scope of this process can be wide indeed. Failure to fully write back is grounds for contempt - although "fully respond" should never be interpreted as supplying any more data than is surely necessary. commonly speaking, creditors should have only the data that you give them.
The most pernicious discovery occurs post-judgment, since at that time creditors can drive disclosure of sources of revenue and the location of assets - even assets that are legally exempt and cannot be touched. This can be a headache since creditors may nonetheless go after the exempt assets, forcing a debtor to seek safety from the court. It is leading that your attorney understand how to make a creditor fight vigorously for every bit of data that is provided in responses to discovery.
The usefulness of post-collection asset safety strategies are also exiguous by fraudulent transfer rules that allow courts to reach back up to two years (these rules apply in many foreign jurisdictions as well). Fraudulent transfers are commonly indicated by so-called "badges of fraud," along with transfers to a house member; Whether or not suit was threatened before it was filed; Whether the transfer was of substantially all of the person's assets; Whether assets have been removed, undisclosed, or concealed; Whether there was equivalent consideration for the transfer; and Whether or not, after the transfer, the transferor became insolvent as a corollary (e.g., made his cash disappear).
Creation of a Series Llc
Texas has exquisite Llc laws. Now that Texas offers a series Llc (new in 2009) the incentive for Texans to form a firm in Delaware, Nevada, or some other state is eliminated for most persons. Also, forming an out-of-state firm requires designation of a registered agent in that state (who serves for a fee) and costly filing fees to register your "foreign company" in Texas.
An Llc provides a true liability barrier (so long as the firm is maintained by minimal record-keeping, cost of taxes, etc.) along with exiguous anonymity. Anonymity is exiguous because data on the organizer, the initial member(s), and the registered agent of an Llc is contained in the Certificate of Formation that is filed with the Secretary of State. It is therefore group record. One can achieve maximum initial anonymity by having your attorney act as organizer, managing member, and registered agent - and then, afterward, privately transfer the membership interest to you (an unreported transaction). This way, your name does not appear on the Certificate of Formation and you are not in the ideas - at least for the first year or so of operations.
The firm Agreement
The firm bargain is the heart of the company. It is indispensable that it discourage creditors from attempting to seek operate of your membership interest or the membership interest of a fellow member. Provisions should be included in the firm bargain to the corollary that any creditor succeeding to a membership interest by means of assignment, collection or execution on a judgment will not be able to vote that interest; not be able to serve as a owner or officer; not be able to direct that assets of the firm be sold; and not be able to alter or sacrifice the company's capability to do business. It is not adequate to rely on a membership interest being exempt from a so-called "charging order." The object is to make your membership interest (or the membership interest of any of your partners) effectively worthless to a creditor, so that the creditor passes it by in any endeavor at collection. Remember: asset safety is about deterrence.
Llc's are typically capitalized by a mixture of equity (monetary contribution) and debt (loans to the company). Your attorney should help you sort this out.
Operation of an Llc
One of the first things you will want to do is transfer the property you wish to safe into the company. In the case of real estate, this is done by means of a normal or special warranty deed. Are deed of trust due-on-sale clauses a problem? almost never, in spite of what your lender may tell you. Lenders have their plates full with monetary defaults and commonly do not accelerate a performing a loan if the property is transferred to the borrower's personal company.
Tenants and creditors should be instructed that they are doing firm with the Llc and manufacture payments to the Llc. There is an old rule of thumb that people tend to sue the someone or entity they write checks to... So ideally, your personal name, address, or group safety whole should never appear in any place on any paperwork or documents executed with third parties.
Once a firm is formed, it must be maintained. There are minimum formalities that must be observed in order to order to maintain the Llc's liability barrier. These comprise issuing membership shares; holding each year meetings; obtaining a Tin whole and filing tax returns; having a firm bank account; and the like. Failure to do this sort of habit maintenance is a base mistake. It can be fatal to your asset safety plan.
Role of Trusts
Trusts come in all shapes and sizes - there is no "standard form." Trusts are useful because they can provide:
(1) anonymity, since underlying rights is not revealed in the deed of property into the trust;
(2) ease of transferability, since useful interests can be privately assigned without necessity for recording a deed or other instrument; and
(3) probate avoidance, since the beneficiaries collect their interest automatically without the intervention of a court.
Note that a trust does not have a liability barrier as does an Llc - so trusts standing alone are insufficient for asset protection.
How do an Llc and trust work together? Once the Llc is established, it can pick to transfer its properties to an "anonymity trust" which indicates nothing of article about real underlying ownership. Example: title to property is held in the name of "Main road Trust." It is a myth that one must even name the trustee in the deed, since county clerks gladly article deeds such deeds. Anyone seeking to know who the principals are and what assets they may have has their work cut out for them.
Note that under Texas law one must surely generate a written trust bargain for this strategy to work. Also, a title firm will want to see a copy of the trust before transferring title out of the trust to a new buyer. Additionally, courts are likely to ignore the existence of an alleged trust that has no written bargain behind it.
"Investor trusts" (our term) are trusts that (1) facilitate the acquisition of property anonymously (the "entry trust" - our term) using an assignment of useful interest; or (2) furnish the capability of anonymously end into a subprime buyer without lender approval and without compliance with the 2005 lease-option restrictions contained in Sec. 5.069 of the property Code (the "exist trust" - our term again). This is potential because useful interests in a trust are personal property and not real property.
The living trust (or inter vivos trust) is a indispensable probate-avoidance device for the homestead and should be thought about by everybody as part of the ample asset safety structure. Anyone who has probated an estate is customary with the procedural nightmare that occurs when dealing with attorneys and judges who will happily sacrifice the estate "castle" to rubble.
Do not be deceived into purchasing so-called suitable trusts off the internet. Texas has very singular trust laws. The Texas Trust Act is part of the property Code. Consult a Texas attorney experienced in trusts if you want to be sure that your trust will be valid in Texas.
Management/Operating Companies
A real estate investor should think setting up a supervision or operating firm that is unaffiliated with the asset-holding Llc and which will serve as the front line of defense against tenants, creditors, and plaintiff's attorneys. This entity should be an Llc (a primary Llc is fine) or corporation that is basically a shell or a pass-through for funds. Many people already have an Llc or corporation and wonder what to do with it now that we have a series Llc ready in Texas. The supervision firm is an exquisite function for this entity.
The supervision firm should own no big whole of real or personal property - it should lease everything, along with vehicles. It should also hire and pay employees. The group should do firm with the supervision firm and never even be aware of true underlying rights or the location of assets - which are of policy held in the series Llc.
Why this structure? In expanding to its supervision duties, the role of the supervision firm is to serve as a target that is deliberately put "out there" to draw fire away from the owners and their assets. If Anyone obtains a judgment against the supervision company, it will be uncollectible. The next step is to form other supervision firm and continue with business.
Attorney-Client Privilege
Use of an attorney as registered agent for the Llc or as trustee of a land trust adds yet Additional layers of safety - first, anonymity, and second, the attorney-client privilege. In the case of an Llc, the attorney can organize the company, list his name as the initial member and registered agent, and then privately assign his membership interest to the client. Result? The client's name does not appear in group records.
In the case of a trust, the attorney can be named as trustee but then appoints the investor's Llc as managing agent and attorney-in-fact to escort day-to-day operations.
In both cases, expect that the attorney will fee extra for the services and risks involved.
Offshore Entities
An Additional selection is to generate an offshore entity (Panama or the Cayman Islands are our favorite jurisdictions) which will own the Texas Llc or operate in tandem with it. This buildings is entirely legal and provides first-rate asset protection. It makes assets very difficult and costly to get to - normally requiring obtaining a U.S. Judgment first, then persuading a foreign jurisdiction to honor that judgment and execute upon it, which can take years and tens of thousands of dollars out of a creditor's pocket. Offshore entities also allow flexibility in holding some of your assets in currencies other than the dollar.
Note that asset safety is an entirely separate concept from tax avoidance. All U.S. Citizens must pay tax on income, wherever and any way earned. Use of an offshore Llc or any other entity to cheat the Irs invites trouble of the worst kind, particularly in light of the 2009 hamlet in the Ubs case in which the names of holders of thousands of Swiss bank accounts (formerly sacred) were turned over to the U.S. Government. One can pay one's taxes and still achieve big asset protection.
The Role of Insurance
It is often asked if obtaining liability assurance alone is sufficient. The write back is a resounding "No." assurance is a passive measure. It is potential to be far more proactive. All legal experts suggest a sensible mix of assurance and asset protection. The indispensable reason is that assurance fellowships are in the firm of collecting premiums and denying claims - thus every endeavor will be made by the firm to exclude or avoid coverage in your case (particularly if the plaintiff alleges fraud, which is never covered). It may then come to be indispensable to sue the assurance company.
Also, even if the insurer concedes coverage, extravagant claims made in lawsuits nowdays may (and often do) exceed ready limits. Moreover, the existence of a big policy and umbrella may in and of itself encourage a lawsuit because it will be perceived by the plaintiff's attorney as a tempting target! Nonetheless, having adequate assurance is a indispensable evil.
Bankruptcy
Bankruptcy - episode 7 in singular - is the "nuclear" selection in asset protection. Even so, rules against fraudulent transfers (called "preferences" in the Bankruptcy Code) apply in this area as well. Also, false data in a bankruptcy petition may be investigated by the Fbi; and of policy bankruptcy does not extraction taxes (although the Irs may be more likely to work with you on a cost plan), child maintain obligations, student loans, and any items that a debtor fails to list on the petition.
The Bankruptcy Code allows a debtor to pick in the middle of the federal exemptions (ie., list of exempt assets) or the state ones - and in Texas we always pick the state exemptions since they are so favorable. These are summarized later in this article.
By and large, filing bankruptcy is an admission that your former asset safety strategies have failed. The bankruptcy trustee and the court assume operate of your life. It is a last resort. This office does not deal with bankruptcy - we suggest obtaining a board-certified lawyer in the field.
Lifestyle Considerations
Your lifestyle should be consistent with maintaining an sufficient asset safety strategy. In expanding to all the other suggestions contained in this article relating to anonymity, creating a liability shield, maximizing protections under the Texas homestead laws, and the like, you should:
(1) avoid conspicuous consumption - living a notch below your means makes a less curious target for plaintiffs and their attorneys;
(2) avoid personally guaranteeing any firm debt or co-signing on others' notes;
(3) carry condition and term life assurance on yourself as well as "key man" term life assurance on your firm partners;
(4) avoid all forms of debt that do not corollary in an revenue stream - this includes nearly all buyer debt which, after the thrill of that new Porsche dissipates, merely serves to keep you up at night;
(5) sacrifice all firm arrangements - along with those with house and friends (especially those with house and friends) - to a written bargain that contains an "exit strategy," specifically along with buy-sell provisions;
(6) diversify assets and investments;
(7) put almost 10-15% of your assets into gold, cash, and other "doomsday" assets - the worst case scenario could surely happen. Own a gun.
Other Domestic Asset safety Devices
There are many other asset safety devices and entities that are beyond the scope of this initial article. Included among them are:
Family exiguous Partnerships
There is much conference about house exiguous partnerships (Flp's) in states other than Texas. For Texas asset protection, this author prefers Llc's and/or trusts. Texas Flp's (like Llc's) must be filed with the state and pertinent rights data is revealed; also an in-state registered agent must be designated to receive service of process if the partnership is sued. So why not just form an Llc (especially a series Llc if assets are in real estate) and then move title to assets into a land trust? The corollary is first-rate liability safety and anonymity. other drawback of the Flp is its concept of a "friendly lien" on the homestead, which is not workable in Texas.
Limited Partnerships with an Llc normal Partner
These vehicles are more involved and expensive, normally used in larger commercial transactions, and are beyond the scope of these comments.
Homestead Protections for Individuals in Texas
Texas offers unique homestead protections for individuals that should be integrated into any asset safety plan. These protections are contained in Art. Xvi, Sec. 50 of the Texas Constitution and in Chapters 41 and 42 of the Texas property Code. They apply to both revenue and assets, and they have long made Texas a haven for debtors. In other states, a judgment can be put you on the street, but not in Texas. If a lawsuit is anticipated, or if a judgment creditor is incredible to endeavor collection, then it is wise to recite and maximize these protections.
Sec. 28 of the Constitution prohibits garnishment of wages, which protects the revenue of a someone who receives a salary or wages. As to assets, the homestead of a house or singular adult is protected from forced sale for purposes of paying debts and judgments except in cases of purchase money, ad valorem taxes, owelty of partition (divorce), home revising loans, home equity loans, and reverse mortgages. No matter how much the home is worth, an ordinary judgment creditor cannot force its sale. An endeavor by such a creditor to place or levy a lien against the homestead can be defeated using the policy in Texas property Code Sec. 53.160. See our companion article, Lien extraction in Texas.
The property Code Additional provides in Sec. 41.001(5)(c) that "The homestead claimant's proceeds of a sale of a homestead are not subject to seizure for a creditor's claim for six months after the date of sale." This expressly permits homestead protections to be rolled over from one homestead to the next, notwithstanding the preference on the part of title fellowships to collect judgments upon sale of the homestead. Taylor v. Mosty Bros. Nursery, Inc., 777 S.W.2d 568, 570 (Tex.App. - San Antonio 1989, no writ).
The Texas property Code goes into more detail, specifically listing the whole and types of other exempt property, along with a vehicle for each licensed driver in the household; home furnishings; and the debtor's Ira or 401(k). In holding with Texas' frontier spirit, you can even keep two horses if you wish.
The Texas Constitution and the property Code furnish an exquisite chance for individuals (not corporations, Llc's, or partnerships) to engage in asset protection. Essentially, this means converting non-exempt assets (cash, for instance, or venture real estate) into exempt assets. As an example, one might think paying off the homestead or the primary vehicles. The conversion process can be tricky. It is best accomplished with the guidance of an attorney knowledgeable in this field.
Texas homestead laws are liberally construed by the courts. "Indeed, a court must uphold and levy the Texas homestead laws even though in so doing the court might unwittingly support a dishonest debtor in wrongfully defeating his creditor." Painewebber, Inc. V. Murray, 260 B.R. 815, 822 (E.D.Tex.2001).
Although there is a conceptual overlap, the homestead safety laws should not be confused with the homestead tax exemption as reflected on the rolls of an assessment district, which is designed to lower ad valorem taxes on homeowner-occupied property.
LegalZoom-Style Internet Services
Internet services assertedly furnish "self-help legal services at your specific direction." This is internet huckstering. All Llc's are not created equal. Your goal should not be to merely "set up an Llc." Your goal should be to organize a Texas Series Llc that includes sophisticated asset safety provisions. At best, internet services furnish a "plain vanilla" firm with no bells or whistles; there is no focused endeavor to maximize asset protection.
Here is what such services do not provide:
No ample guidance on how to buildings your firm and investments so as to achieve an ample asset safety plan
No attorney to serve as organizer, initial member, and/or registered agent in order to maximize your anonymity
No sophisticated firm bargain that deters creditors from taking operate of your company
No guidance on how to move property into the Llc after it is formed
No guidance on how to use the Llc in conjunction with a land trust
No guidance on how to set up and arrange the Llc's finances, along with setting up Llc accounts, injecting capital, and/or loaning money to the Llc
No guidance on how to pronounce the Llc liability barrier to preclude a plaintiff from "piercing the corporate veil"
No free follow-up questions after the Llc is formed
Additionally, the documents provided by such services are simplistic and barely above the level of junk. This office spends a fair division of its time cleaning up the inadequacies in fellowships formed this way.
Conclusion: Asset safety in the Real World
Absolute, "bulletproof" asset safety is not achievable in the real world - even in Texas - in spite of claims made by internet and conference "gurus" who have never spent time in a real court of law in front of a real judge. However, one can arrival this ideal by using the definite structure. Asset safety is ultimately about deterrence of lawsuits and exhaustion of your opponent's measurement and resources. Deterrence has real value inspecting the whole of frivolous and contingency-fee lawsuits that are filed each year in the U.S. If you can make it difficult to find your assets and make it unacceptably costly and time-consuming for a plaintiff and his attorney to reach them, then your asset safety plan has done its job. Every dollar of cost that is imposed on a potential plaintiff or his attorney makes your revenue and assets incrementally more collect and makes it less likely that you will have to experience the living nightmare of a lawsuit.
