Transcription
I was on the Bigger Pockets forum and I saw a post from a concerned investor that was really confusing and from the responses that followed, looks like it led many investors to the wrong conclusion when it comes to protecting rental real estate through LLC's. I'm Jeff Hampton, asset protection attorney, former personal injury lawyer, and founder of St. Law. Guys, in this video, I'm breaking down this critical Bigger Pockets post and setting the record straight. Whether anonymity and LLC's really matter that much when protecting your assets. Stick around because following the wrong advice here could cost you everything if greedy lawyers bring a lawsuit. Let's see what this post said.
"I'm tired of reading about Real Estate Investors seeking advice on where they should incorporate or how they should structure their entities for anonymity. Anonymity is not asset protection. To lay it out simply as possible, if there's a viable claim, a plaintiff's attorney will pursue it regardless of whether you are incorporated in Wyoming, you believe you're hiding behind a Management LLC, or whatever other anonymity maneuver you believe is shielding you from liability. All a plaintiff's attorney needs is the deed holder named to file a claim, and this is public record everywhere. Once their claims are filed, they can obtain your identity through discovery. But in most cases, they don't care who you are. This is because they are most interested in your insurance. It's the path of least resistance and how they and their clients are compensated. In fact, I would make the argument when a plaintiff's attorney sees the $100,000 home in Detroit owned by a Wyoming LLC, that attorney will be even more interested in you. Exactly the response you are hoping to avoid. From a plaintiff's attorney's perspective, that is peculiar behavior and may actually believe you are hiding something. Congrats, you just made discovery a more drawn-out process than necessary, and your insurance carriers' legal bills have gone up, which I can assure you will impact your next year's premium. I'm hoping investors allocate some of the resources and energy spent hiding in the cloaks of secrecy on being a good real estate operator who avoids claims from arising in the first place, as opposed to falsely believing you have greater protection. I can assure you your business will perform far better as well."
Let's break this post down one step at a time. First, is anonymity asset protection? What is he talking about here? Now, look, it is true that some attorneys out there claim that having anonymity somehow makes you a ghost and you're completely protected from greedy lawyers. That is not true, and I completely agree with that part of his post. What he didn't explain is why that is exactly the case. So let's start by breaking this down by looking at the most traditional way to protecting your assets: the LLC.
Now, unlike the author of this Bigger Pockets post, I have actually sued rental property owners for premises liability, and I know exactly what injury lawyers are looking for when they bring a lawsuit. Most Real Estate Investors move their property title into an LLC. And by the way, this is a common mistake that I see. If you have set up an LLC but you have not actually transferred title from your personal name into that LLC, that is step number one, and you need to make sure you take care of that. But even if you do, the problem is not all states provide the same level of protection. In other words, most states do not provide you the combination of privacy and charging order protection that you need in order to really protect your assets.
What exactly do I mean by privacy? Well, earlier it was mentioned anonymity. There is no such thing as being a ghost, but there are ways you can make yourself and your identity associated with the property much more private. And the best way to do that is if an attacking lawyer, let's say a plaintiff's lawyer like I used to be, if I wanted to bring a lawsuit against a property owner, the first place I'm going is to the Secretary of State to find out who exactly is in control of that LLC. And if you have actual privacy, maybe it's built into your laws for your particular state, the Secretary of State will not tell me the names of the member or managers that might be on that LLC.
But wait, the author of this post claims that the plaintiff lawyer only needs to find out who's on the title. That is true. But if you took the smart step of making sure that the title of your property is now held by your LLC, the only place for that plaintiff's attorney to find out who's in control and who to sue is to now go to the Secretary of State for your LLC. This is really important because plaintiff's lawyers know they must have legal standing to bring a lawsuit, and that means they have to sue the right party in order to be able to substantiate their lawsuit. And in this situation, if you have an LLC, now your state, if it has the right provisions, may provide you privacy in order to make sure that that attacking lawyer doesn't know you are involved. But watch out, if your state law for your LLC provides you this privacy, it will expressly be provided within the statute. Remember, only a handful of states provide this privacy.
What about charging order protection? We mentioned earlier this. This is perhaps even more important. Normally, if you have rental property in an LLC and you are sued and then lose, the winning attorney can turn around and get what's called a forced sale order in order to liquidate the property, and now you lose everything. But if your property is located in a state with charging order protection built into the law, now even if you lose the lawsuit, that plaintiff's lawyer can never make you sell. In other words, even if there is a judgment against your LLC, your LLC can keep paying its bills, it can continue to operate as a business, and the creditor cannot get access to any of your funds so long as you do not take, as a member or manager, an owner's distribution. The problem here, only a handful of states in the entire country provide you the combination of privacy and charging order protection to really protect these assets.
So how do you really protect these assets? Is it true, like the Bigger Pockets post said, that plaintiff's attorneys don't really care if your property is an asset protection and that insurance is always enough? The simple answer is no. Let me ask you this: if someone loses their life on your rental property, do you think the best injury lawyers are only going to stop by suing your insurance company? By the way, do you even know if you have the right insurance? Do you know if you have commercial insurance? What if you're underinsured? Are you going to trust your financial security into the hands of a third party that has every incentive in the world to deny your claim? When I brought injury claims in court, I would sue everyone and everything to gain the biggest injury settlement for my client. So I can promise you, having asset protection on top of your insurance makes a huge difference in protecting your assets if you actually get sued. The better question is not whether you should have asset protection, it's how do you set it up properly so that you have real protection, like all growing investors want.
This brings me to a few questions for you. Number one, what state is your property located in? For example, if you have maybe a rental property in Tennessee, you need to make sure you set up a Tennessee LLC to hold that title and not another state LLC. Why? Because Tennessee law will be applied to a Tennessee lawsuit against your Tennessee property, and using another state's LLC will provide you no extra asset protection, and in fact, it'll cost you more because now you'll have to pay for two registered agent fees, and you'll have reporting requirements in multiple states because you have a foreign LLC.
Number two, unless your property is already located in either Wyoming or Delaware, you need a holding company strategy to actually provide you charging order protection so that greedy lawyers can't force the sale of your property if you end up in a lawsuit. What are the best states for a holding company strategy? Wyoming and Delaware are a good place to start.
So how does all of this work? Essentially, what you would need to do is set up a Tennessee LLC that would hold title to the property, and now it would be a single-member LLC. That single member, instead of it being you, would now be a Wyoming LLC holding company. So the Tennessee LLC would be a single member held by a Wyoming LLC holding company. How does this protect you from greedy lawyers? Well, if now a greedy lawyer wants to sue you, they're first going to go look at the title, and they're going to see that the title is held by a Tennessee LLC. That means they're now going to have to go to the Tennessee Secretary of State because the lawyer is going to want to find out who's in control, who are the members and the managers. When they get to the Tennessee Secretary of State, they are now going to learn that there's only one member, and that member is a Wyoming LLC holding company. That's going to force that lawyer to now have to go to Wyoming to get answers. When the lawyer gets to Wyoming and they speak to the Secretary of State, they're going to find out that there are privacy laws in Wyoming. So now they're not going to know who the members or the managers are on that particular LLC, which means now the lawyer doesn't really know for sure who they're going to sue. But more importantly, that attacking lawyer will now find out that Wyoming provides charging order protection for the Tennessee property. This means that even if the attacking lawyer wins the lawsuit in Tennessee, they cannot force the sale of the property because of the charging order protections in Wyoming. As long as you do not pay yourself an owner's distribution, the greedy lawyer never gets access to the equity in the property. Take it from me, who has brought many lawsuits against property owners, the moment an attacking attorney finds out you have charging order protection, you become very unattractive. Why? Because remember, they can't force you to sell, and plaintiffs' lawyers take these cases on a contingency fee basis. That means these lawyers have to pay for all the expenses of the lawsuit out of their own pocket on the front end. They only make money if they can recover on the back end. But if they learn they can't make you sell, then now they're taking on a huge risk by having to pay for all these expenses with a pretty good chance they're never going to recover. So this is where this actual post is somewhat correct. If you set this up the right way with strong asset protection, you make the easy button for the personal injury lawyer the insurance settlement. Because now the last thing a lawyer wants to do is bring a lawsuit against someone where the lawyer loses money. They want to make sure they walk out the door with some money in their pocket.
So, was this Bigger Pockets post correct? They were correct that anonymity does not equal asset protection, but they didn't tell the rest of the story. By structuring a strong asset protection holding company strategy, you now have charging order protection coupled with privacy so that you can rest assured at night knowing that your hard-earned assets are actually protected in a lawsuit.
If you'd like to learn more, check out the link in the description below. I'm going to provide you a free resource to not only learn how to protect your assets, but there's also a resource in there about making sure you're protected with your insurance layered on as well. Speaking of protection, what if you're ready to move the title of your property into an LLC and all of a sudden you find out that your particular state charges a real estate transfer tax? Maybe you're in a state like New York, California, or Florida. Check out this next video where I break down how you can avoid that real estate transfer tax and actually get that title of the property out of your name and into an LLC so that you can rest easy knowing your assets are protected. See you over there.