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Real Estate

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De Jay Adkisson :

The standard methodology for protecting real property is to (1) put the property into an LP or LLC so as to both contain internal liabilities and to create charging order protection against external creditors, and then (2) equity-strip the property as Ryan has described.

Correctly protecting real property is hard work and requires a minimum level of competence, which is exactly why some planners will not do it. Usually, there are also intense federal, state, and even local tax issues involved in transferring property, thus requiring the involvement of an experienced tax attorney.

Beware “easy” or “sounds too good” methods for protecting real estate.

You need to be aware that the type of “family trusts” you have described (which I think are probably simply “living trusts”) might be helpful in avoiding probate, but won’t do much more than that … they certainly won’t save you taxes and won’t provide any asset protection. If you want to do an asset protection plan that will actually keep you out of trouble in the event that either (or both) are sued, you’ll need something a bit more complicated — something that won’t necessarily come from a kit. I suggest that you spend the money to sit with a pro for an hour, explain what your primary goals are, put it into the context of an overall asset protection and estate plan, and go from there. It will cost you a bit more than the kit cost you, but in the end, it will be worth it.

I would further point out that real property should ordinarily not be put directly into a trust, since if something occurs on the real property (slip & fall, environmental, etc.) the the trust as the owner of the real property would be liable, thus exposing all the trust assets to those creditors. The exception might be residences and vacation homes, etc., which are not likely to generate significant liabilities.

Instead, the trust should form one or more LPs or LLCs to hold title to the real property AND hold those interests strictly as passive limited partners or non-managing members.

For the same reason, liability-creating items such as cars, boats and airplanes should generally not be put into the trust directly.

[ 04-19-2006, 07:26 AM: Message edited by: Jay Adkisson ]
Posts: 210 | From: Dallas, TX | Registered: Jun 2004 | IP: Logged

Randall K. Edwards
Member # 792

posted 04-19-2006 08:29 PM
Jay makes an excellent point here, and one which is hard for a lot of folks to stomach — especially those that have fallen prey to the “fast and easy” asset protection hustlers. Simply put, good asset protection is neither easy nor cheap. It will cost some bucks to establish different LLCs or LPs to hold potentially high-liability items (I had a client who owned a fleet of trucks; he set up separate LLCs for each two trucks, the only asset in each being the two trucks) and more bucks to set up a trust or a family limited partnership that will hold other assets. It will also require that you maintain all of these structures, with properly documented shareholders (or members) meetings, up-to-date filings with your state corporate division, and periodic updates of your overall estate plan and goals. It might require the filing of several tax returns that you otherwise wouldn’t have to without the plan — and it will probably require that you maintain and keep straight different bank accounts. It’s all kind of a pain. And, after all of that, you may never have to put your plan to the test — at least you hope you never will.

The only thing you get out of it is peace of mind, and the knowledge that if everything falls apart, you’ve got a couple of moats around the castle, which you’ve also reinforced with a pretty sturdy drawbridge and some fairly thick walls. But peace of mind is pretty valuable if you are smart enough to realize that anyone — even you — could be a target.

You’re to be congratulated on taking asset protection seriously enough to have at least taken a few steps and to have considered the issue with regard to your property purchase. The next step is to put together a plan that will actually work — and that’s probably not the place to try to do it “on the cheap.” (I had a doctor client once who kept complaining that it shouldn’t cost so much to put together a plan for him, when he could just as easily do it from a kit that he got on Ebay for under a hundred bucks; he finally shut up when I asked him if he’d do his own brain surgery from a kit he’d bought on Ebay for under a hundred bucks).

Again, take the time to sit for an hour or two with a good, qualified asset protection planner, implement the plan, do the upkeep, and review where you are every once in a while. It will be money well spent.

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