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Outline Principles of Asset Protection deterrence of lawsuits and creditor action exhaustion of your contestant and depletion of his resources Elements of Asset Protection advance, preemptive planning creating legal barriers to personal liability maximizing anonymity in the public records utilizing homestead and income 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 company (especially the Texas Series LLC) shell management company (a separate, pass-through entity) anonymous land trust assumed name certificates attorney-client privilege more exotic devices, including offshore entities Introduction Texas has an traditionalisti history of protecting debtors. This is a summary of the how the Texas Property Code, the Texas Business Organizations Code, and the Texas Constitution make it possible for humans and businesses to shield income and pluses (particularly equity in real property). Together, these are the most favorable asset shelter laws in the United States. To do better, one would need to step into the realm of offshore entities. Individual Texans may assert the spacious protections afforded by the Texas Constitution and the Property Code. The availability of these protections makes Texas unambiguously suitable to asset protection. They are always available and in general do not require any special action, altho a sure amount of planning and re-arranging of pluses is advisable in order to maximize these protections – specially the conversion of non-exempt items into immune items if one anticipates being sued. The next level of shelter is achieved by forming a Texas series fixed liability company which accomplishes two critical goals: it brings about a liability shield for the shelter of member-owners; and it brings about person “series” or compartments which, when the right way implemented, insulate each series from the indebtednesses affiliated with the other series. (details below). When decently structured, an asset shelter scheme will deter the filing and pursuit of lawsuits and also make it difficult to gather on a judgment. Pre-Suit Asset Protection Strategies Asset shelter systems fall into two groups – schemes enforced in advance of collection action and suit; and schemes that may be put into effect afterward. It is by far preferable to plan in front and be prepared, since the range of pre-suit number of things from which only one can be chosen is much greater. After suit is filed, depending on the circumstances, choices are scaled down by laws relating to “fraudulent transfers” – i.e., moving summations around to defeat the rightful claims of creditors. After suit is filed, the Texas defendant may be fixed to converting summations to homestead-exempt items (one’s important residence, cars, etc.), moving depository accounts into cash, and pre-paying sure key items (taxes, attorney’s fees, etc.). The basic in advance asset shelter program that adequately protects most persons is: (1) establish a Texas Series LLC for investments and businesses; (2) form a shell management company (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 immune items; and (6) form a living trust for the homestead to keep away from probate and prepare a pour-over will. Remember: “Failing to plan is planning to fail.” Anonymity Anonymity is an necessary aspect of asset protection. An LLC may provide a sure measure of anonymity depending on the amount of selective information that is financed to the Secretary of State when the initial documents (the “Certificate of Formation”) is filed. Additional anonymity tools include use of land trusts, which will have to not disclose any personal names in the public 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 arouse the attorney-client privilege. The goal ought to be to achieve greatest or most complete or best possible anonymity combined with the liability barrier invented by the series LLC. All of this brings about legal and practical obstacles to a potential plaintiff. A word in regards to the company’s registered address: a heap of persons go to the disturb of forming an LLC but then list their home as the registered address. This hardly enhances anonymity, nor does it prevent a constable from knocking at your door at 5:30 a.m. to serve a lawsuit. Either use your office address, if you have a physical office; use your attorney as registered agent of the company ($250 annual charge); or go to a UPS store and obtain a box with a street address and suite number (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 public at big ought to 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 invention procedure (including interrogatories and requests for production of documents) is available to creditors to inquire into your transactions, and the scope of this procedure may be wide indeed. Failure to completely respond is grounds for contempt – even though “fully respond” must never be interpreted as providing any more data than is utterly necessary. Generally speaking, creditors must have only the data that you give them. The most pernicious invention occurs post-judgment, since at that time creditors may compel disclosure of roots of income and the emplacement of sum totals – even pluses that are legally immune and can not be touched. This may be a headache since creditors may nonetheless go after the immune assets, forcing a debtor to seek shelter from the court. It is crucial that your attorney comprehend how to make a creditor fight vigorously for each bit of data that is provided in responses to discovery. The usefulness of post-collection asset shelter systems are likewise fixed by fraudulent transfer rules that concede courts to reach back up to two years (these rules implement in numerous alien jurisdictions as well). Fraudulent transfers are in general indicated by so-called “badges of fraud,” including transfers to a family member; whether or not suit was threatened before it was filed; whether the transfer was of substantially all of the person’s assets; whether sum totals have been removed, undisclosed, or concealed; whether there was equivalent thoughtfulness for the transfer; and whether or not, after the transfer, the transferor became insolvent as a result (e.g., made his cash disappear). Creation of a Series LLC Texas has magnificent LLC laws. Now that Texas offers a series LLC (new in 2009) the incentive for Texans to form a company in Delaware, Nevada, or numerous other state is eradicated for most persons. Also, forming an out-of-state company requires identification 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 company is maintained by minimal record-keeping, payment of taxes, etc.) along with fixed anonymity. Anonymity is fixed because data on the organizer, the introductory 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 consequently public record. One may achieve greatest or most complete or best possible firstborn 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 scheme – at least for the firstborn year or so of operations. The Company Agreement The company agreement is the heart of the company. It is critical that it admonish creditors from attempting to seek control of your membership interest or the membership interest of a fellow member. Provisions ought to be included in the company agreement to the effect that any creditor succeeding to a membership interest by means of assignment, collection or execution on a judgment will not be competent to vote that interest; not be competent to serve as a manager or officer; not be capable to direct that pluses of the company be sold; and not be competent to modify or reduce the company’s capacity to do business. It is not sufficient to rely on a membership interest being immune from a so-called “charging order.” The object is to make your membership interest (or the membership interest of any of your partners) efficaciously despicable to a creditor, so that the creditor passes it by in any undertake at collection. Remember: asset shelter is with regards to deterrence. LLC’s are distinctively capitalized by a combining of equity (monetary contribution) and debt (loans to the company). Your attorney must help you sort this out. Operation of an LLC One of the original things you will want to do is transfer the property you wish to protect into the company. In the case of real estate, this is done by means of a popular or particular 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 in general do not accelerate a performing a loan if the property is transposed to the borrower’s personal company. Tenants and creditors ought to be instructed that they are doing business with the LLC and making payments to the LLC. There is an old rule of thumb that people tend to sue the person or entity they write checks to… so ideally, your personal name, address, or social security number must never appear anyplace on any paperwork or documents executed with third parties. Once a company is formed, it must be maintained. There are minimum formalities that will have to be observed in order to order to preserve the LLC’s liability barrier. These include issuing membership shares; keeping annual meetings; obtaining a TIN number and filing tax returns; having a company bank account; and the like. Failure to do this sort of routine maintenance is a mutual mistake. It may be fatal to your asset shelter plan. Role of Trusts Trusts come in all shapes and sizes – there is no “standard form.” Trusts are utile because they may provide: (1) anonymity, since underlying ownership is not revealed in the deed of property into the trust; (2) ease of transferability, since beneficial interests may be privately assigned without requirement for recording a deed or other instrument; and (3) probate avoidance, since the beneficiaries acquire their interest mechanically 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 may choose to transfer it is properties to an “anonymity trust” which gives evidence of not one thing of record when it comes to real underlying ownership. Example: title to property is kept in the name of “Main Street Trust.” It is a myth that one must even name the trustee in the deed, since region clerks gladly record deeds such deeds. Anyone seeking to recognise who the principals are and what summations they may have has their work cut out for them. Note that under Texas law one will have to actually formulate a written trust agreement for this system to work. Also, a title company 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 agreement 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 beneficial interest; or (2) provide the capability of anonymously closing into a subprime buyer without lender approval and without compliance with the 2005 lease-option limitations contained in Sec. 5.069 of the Property Code (the “exist trust” – our term again). This is possible because beneficial interests in a trust are personal property and not real property. The living trust (or inter vivos trust) is a valuable probate-avoidance device for the homestead and must be considered by every one as share of the overall asset shelter structure. Anyone who has probated an estate is intimate with the procedural nightmare that occurs when dealing with attorneys and judges who will happily reduce the estate “castle” to rubble. Do not be deceived into purchasing so-called general trusts off the internet. Texas has very queer trust laws. The Texas Trust Act is percentage 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 capitalist will have to consider setting up a management or operating company that is unaffiliated with the asset-holding LLC and which will serve as the front line of defense versus tenants, creditors, and plaintiff’s attorneys. This entity ought to be an LLC (a traditionalisti LLC is fine) or corporation that is fundamentally a shell or a pass-through for funds. Many humans already have an LLC or corporation and wonder what to do with it now that we have a series LLC available in Texas. The management company is an magnificent function for this entity. The management company must own no significant amount of real or personal property – it ought to lease everything, including vehicles. It must also hire and remunerate employees. The public ought to do business with the management company and never even be conscious of true underlying ownership or the emplacement of sum totals – which are of course kept in the series LLC. Why this structure? In addition to it is management duties, the role of the management company is to serve as a target that is purposely put “out there” to draw fire away from the owners and their assets. If anybody incurs a judgment versus the management company, it will be uncollectible. The next step is to form another management company and proceed with business. Attorney-Client Privilege
Use of an attorney as registered agent for the LLC or as trustee of a land trust adds yet further and added layers of shelter – first, anonymity, and second, the attorney-client privilege. In the case of an LLC, the attorney may coordinate the company, list his name as the introductory fellow member and registered agent, and then privately assign his membership interest to the client. Result? The client’s name does not appear in public records. In the case of a trust, the attorney may be named as trustee but then appoints the investor’s LLC as managing agent and attorney-in-fact to conduct day-to-day operations. In both cases, suppose that the attorney will charge extra for the services and risks involved. Offshore Entities An further and added option is to manufacture an offshore entity (Panama or the Cayman Islands are our preferent jurisdictions) which will own the Texas LLC or operate in tandem with it. This structure is completely legal and provides superior asset protection. It makes summations very difficult and costly to get to – normally necessitating obtaining a U.S. judgment first, then persuading a alien jurisdiction to honor that judgment and carry out upon it, which may take years and tens of thousands of dollars out of a creditor’s pocket. Offshore entities also concede flexibleness in keeping galore of your summations in currencies other than the dollar. Note that asset shelter is an altogether distinguished conception from tax avoidance. All U.S. citizens must pay tax on income, wherever and notwithstanding 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 settlement 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 may remunerate one’s taxes and still achieve substantial asset protection. The Role of Insurance It is ofttimes asked if obtaining liability insurance alone is sufficient. The answer is a resounding “No.” Insurance is a passive measure. It is possible to be far more proactive. All legal experts commend a sensible mix of insurance and asset protection. The indispensable reason is that insurance companies are in the business of gathering premiums and denying claims – thence each crusade will be made by the company to exclude or stay clear from coverage in your case (particularly if the plaintiff alleges fraud, which is never covered). It may then become necessary to sue the insurance company. Also, even if the insurer concedes coverage, extravagant claims made in lawsuits nowdays may (and many times do) exceed available limits. Moreover, the existence of a sizable policy and umbrella may in and of itself give hope or courage to a lawsuit because it will be sensed by the plaintiff’s attorney as a tempting target! Nonetheless, having adequate insurance is a necessary evil. Bankruptcy Bankruptcy – Chapter 7 in queer – is the “nuclear” option in asset protection. Even so, rules versus fraudulent transfers (called “preferences” in the Bankruptcy Code) implement in this area as well. Also, untrue data in a bankruptcy petition may be investigated by the FBI; and of course bankruptcy does not discharge taxes (although the IRS may be more likely to work with you on a payment plan), child help obligations, student loans, and any items that a debtor fails to list on the petition. The Bankruptcy Code allows a debtor to choose among the federal exemptions (ie., list of immune assets) or the state ones – and in Texas we always choose the state exemptions since they are so favorable. These are summarized later in this article. By and large, filing bankruptcy is an admittance that your former asset shelter schemes have failed. The bankruptcy trustee and the court assume control of your life. It is a last resort. This office does not handle bankruptcy – we commend obtaining a board-certified lawyer in the field. Lifestyle Considerations Your lifestyle will have to be consistent with preserving an effective asset shelter strategy. In addition to all the other suggestions contained in this article relating to anonymity, creating a liability shield, maximizing protections underneath the Texas homestead laws, and the like, you should: (1) stay clear from conspicuous consumption – living a notch underneath your means makes a less likeable target for plaintiffs and their attorneys; (2) keep out of the way of personally guaranteeing any business debt or co-signing on others’ notes; (3) carry health and term life insurance on yourself as well as “key man” term life insurance on your business partners; (4) keep away from all forms of debt that do not result in an income stream – this includes almost all buyer debt which, after the almost pleasurable sensation of fright of that new Porsche dissipates, plainly serves to keep you up at night; (5) reduce all business arrangements – including those with family and friends (especially those with family and friends) – to a written agreement that holds an “exit strategy,” distinctively including buy-sell provisions; (6) diversify summations and investments; (7) put approximately 10-15% of your sum totals into gold, cash, and other “doomsday” summations – the worst case scenario could in truth happen. Own a gun. Other Domestic Asset Protection Devices There are a great deal of other asset shelter gadgets and entities that are beyond the scope of this initial article. Included among them are: Family Limited Partnerships There is much discussion regarding family fixed partnerships (FLP’s) in states other than Texas. For Texas asset protection, this author alternatively chooses LLC’s and/or trusts. Texas FLP’s (like LLC’s) will have to be filed with the state and pertinent ownership selective information is revealed; also an in-state registered agent will have to be indicated to receive service of routine if the cooperative relationship is sued. So why not just form an LLC (especially a series LLC if pluses are in real estate) and then move title to summations into a land trust? The result is superior liability shelter and anonymity. Another drawback of the FLP is it is conception of a “friendly lien” on the homestead, which is not workable in Texas. Limited Partnerships with an LLC General Partner These vehicles are more complex and expensive, ordinarily employed in larger mercantile transactions, and are beyond the scope of these comments. Homestead Protections for Individuals in Texas Texas offers distinctive homestead protections for persons that must be integrated into any asset shelter 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 employ to both income and assets, and they have long made Texas a haven for debtors. In other states, a judgment may be put you on the street, but not in Texas. If a lawsuit is anticipated, or if a judgment creditor is expected to undertake collection, then it is wise to review and maximize these protections. Sec. 28 of the Constitution prohibits garnishment of wages, which protects the income of a person who receives a salary or wages. As to assets, the homestead of a family or single adult is protected from forced sale for purposes of paying debts and judgments except in cases of buy money, ad valorem taxes, owelty of partition (divorce), home betterment loans, home equity loans, and reverse mortgages. No matter how much the home is worth, an frequent judgment creditor can not strength it is sale. An undertake by such a creditor to place or enforce a lien versus the homestead may be discomfited using the procedure in Texas Property Code Sec. 53.160. See our associate article, Lien Removal in Texas. The Property Code further 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 assert for six months after the date of sale.” This expressly permits homestead protections to be rolled over from one homestead to the next, nonetheless the preference on the part of title companies to gather 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, distinctively listing the amount and types of other immune property, including a vehicle for each licensed driver in the household; home furnishings; and the debtor’s IRA or 401(k). In keeping with Texas’ frontier spirit, you may even keep two horses if you wish. The Texas Constitution and the Property Code provide an splendid chance for people (not corporations, LLC’s, or partnerships) to engage in asset protection. Essentially, this means converting non-exempt pluses (cash, for instance, or investment real estate) into immune assets. As an example, one might consider paying off the homestead or the indispensable vehicles. The conversion routine may be tricky. It is best accomplished with the guidance of an attorney welleducated in this field. Texas homestead laws are liberally construed by the courts. “Indeed, a court ought to uphold and enforce the Texas homestead laws even even though in so doing the court might unwittingly aid 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 shelter laws will have to not be confused with the homestead tax exemption as reflected on the rolls of an appraisal district, which is designed to lower ad valorem taxes on homeowner-occupied property. LegalZoom-Style Internet Services Internet services allegedly provide “self-help legal services at your specific direction.” This is internet huckstering. All LLC’s are not invented equal. Your goal ought to not be to merely “set up an LLC.” Your goal ought to be to establish a Texas Series LLC that includes sophisticated asset shelter provisions. At best, internet services provide a “plain vanilla” company with no bells or whistles; there is no concentered crusade to maximize asset protection. Here is what such services do not provide: NO comprehensive counsel on how to structure your business and investments so as to achieve an overall asset shelter plan NO attorney to serve as organizer, primary member, and/or registered agent in order to maximize your anonymity NO sophisticated company agreement that deters creditors from taking control of your company NO counsel on how to move property into the LLC after it is formed NO counsel on how to use the LLC in conjunction with a land trust NO counsel on how to set up and arrange the LLC’s finances, including setting up LLC accounts, injecting capital, and/or loaning cash to the LLC NO counsel on how to maintain the LLC liability barrier to prevent 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 hardly above the level of junk. This office spends a reasonable portion of it is time cleaning up the inadequacies in companies formed this way. Conclusion: Asset Protection in the Real World Absolute, “bulletproof” asset shelter is not accomplishable in the real world – even in Texas – in spite of claims made by internet and seminar “gurus” who have never expended time in a real court of law in front of a real judge. However, one may approach this idealisti by using the rectify structure. Asset shelter is ultimately regarding deterrence of lawsuits and exhaustion of your opponent’s determination and resources. Deterrence has real value taking into account the number of frivolous and contingency-fee lawsuits that are filed each year in the U.S. If you may make it difficult to find your summations and make it unacceptably highpriced and time-consuming for a plaintiff and his attorney to reach them, then your asset shelter plan has done it is job. Every dollar of cost that is enforced on a potential plaintiff or his attorney makes your income and sum totals incrementally more secure and makes it less likely that you will have to endure the living nightmare of a lawsuit.
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