A couple years ago I was teaching a class for a Real Estate Investor Association in New Jersey. An older gentleman, “Ron”, stopped me to discuss his existing structure. He owned twenty-three rental properties, all free and clear, with a value of $350k to $450k each. “Ron” explained that over the years, he would set up a new LLC for each property he bought. “It is so easy and so inexpensive to form LLC’s here in New Jersey. I pay the state $125, open a bank account, and quit claim the property to the LLC. Why would I want to use the structure of forming a Nevada LLC and Land Trust for each property?”
My response: “Well Ron, at some point there is going to be an accident on one of these properties. When you get brought into a deposition, you must list everything you own: your house, your cars, and 22 OTHER LLC’s. If the lawyer is successful in piercing the corporate veil, he will get not only the property where the accident took place, but also be able to sue you for all the LLC’s you own.”
Statistically, the corporate veil gets pierced almost 50% of the time. This is exclusively with small business, when you have 5 shareholders or less. In Ron’s case, he was a single member LLC – putting him at the higher end of the veil piercing spectrum. Lawyers can make “alter ego” claims. You own the LLC, control the LLC, you ARE the LLC. The LLC is nothing more than a sham.
Land trusts are a great way to separate liability of each property without having to have multiple LLC’s. Additionally, if you have a VA loan or conventional loan in place and quit claim the property to the land trust, there is a federal law, the Garn St. Germaine Act of 1982, where the bank cannot invoke the “due-on-sale clause.”
The beneficiary of the land trust will be your Nevada or Wyoming LLC. This provides you with Charging Order Protection, the very best protection in the event of an accident. Charging Order Protection protects you from the LLC and protects the LLC from you.
Ron explained that he already had a pending lawsuit. A squatter moved into one of his vacancies. The squatter was drunk and high, slipped and fell, and sued Ron’s LLC AND sued Ron personally. And exactly as predicted, the squatter was in fact going after all of Ron’s LLC’s. Ron was 2 years into litigation. His lawyer predicted it may be 5 years before this case settled.
Be proactive. The best time to protect your assets is when the skies are blue, and there are no pending issues.
Protecting your assets is key to long-term success in real estate investing! Reach out to NCH for a consultation and let their experts help you strategize the best ways to safeguard your investments and build a solid foundation for growth.
