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Let’s look at three ways to protect yourself: (1) traditional asset protection, (2) trusts, and (3) proper insurance (your first line of defense).

Protect Your Real Estate Assets

Segregating Your Assets

Forming corporations and trusts helps you segregate your assets, which means getting assets out of your own name. Most people have their bank accounts, houses, and cars in their own names, so do cou-ples. However, if you get sued, everything you own (that is in your name) can be attached by a judge to satisfy the suit. Depending on the laws in your state, if you are married and get sued, everything you both own is at risk.

Traditional Asset Protection

You can split ownership with your spouse, putting some items in your name and some in your spouse’s. During the 1960s and 1970s, many well-to-do doctors put many of their assets in their wives’ names. That meant if they got sued, they might lose their office equipment, for example, but not the large items they put in their spouses’ names.

However, if you follow this traditional way, make sure your spouse will love you forever and never leave you. What if your home ends up belonging to the pool boy because your wife left you and married him? She could do just that if she owned the property.

Also be careful about splitting ownership among your children.

When your children reach 18 and obtain title to your property, they may hate you and take revenge by taking over the property, even renting it to you!

Believe me, trusts, corporations, and perhaps partnerships are bet-ter ways to split possessions than this traditional way.

Two Types of Trusts

1. Land trust. Do you know that the worth of your home and debt owed is on public record when your home is in your name? Anyone, including a plaintiff’s attorney, can find out what your property is, where it is, what it is worth, and what the debt is. To be anonymous, many people take their proper-ties out of their names and put them into a land trust. Then you do not own it; the land trust does. You can call it the 123 Jones Street Land Trust and become the beneficiary, the owner, and the trustee. You control it and still get the tax advantages, but it is not in your name. Land trusts are also good if you are flipping, wholesaling, or lease-optioning houses. You can control them that way.

2. Irrevocable trust. This is a kind of trust you can set up, but you cannot change it because it is irrevocable. An irrevocable trust is almost impossible to break in any type of court or legal situation. If you have an irrevocable trust with $1 mil-lion of real estate that generates $100,000 a year and your child is the beneficiary, make sure it has a spendthrift clause.

That will ensure that no one else (for example, a creditor who sues after a car wreck or a participant in a divorce) will be able to claim the money intended for your child. Also, if you have life insurance, your heirs might have to pay estate taxes on that life insurance. You can move that asset out of your estate and put it into an irrevocable life insurance trust.

Remember, once you place your assets in an irrevocable trust, no one will be able to attach them.

Debt to Protect Assets

Another way to protect your assets is through debt. If you own 10 paid-for houses worth $1 million, would your assets look attrac-tive to a plaintiff’s attorney? Yes, of course they would. If you own 10 houses worth $1 million, but you also have $899,000 in debt,

Protect Your Real Estate Assets

Defining the Parts of a Trust

There are three parts to a trust: the agreement itself, the trustee involved, and the beneficiary or beneficiaries. They are defined as follows:

1. The trust agreement. Describes the agreement, what the trust does, who owns it, and what the owner’s responsibilities are.

It can say whatever you want it to say.

2. The trustee. The person who does what the trust agreement says. It can be you, an attorney, an accountant, or a trusted advisor. That person’s only job is to do what the agreement says: manage the property, sign documents, pay bills, or what-ever you specify.

3. The beneficiary. People who get the benefit of that asset. That could be you or your children, family members, or friends.

you become less attractive. I am not recommending going into debt, but it can be a viable asset protection tool.

Corporations and Partnerships

You can set up corporations and partnerships to help protect your assets. If you own assets and others sue you, they can get every-thing that is recorded in your name. If only a percentage is in your name and the rest belongs to a corporation, those suing you cannot get it all, only what remains in your name. A corporation or limited partnership is viewed as another entity by the law, separate from you, even though you still control its activities. For example, you might sell your equipment to your corporation and lease it back, so if you get sued, your equipment shows up as leased equipment, not an asset you own.

Most businesses in the United States operate through a corpora-tion or partnership of some kind. These entities continue past your lifetime, they make you look more professional, and they allow you to run your real estate business with some level of asset protection.

You would choose from basically three types of corporations:

S Corp, C Corp, and a new type called a Limited Liability Company (LLC). If you ask 100 attorneys and accountants which are the best states to incorporate in, most of them will say Wyoming, Nevada, or Delaware because these states seem to be in competition to outdo the others by making their corporate laws more attractive. If you ask 100 real estate attorneys what is the best way to own real estate, 90 of them will say a limited liability company. (Since lawyers will never agree on anything, 90 percent is excellent.)

LLCs offer these benefits:

■ An LLC can do everything any other type of corporation can, in general.

■ In many states, each limited liability company can have only one owner.

■ In certain states, an LLC can be set up anonymously.

■ An LLC provides all the protections of every other type of partnership and corporation, and you can elect how you are taxed—either as a partnership or a corporation.

Can lawyers and plaintiffs bust open your limited liability company and get what is inside? Not if it is managed properly. All they can get is a charging order, which is what you, the shareholder, are entitled to. Here is an example of a charging order.

You control $1 million of real estate that produces $100,000 of income a year. The real estate is owned by your limited liability company. Someone sues you and wins a judgment against you.

The plaintiff gets a charging order against the assets in your lim-ited liability company—$100,000 a year. However, the rules of an LLC say you do not have to distribute income if you do not want to, so you tell the plaintiff’s attorney, “Yes, we made $100,000 this

Protect Your Real Estate Assets LLCs Keep the Best, Drop the Worst

The Limited Liability Company category was created to use the best of the other categories and leave out the worst. Some attorneys object to LLCs because they are new and untested in the law.

However, they are statutory, and in most states, they are rock solid if you set them up properly.

Work with Experts

I recommend you have an attorney experienced in your business completing your incorporation and partnership papers, plus making sure you follow through with the instructions every year. A lot of people file corporate forms but do not follow all the rules and file all the documents. If they ever get sued, their corporation can be torn apart because it is not valid. So always have professionals do your paperwork.

year and you have a charging order. The court says you have the right to this money, but we are not distributing it. According to the IRS, you will have to pay taxes on that $100,000, but you do not have the $100,000.”

Do you see the value of not putting real estate in your name? If you had that million dollars of real estate in your name, the plain-tiff could attach all of your real estate assets. Do you think anyone would want the tax liability for your limited liability company, but none of its assets or income? No. Do you think they would be willing to negotiate a better settlement with you? Yes.

So how do you want to hold your assets? How do you want to protect them? Take time now to look at the activities you are doing and decide the best way to hold them.

I always like to copy what successful real estate people do. Most large hotels and apartment buildings are owned by LLCs. I figure

LLC and Divorces

In a divorce situation (always a situation that poses one of the biggest threats to asset protection), an attorney friend of mine had a client, about 80 years old, who fell in love with a 25-year-old woman.

The gentleman’s net worth was about $30 million. (Of course, they only married for true love, but unfortunately became divorced soon after the marriage.)

The man’s attorney had recommended he form a limited liability company, so when the woman sued her former husband for half of his assets, these assets could not be touched. The defendant’s attor-ney said, “All you get is a charging order, and yes, we have earned about $2 million this year and you can get part of that, but you have to pay taxes on it, and we are not distributing any of the income. We are probably going to do the same for the next year, and the next year, and the next year. So you’ll owe the IRS about $400,000 or

$500,000 this year. Can you pay that?”

Not surprisingly, this couple worked out a more amicable divorce settlement.

that if it is good enough for their $50 million hotels, it is generally good enough for my little $50,000 or $80,000 duplexes.

If you acquire a lot of assets, have two or three differ-ent differ-entities to sprinkle them in, so at no given time could they all be attached.

If you are a drug dealer or an international terrorist, governments can likely get to your assets wherever they are. But as an investor, you can protect your assets if you set them up right. A successful investor friend named Bob owns nothing in his name. His cars are owned by one LLC; some of his real estate is owned by another.

More of his real estate is owned by yet another corporation. He has trusts that own several liquid assets he controls. Because of his success, he has a lot of lawsuits against him. (I believe that if you are not getting sued, you are not doing enough business.) But no one can touch his assets because he does not own any of them personally—they are allocated among different entities.

Important Step: Record All Contracts

Whenever you sign a contract or option to buy a property, espe-cially from a motivated seller, be sure to record that contract against the property at the courthouse in the particular town or city. In certain states, you can actually record the contract through an affidavit, which is basically a letter stating you have a contract or option on the property. That way, it is recorded and the whole world knows you have an interest in that property, so no one can sell or refinance it.