DAVID J. WILLIS ATTORNEY
http://www.LoneStarLandLaw.com
http://www.TexasSeriesLLC.com
Copyright 8 2010. All rights reserved worldwide.
DEEDING TEXAS PROPERTY INTO AN LLC
An Essential Aspect of Asset Protection
by David J. Willis Attorney
Introduction
A primary purpose of an LLC is to provide asset protection, ie., protection from personal liability for its members. For this reason, any property that could potentially generate a lawsuit or other liability, especially rental property, should be held in the name of an LLC – never in a personal name.
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The New Texas Series LLC
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Property should be titled in a series LLC, which is now the vehicle of choice for real estate investors. A series company permits a single entity to hold multiple properties in separate “compartments” – for example, Series A, Series B, and so forth. The assets and liabilities of each series are confined to that series only. In other words, if there is a lawsuit or a foreclosure that affects the property in a certain series, the other series are not affected or in any way liable for the outcome. Because of these features, the traditional LLC is now an out-of-date vehicle for real estate investment.
Texans formerly had to go out of state (eg., Delaware) to obtain a series company. With the recent changes and improvements to the Texas Business Organizations Code (the “BOC”), there is now no good reason to do so unless one is contemplating going entirely offshore (Panama, for instance). The BOC is a model of progressive legislation.
For a summary of the advantages of LLC’s, see our companion articles on LoneStarLandLaw.com, The Texas Series LLC, Texas Homestead Protections, and Asset Protection in Texas.
Deeding Property into the LLC
If possible, rental or investment property should be acquired in the name of the LLC. Often, however, lenders require that an investor take the property in his or her personal name. If that is the case, then the property should be moved into the LLC by means of a general or special warranty deed without delay. When deeding property into a specific series, then the deed should reflect that specifically; for example, title could be taken into the name of “ABC, LLC – Series A.” Failure to do this results in the property being held generally by the company, thereby losing series protection.
Investors occasionally wonder if property can be transferred if there is a “due on sale” clause in their deed of trust. First, note that the standard due on sale clause prohibits nothing; it merely gives a lender the option to accelerate a note if a transfer occurs – so it is not correct to say that a transfer of property “violates” or “breaches” the due on sale clause. Second, lenders seldom protest transferring real property into a personal company and, in any case, are far more concerned with loans that are in monetary default. Some lenders will send a threatening letter if they discover that their security property has been transferred, but little comes of it so long as the note is kept current - nor is credit affected. The due on sale clause is a factor, but a negligible one.
What should be done with homestead?
It is neither necessary nor advisable to transfer a homestead into an LLC that holds investment properties. Homestead-exempt assets should always be kept separate from investment assets. One reason is that the homestead is already protected by the Texas Constitution and the Property Code against forced sale or execution upon a judgment. It is highly recommended that the homestead be transferred into a living trust that can transfer beneficial interest in the property upon death without the delay and expense of probate. A “pour over” will should then be executed along with the living trust.
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Asset Protection
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Asset protection in Texas is about (1) creating a barrier to personal liability with an LLC; (2) maximizing anonymity in the public records; (3) utilizing homestead protections afforded to individuals by the Texas Constitution and the Property Code; and (4) deterring lawsuits and judgment creditors and, in the event of suit, exhausting their determination and resources. Planning ahead is critical.
Although there is no such thing as a “bulletproof” asset protection plan - in spite of whatever internet and seminar promoters may claim - the rule is this: the more fences a plaintiff and his attorney have to jump, and the more money they have to spend in order to get to you personally, the better protected you are. A basic but excellent asset protection structure for real estate investors is the following:
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(1) establish a Texas Series LLC for investments and businesses;
(2) form a shell management company (LLC) for dealings with tenants, vendors, and the public;
(3) file assumed name certificates (DBA’s) for the series LLC and for the management company;
(4) transfer properties held in personal names to the series LLC;
(5) pay down homestead, personal vehicles, and other exempt items;
(6) form a living (inter vivos) trust for the homestead to avoid probate and achieve a measure of anonymity, and then execute a pour over will to go with the trust.
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The Importance of Good LLC Documents
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LLC documents, particularly the company agreement, should be drafted by a knowledgeable asset protection lawyer to maximize protection of membership interests from creditors. So-called “standard forms” are insufficient and can actually be harmful to your asset protection goals. Specialized asset protection provisions should be inserted in the company agreement. . Note that non-lawyer internet services that form LLC’s supply only the most basic documents and never include such provisions. No serious investor or businessperson should ever consider using this method to form an LLC, especially a series LLC.
General Warranty Deeds vs. Special Warranty Deeds
This distinction pertains to the grantor’s warranty of title. A deed with general warranty conveys the property “to Grantee and Grantee’s heirs, executors, administrators, successors, and assigns against every person whomsoever lawfully claiming or to claim the same or any part thereof.” The legal effect of this is to warrant title all the way back to the origins of the real property records. A special warranty deed conveys the property “to Grantee and Grantee’s heirs, executors, administrators, successors, and assigns against every person whomsoever lawfully claiming or to claim the same or any part thereof, when the claim is by, through, or under Grantor, but not otherwise.” Title is warranted from the grantor, but no further back than that. Commercial properties are typically conveyed by special warranty deed. Deeds into an LLC may be either with general or special warranty, depending on the situation.
Under no circumstances, however, should a “quit claim deed” be used. Quit claims, technically speaking, are not even true deeds. Texas title companies do not respect these documents, so they can create problems with the chain of title.
Clauses in the Deed
One factor that should be considered in deeding property into an LLC is whether or not the property is to be transferred with an assumption of the existing loan or “subject to” the existing loan (ie., the LLC does not take liability for the loan). This choice has accounting implications, ie., whether or not the company will in the future be carrying the loan on its books as a company debt. Most such transfers are “subject to.” An appropriate clause specifying assumption or “subject to” should be included in the deed.
It is also generally advisable to include an “as is” clause in the deed. If the property is rented it may be appropriate to assign the security deposit to the LLC. Consideration should be given to assigning the escrow account as well.
If two spouses are on title, then both must sign the deed into the LLC.
Planning Ahead
If the objective is to protect an asset, it is preferable to transfer that asset into an LLC before trouble arises. Otherwise the usefulness of doing so may be limited by rules against “fraudulent transfers” that reach back up to two years (these rules apply in many foreign jurisdictions as well). Fraudulent transfers are generally indicated by so-called “badges of fraud,” including: (1) transfers to a family member;
(2) whether or not suit was threatened before it was filed;
(3) whether the transfer was of substantially all of the person’s assets;
(4) whether assets have been removed, undisclosed, or concealed;
(5) whether there was equivalent consideration for the transfer; and
(6) whether or not, after the transfer, the transferor became insolvent as a result (eg., made his cash and property disappear).
Summary
Transferring property into an LLC should be part of an overall asset protection plan - one that should be made prior to a catastrophic event such as a lawsuit or judgment. In preparing such a plan, one needs at least two professional resources: a good CPA to consider the tax ramifications of any action, and a skilled asset protection lawyer who has experience – including courtroom experience – keeping the wolves away.
Note on Legal Fees: This office charges $175 for a warranty deed conveying property into an LLC. Per-page recording fees (usually about $28, depending on the county) are not included. We need a copy of your existing deed and the name and address of your LLC. These can be emailed or faxed to (832) 201-5321. Specify whether the note will be assumed or if the transaction will be “subject to” the loan. Mention any special requirements you may have.
DISCLAIMER
Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing to do so.
Copyright © 2010 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at www.TexasSeriesLLC.com and www.LoneStarLandLaw.com.
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