Insurance/Asset Protection - Posted by JPiper

Posted by chris on May 22, 1999 at 16:17:38:

I’m no expert but those that are use such a thing. They tell me it works great . …If something happens to a person on the front lawn ( for exalmple ) of a property that uses such a legal device , it can take up to five years or longer to determine who the owner is. How does one get a judgment from the owner of a property if one can’t determine who the owner is? After five years or so many things can change… . If one gets into a car accident & is gets a judgment against them & then has to go under a debtors examination, one has to tell the truth under oath @ that point… But if the benificial intrests are LLCs or LLPs , then that person will not be ruined. Insurance generally will not cover some of these huge judgments that we’ve all seen. …Again I’m no expert , but those that are , ( " owners " of hundreds of rental houses each - among other things ) swear by the use of land trusts when properly implemented w/LLCs , LLPs , COs & whatever else their lawers can dream up.

Insurance/Asset Protection - Posted by JPiper

Posted by JPiper on May 21, 1999 at 15:00:29:

I’m in the process of changing the way I hold title to some of my properties to focus more attention on asset protection. My plan is to title properties in an individual land trust which will read as follows: XXX Trust by It’s Trustee, YYY, Inc. The beneficiary of each trust will be an LLC (which will be formed by the way using Bill Bronchick’s LLC course, a good course in my opinion.)

In light of these changes in title, I’m having my insurance reevaluated. It appears that I can insure in two different ways. One way is to insure each property according to the name on the deed?.ie XXX Trust by It’s Trustee, YYY, Inc.

The other possibility is to insure through the use of a blanket type policy. For this purpose the insured needs to be the same party in each property. So for this purpose, I could insure under a blanket policy by YYY, Inc. Trustee. The result of this is it drops the cost of insurance. The problem however is that when the insurance policy is sent to any lenders involved, each property is listed on the blanket insurance form. It’s not much of a stretch to imagine a lawsuit where information would be subpoenaed from the lender, and somewhere in that process this list of properties would arise, thereby defeating one of the purposes of these asset protection moves to begin with.

So my question: Has anyone dealt with these particular issues, and if so, how did you resolve them and why? All comments on this or other aspects of this are welcome.

JPiper

Re: Insurance/Asset Protection - Posted by Bill Gatten

Posted by Bill Gatten on May 23, 1999 at 17:45:19:

Jim,

Non-partionability! Non-Partionability! [Iwould urge that you…] Make sure your land trusts all have a co-beneficiary or remainder agent…preferably someone or some entity with a different last name. By virtue of the fact that a properly constructed land trust converts your ownership interest from Realty to Personalty (in all but Louisianna), and in view of the fact that a judgement creditor can’t partition Personalty to satify a judgement…a land trust becomes [can become] a simple and effective asset protection device. I’m surprised, after all my ranting on the issue, that the other responses to your post don’t take that fact into consideration when trying to pooh-pooh the land trust holding concept.

On the insurance issue, as you know by heart by now, my properties are all in land trusts in the borrower’s names, with the insurance (in their names) co-insuring the trusts in which I am co-beneficiary while I maintain the premiums. BTW my interest appear in no public recofd anywhere… ever.

Regarding your LLC being the beneficiary… an excellent idea–in which, as a matter of fact, I will soon be following suit because of your note.

Bill

Re: Secrecy & Asset Protection - Posted by J.P. Vaughan

Posted by J.P. Vaughan on May 22, 1999 at 13:33:58:

Jim,

I know you know this, but I want to clarify some issues for others.

There are two different issues:

  1. Secrecy
  2. Asset Protection

Secrecy (concealing assets) is NOT asset protection.

Secrecy can keep your assets less visible, thereby discouraging potential litigants. But that secrecy will evaporate quickly when a judgment creditor starts searching for your assets with questions like. . .

–Are you or your spouse a grantor, trustee or beneficiary to any trust?
–What major assets have you transferred in the last five years?
–Are you an endorser, co-maker or guarantor to any loan?
–What loans or credit have you applied for over the last 5 years?
–Have you granted mortgages on any property within the last 5 years?

A revocable trust (land trust or living trust) will not protect assets. While it can be useful for estate and tax planning, once those assets are discovered, the assets transferred to the revocable trust are not protected from creditors.

When a grantor reserves the power to take property back from the trust (as is the case in land and living trusts), the grantor’s creditors stand in the grantor’s position and can compel the grantor to re-transfer trust assets for their own benefit.

Yes, there are ways to enhance protection through a revocable trust. . . such as using multiple trusts for different assets, establishing out-of-state trusts, adding beneficiaries other than you and your spouse, etc.

But why beat out your brains?

I agree with Dr. Goldstein, who says, arm yourself with a good asset protection plan and then publicize it to potential litigants. “Make them realize that they cannot easily collect even if you do have considerable wealth and they do win their lawsuit…It makes little sense to engage in protracted litigation because the plaintiff believes you have ‘deep pockets,’ when you can stifle that enthusiasm by revealing assets fully protected from potential judgments.” See, “Asset Protection Secrets,” Goldstein, Arnold S., p. 22. (Available from amazon.com)

While I think a corporation has to fit somewhere in the asset protection plan (because of the tax and income-shifting benefits), I’ve come to the conclusion that a Limited Partnership or Limited Liability Company are the entities that put the real teeth into an asset protection plan.

(I lean more in the direction of an LP over an LLC only because LP law is very well developed and the LLC is still a newcomer. They should, in theory, operate the same way. And the points below should apply equally to an LLC.)

The real power of an LP is that the Uniform Limited Partnership Act limits a creditor’s remedy to a “charging order.” The creditor cannot seize your partnership interest or partnership property. The “charging order” gives the creditor only the right to any profit distributions from the partnership to the debtor partner. As a result, the creditor’s charging order is nearly worthless because the general partner of the LP can decide NOT to distribute profits.

And here’s the best part: Under the Tax Code, a charging order creditor automatically becomes liable for taxes due on the debtor-partner’s share of the LP’s income.

If you have a 50% share of the LP and it earns $100K, that’s still $50K of taxable income–EVEN IF IT THE INCOME HAS NOT BEEN DISTRIBUED to the partners. But now, the charging order cre

A couple thoughts … - Posted by HankM

Posted by HankM on May 21, 1999 at 21:09:15:

First, I’m in Illinois … your neighbor and the Land Trust capital of the world. Second, I look at my share of files in the courthouse and recorder filings.

The biggest problem I find with the land trust is the conveyence … if you already own the proeprty and NOW you want to protect it, what do you do? … bzzzt … you quit claim to the trust… how stupid does that look? I see lots of people with trusts and I see this all the time, and the tax bill (from the assessor is sent to the home of the beneficiary); who are they foolin’? … not me.

Second, if you have any kind of financing on the property, find a bank that has trust powers, they will at least be somewhat knowledgeable on the trust stuff. Way too many times do I see the beneficiaries signing the note and mortgage … not only a violation of privacy, but of protocol … since I don’t see the respective transfer in and out of trust.

If I look at 20 trust files, 19 will violate one of the two, making anonimity mute. Of course, I have respect for the one that does it right, which makes me dig harder.:slight_smile:

Didn’t speak to your points at all Jim, but hope it makes you think about a couple others!

Hank

Re: Secrecy & Asset Protection - Posted by David(Ca)

Posted by David(Ca) on May 23, 1999 at 19:35:56:

J.P.,

Great post!

Since I’m still trying to get my arms around many of these asset protection concepts, I’d like to clarify one thing.

Does “publicize” mean that all properties are titled in an LLP or LLC? If so, doesn’t this fly-in-the-face of the different revocable trust ideas we’ve been hearing about on this board?

Thanks, Dave.

Re: A couple thoughts … - Posted by JPiper

Posted by JPiper on May 21, 1999 at 23:00:56:

I agree?a transfer to a trust from the owner’s name is problematical. However, let’s say the owner owns properties A and B. The owner transfers each property to a separate trust. Later, a situation occurs regarding property A?.and a lawyer digs into the ownership. As you point out, he finds out who the former owner is, and that the tax bill is being sent to the same address. Oops.

Now he runs a search for more properties under either the owners’ name or the trust’s name. Property B doesn’t come up on this search of course. So while the ownership of property A has been detected, the ownership of property B hasn’t. Barring other moves by the lawyer, property B is unaffected.

Contrast this with not doing anything. Still makes sense to me to convey, eventhough it’s not perfect.

JPiper

Re: Secrecy & Asset Protection - Posted by J.P. Vaughan

Posted by J.P. Vaughan on May 23, 1999 at 19:58:24:

Dave, I am definitely talking about titling (and transfering)
assets to an LP (or LLC). The point is this: If you
have everyhting in an LP, you don’t have to worry about
"secrecy" because a creditor’s only remedy is a “charging
order.”

I don’t know whether this flies in the face of what you
understand or have heard about land trusts because I don’t
know what that is. If you can be more specific, I’ll try to answer.

JP

JPiper what are your reasons for Land Trust? - Posted by JSmith

Posted by JSmith on May 22, 1999 at 10:59:40:

J,

I believe in every interrogatory that an attorney requests seeking more information about your assets, the document asks in various ways are you the beneficiary of any trust.

What would you say to these types of questions? Other questions on the interrogatory would ask if you transferred your beneficial rights. What would you say to this?

Furthermore, if you use Land Trusts for anonymity, who are you wanting to be anonymous from? If the suing attorney will discover your beneficial interest, what else would you need the Land Trust for? Why do you care if someone else happens to see on public records that you bought low and sold high? This is not a case for privacy. Anytime, anywhere, anyone who wants to sue you for whatever reason can find more information about you way better than what the courthouse can provide.

Basically, I am not a Land Trust fan. I do not need to hide, try to discourage attorneys, or keep my business secret from others. I fully understand that certain contracts and deals never get recorded because of the nature of the contracts (assignment). The idea that you are going way out of your way for things that are going to be found out anyway if someone wants to doesn’t make sense.

I hope my tone is not bad, just wanted to share my thoughts. Land Trusts are a lot of hype for little bang.

I fully appreciate planning trusts for retirement and death, but not for simple transactions.

JSmith

Re: A couple thoughts … - Posted by ccreed

Posted by ccreed on May 22, 1999 at 10:04:48:

“Now he runs a search for more properties under either the owners’ name or the trust’s name. Property B doesn’t come up on this search of course.”

It wouldn’t? If searching on the owner’s name, he’d uncover the conveyance of prop B into the trust wouldn’t he? If he’s halfway diligent, that is.

While working the record index we frequently run across a whole series of actions by one person and their partners. If people knew how many attorneys come thru the vault in a day, they might be more circumspect about how their interests appear in the public record.

–CR

Re: A couple thoughts … - Posted by HankM

Posted by HankM on May 22, 1999 at 09:20:44:

You’re right if you’ve got separate trusts for each property, finding one they know about might not be too tough, but the others would be hidden. Unless the plaintiffs attorney is smart enough to ask if you are the benficiary of any other trusts (while you’re under oath) that is.

You’re absolutely right it’s better than doing nothing. The funny thing I see is that folks who are buying and taking title from the get go do the loan thing wrong. Every once in a while I see a file where the trusttee executes the docs and there is no mention of the beneficiary, but it’s pretty darn rare … sad actually.

Hank

Re: Secrecy & Asset Protection - Posted by David Alexander

Posted by David Alexander on May 23, 1999 at 20:36:44:

Ok, J.P.

Quick question? I understand the charging order stuff, and the fact that they would never even get the cash flow unless the GP distributed it.

From what I understand, not experienced enough yet to know, but when a lawsuit gets filed against a property in a Corp, L.P. or other Entity, wouldn’t all them be subject to the suit and until things are settled or satisfied the cashflow and profit from everything would be tied up.

But, if the properties were further in hidden or secret and no one knew what assets were held by the L.P. wouldn’t that be extra prevention worth the few extra pieces of paper of a trust?

Seems that a lot of law suits would never even get off the ground. Is my thinking wrong on this?

David Alexander

Re: Secrecy & Asset Protection - Posted by David(Ca)

Posted by David(Ca) on May 23, 1999 at 20:16:34:

Ok, got it about titling in a LP.

Regarding my remark about “flying in the face”…I mean, if one were to adopt this sort of asset protection plan, it seems like there would be no need for a land trust, PACTrust™, or even an estate planning living trust as the primary title holding device.

I could see an estate planning trust as some sort of a beneficiary of the LP, but I don’t see any need for a land trust or PACTrust™, again, IF one were to adopt THIS particular asset protection plan.

Just trying to clarify, I have nothing against any of the other methods.

Dave

Re: JPiper what are your reasons for Land Trust? - Posted by chris

Posted by chris on May 22, 1999 at 22:02:52:

JSmith, you keep going back to the case where a known individual is facing a judgment. That’s been addressed a few times below… What if somehting happens ( like an accident ) on a piece of real property where the “owners” identity is not known? Depose the trustee you say, right? Well, if the trust is written so that the trustee resigns upon a legal action , the next step is finding the next trustee. As many trustees can be lined up as you want , in as many states ( what if one of them likes to travel? ) as you want. The other trustees are not recorded ( if specifics are needed on how that works perhaps I can get that information later , but as I recall it’s got something to do with what does/does not get microfeeshed ). So the point is that it can take many years & many dollars to find the benificiary. I’m no expert , far from it , but I’ve been advised by a wise man that this is known as a cascading trustee trust. It works. It’s been tested. …The creative use of all types of trusts ( overseas too , as posted below ) in conjunction w/LLCs, LLPs, & COs is one reason the “old money” that employs these techniques rarely get “taken down”. It’s the middle classes that don’t know enough to set up these paper barriers, that get clobbered. …I suspect a lawer that doesn’t know much about these types of things has your ear… …Did you know that 98 % of family trusts set up to avoid probate don’t work - meaning the estate goes into probate despite the best efforts of the family & their lawers. Why? because MOST LAWERS DON’T KNOW ENOUGH ABOUT USING TRUSTS FOR ASSET PROTECTION TO USE THEM CORRECTLY. It’s similar to the fact that most MDs don’t know all that much about the very important topic of nutrition. These guys, ( Doctors & Lawers as well as most individuals ) focus on putting out the fires once they’ve started , not preventing them in the first place. There’s a lot of incompetence out there, but that shouldn’t come as a surprise to anybody…If you’re curious , the 98% figure came from Fortune magazine… Like I’ve said many times before, I’m no expert, so take what I say for what it’s worth.

Re: JPiper what are your reasons for Land Trust? - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on May 22, 1999 at 19:38:12:

As JP pointed out above and I pointed below, it’s not a interrogatory attorney who will ask about assets, but the attorney for a judgment creditor, which happens after the court renders the judgement on the subject of lawsuit.

By virtue of this with land trusts at least one could buy some time to use assets before the judgement is rendered. If real estate equity is all one has, one could convert equity into cash to finance the litigation.

In our area there was a recent lawsuit against a broker who was heavily rehabbing low income properties. He had about 40 homes in different stages, all titled into hi s personal name. Along with the lawsuit the lis/pendence was filed against his name which tied up all his properties. Had he had them titled into separate land trusts he might have been able to use them to finance the litigation. The lawsuit lasted for over 2 years, during which his properties were tied up.

Here’s what Joe did. - Posted by hkCA

Posted by hkCA on May 22, 1999 at 19:37:37:

Here is a scenario:

Joe has his properties properly placed in Land Trusts. He is the beneficiary. Along comes Pete and decides to file a suit for some reason. Pete hires and attorney. The attorney searches to see if Joe has any assets to seize. He suspects that Joe may be the beneficiary of some of the trusts. He deposes Joe. Before the deposition, Joe asks his Trustee (which just happens to be his brother, friend, attorney, etc.) to transfer his beneficial interest to another party, saying he meant to do this last year and forgot ;-). The Trustee back-dates the transaction a year (transfers do not have to be notarized or recorded). At the deposition the attorney asks Joe if he is the beneficiary of any Trusts. Joe says “no.” He’s telling the truth. His assets are no longer at risk.

Now, I’m not advocating doing this. I’m not saying it’s legal or ethical. I’m only saying it could very easily be done. Put into Joe’s position, I might think hard about doing what Joe did rather than facing losing everything.

hkCA

Land trust = Cheap insurance policy! - Posted by Matthew Chan

Posted by Matthew Chan on May 22, 1999 at 19:30:02:

You may not have anything to hide but if you keep “advertising” your assets unnecessarily, you might get hit with a frivolous lawsuit as JPiper mentions.

Part of avoiding lawsuits (or any other tragedy in life) is called prevention. What is that saying? An ounce of prevention…?

Aside from the lawsuit issue, you can better avoid the “due on sale” clause. Ahhh, but of course you wouldn’t want to do that. You would want to go trhough all of the bank’s bureacratic nonsense.

Land trusts are hype to those who don’t fully understand ALL the things it can do. (I don’t know EVERYTHING about it, but what I do know, I like! And it IS worth it to me. Cheap insurance policy that I can write.)

Re: JPiper what are your reasons for Land Trust? - Posted by JPiper

Posted by JPiper on May 22, 1999 at 14:13:47:

In my total business career (not all of this in real estate) I have been served with 4 lawsuits. One of those was in my mid-20’s regarding a “non-compete agreement”. The other 3 have been in the last 12 months. Each of these last three was a frivolous suit?.and each was dropped, AFTER I paid my attorney legal fees. I think the point here is that an unfortunate commentary on society today is that some people are out to sue other people?.whether the suit has merit or not, and not just over matters related to real estate?.but over almost anything that could be dreamed up. And sometimes people lose lawsuits that are so incredible as to make your jaw drop?.you can hardly believe that a court would have ruled as they did.

In light of the above I think it only makes sense to take some steps toward asset protection. A land trust is quite a simple vehicle to employ which does several things. One is to conceal assets. An obvious statement is that before anyone spends very much money on a lawsuit?.whether it be the client, or the attorney in a contingency suit?..they are going to attempt to figure out whether any judgment that they may win will be collectible. To the extent that your assets are less visible through the use of a land trust I would think this makes a great deal of sense. Employing a land trust takes next to no time at all, so it’s hard to see where you come up with the concept of “going out of my way”.

As you say, an attorney willing to spend both the time and money to figure out whether I have other assets will accomplish his goal. He’ll get it figured out. But if the assets aren’t obvious to begin with, perhaps he won’t make the choice to go down this road on a fishing expedition. Perhaps he’ll turn to his client for the money to subsidize his efforts. Perhaps the client will be unwilling or unable to finance a fishing expedition. I can’t predict the future, or the motivations of other people?..but I think paying no attention to issues of this type is foolhardy.

I’m not an advocate of going to extraordinary lengths to establish offshore trusts, foreign bank accounts, or some of the other techniques you hear about. But I am an advocate of reducing my personal exposure by taking simple steps?.just as I’m an advocate of paying attention to ANY of the types of risk that a real estate investor might be exposed to.

Really this amounts to personal choice. You evidently are unconcerned about your legal exposure. I would only comment that I hope that this attitude doesn’t also extend to a refusal to use corporations and/or LLC’s to shield personal exposure. My view would be that asset planning is kind of like preventive maintenance. You won’t know the value of it until it’s too late.

JPiper

Re: A couple thoughts … - Posted by Alex Guervich, TX

Posted by Alex Guervich, TX on May 22, 1999 at 19:15:26:

>>Unless the plaintiffs attorney is smart enough to ask if you are the
>>benficiary of any other trusts (while you’re under oath) that is.

I am told that assets are not discoverable until after the judgement is rendered. So I’d think the question like that from plantiff’s attorney should be objected by defendant’s attorney, should it not ?

Would be great to hear on that from Bill Bronchick or Irwin.

Re: Secrecy & Asset Protection - Posted by J.P. Vaughan

Posted by J.P. Vaughan on May 23, 1999 at 20:34:10:

Dave, a total asset protection plan can get very complex,
depending upon the situation. I made the original post
because (from the previous posts) it looked to me like
some folks thought that a revocable trust protected
assets. There are many good and valid uses for land trusts
within the structure of an asset protection plan.

By the way, I don’t know what “THIS particular asset
protection plan” means, since I didn’t articulate any
particular structure. I merely stated my opinions on the
value of LP’s (LLC’s) and also mentioned that a corporation
should fit somewhere in the mix.

Again, exactly what that “mix” should be will depend upon
one’s personal circumstances.

JP