Protecting Your Real Estate Investments

A Case History: Saying No To Greedy Plaintiffs

Mr. Soto is a real estate builder and developer. He completed a 60-house development in Northern California in 2005 and quickly sold off all of the homes at a handsome profit. Having been a developer and a builder for many years, he understood his liability exposure. Under California law, he could be pursued for a period of 10 years for any construction defect, real or alleged. Mr. Soto wished to insulate himself and his family from any potential future lawsuit with respect to this development. His asset protection planning involved a two-step process.

First, pursuant to a transmutation agreement, some of the assets were transferred to Mrs. Soto, as her sole and separate property. The assets transferred to Mrs. Soto included the couple’s personal residence and two apartment buildings. Mr. Soto retained the ownership of the building-development company, and a significant amount of cash. Following this split of the assets, in the event of a lawsuit against Mr. Soto, the residence and the apartment buildings would no longer be reachable by Mr. Soto’s creditors. He longer owned these assets, they were now owned by Mrs. Soto.

Second, all of the assets were placed into special protective structures to create a second level of obstacles for a prospective plaintiff. Mrs. Soto transferred the ownership of the residence to a special residence trust. The apartment buildings were transferred into a limited liability company. Mr. Soto transferred his significant liquid assets into an offshore trust-LLC structure.

As a result, a creditor wishing to pursue the equity in the Sotos’ residence would now need to attempt to break through the transmutation agreement, and then through the residence trust. We have implemented hundreds of these structures and find them to be an effective shield against creditors over 99% of the time.

A Case History: The Aspiring Donald Trump

Jonathan was in his early 40s and a successful physician. One of his investments included a 10-unit apartment building. He was concerned about a creditor attack against the apartment building in the event of a lawsuit. We transferred the ownership of the apartment building into a limited partnership with a limited liability company acting as the general partner. For tax purposes both the limited liability company and the limited partnership were treated as disregarded entities, with no federal tax return filing requirements. Because Jonathan no longer owned the apartment building, a creditor could no longer reach it. Jonathan now owned interests in the limited partnership and the limited liability company, but both were protected by the charging order limitation. All our research and practical experience allow us to conclude that the charging order protection is an extremely powerful tool and very rarely tested by creditors.

A Case History: A California Mogul

Mr. Johnson is a well-known California real estate developer, builder and investor. He owns over one hundred separate real properties, primarily in California. While the overall structure we devised was fairly complex, we used a Delaware series limited liability company as the umbrella entity. A series LLC allows one to compartmentalize liabilities within one LLC. This significantly cuts down on franchise taxes, legal fees and accounting fees. Mr. Johnson was able to reduce his annual California franchise taxes from approximately $80,000, to $800.

Posted in: What do you want to protect?