If you found yourself yawning when you read that headline, grab a cup of high-test coffee and keep reading.
In the weeks leading up to its February 16th effective date, apartment owners across the State of California were hungry for anything and everything they could find that might help them avoid the consequences of Proposition 19. (There are still solutions btw – even after that date. If you need help, let us know.)
Without question, the impacts that trouble landlords most about “Prop 19” relate to property taxes and capital gains taxes. Tax increases always command the attention of the people who will have to pay them – for good and obvious reasons.
Just be careful not to let the tax tail wag your property dog, though. The first rule of tax planning has nothing to do with taxes actually. Instead, it’s much more basic than that. The first rule of tax planning is: Don’t lose your assets.
We’re not talking about losing your property to hazards. You’ve got insurance against winds, floods, and lightning bolts. No, we’re talking about the kind of storm that comes dressed as a creditor with a judgment in one hand, and a charging order in the other. All the tax planning in the world won’t do a thing for you in the future if a Court forces you to turn over your property (or the money that should have been yours from the rental or the sale of it) to a tenant who took offense to you climbing past their window without giving prior notice on your way to fix a leaking roof.
Don’t nod off now just because your property is owned by an LLC, or an S-corp. Or by a series of them. If those entities really provided the protection we’ve all been told they would, then why does a Wake Forest Law Review article1 cite a finding reporting that the “corporate veil” was pierced in 39.34% of state court cases and 41.42% of federal court cases?
A 2016 article from the Hastings Business Law Journal2 refers to the “corporate veil” that is supposed to protect the personal assets of the owner of an LLC from a creditor of that LLC (and vice versa) as “The Elephant in the Room.” An article entitled “The ‘Alter-Ego’ Theory AKA ‘Piercing the Corporate Veil’” (published on a California Law Firm’s blogsite reads), “It is well settled that California courts can pierce the corporate veil …”3 The Dupage County [IL] Bar Association published a finding in its Journal that courts in Illinois pierce the corporate veil in 42 to 55% of cases4. A sentence from the Wake Forest Law
1 McPherson, R. and Raja, N. Corporate Justice: An Empirical Study of Piercing Rates and Factors Courts Consider When Piercing the Corporate Veil. The Wake Forest Law Review. (2010). pp 931-969.
2 King Fung Tsang, The Elephant in the Room: An Empirical Study of Piercing the Corporate Veil in the Jurisdictional Context, 12 Hastings Bus. L.J. 185 (2016). Available at: https://repository.uchastings.edu/hastings_business_law_journal/vol12/iss2/3
3 Adishian Law Group. The “Alter-Ego” Theory AKA “Piercing the Corporate Veil”. (2021). Available at: https://adishianlaw.com/alter-ego-corporate-veil/
4 Nizamuddin, A. Piercing the Corporate Veil During the Time of COVID 19. The Journal of the Dugae County Bar Association. (2020-21). Available at: https://www.dcba.org/mpage/v32-Azam-Nizamuddin
Review article cited above should be of particular concern to the owners of “single-Member LLCs” and LLC’s or S-corps that are owned by family members or a small group of partners. It reads: “There are no cases in which courts pierced the corporate veil of a public corporation – piercing the corporate veil is limited to close corporations.”5
The explanations behind those studies, findings, and conclusions are beyond the scope of this article.
What matters for our present purposes is this …
for closely-held, or tightly-held, and, especially for single-member/single-owner LLC’s and corporations, the promise of protecting assets from the claims of creditors is merely an illusion in roughly half of all court cases brought in state or federal courts. It’s a coin flip, in other words.
Real asset protection isn’t about making a property owner “suit-proof”. No Advisor and no tool can promise that someone using a particular entity, instrument, or approach can never be sued. Instead, bullet-proof asset protection is about making sure that even if you lose a lawsuit you’re still in total control of if, when, and how much you pay, to make that suit go away. Unless you’re willing to take your chances on a coin flip, you need a better tool than LLC’s and corporations can provide.
And, no matter what you might have been led to believe, the asset protection inadequacies of LLC’s and corporations for entities that are owned by 1 or 2 people, especially, are the same whether you have 1 LLC that owns 10 properties or 10 LLC’s that each own 1. We think you should get a lot more than a heads or tails chance if you’re sending $8,000 a year to the CA Franchise Tax Board (plus another $4- 5,000 for tax returns) for 10 LLC’s in California (or whatever your state charges).
That’s where highly-specialized trusts – drafted purposefully to include provisions fully-supported by the legal Codes of the respective States and settled case law – DO offer property owners real, “bullet-proof”, answers to their asset protection concerns.
A thorough discussion of how those proprietary, copyrighted, on-shore, US-based, trusts are written, interpreted and enforced, and how they can assure you that, even if you lose a lawsuit, even if the court grants your opponent a judgment and a charging order, you remain in control of how, when, and even if, that suit gets settled, is beyond what we can cover in these few paragraphs. That’s a task that’s best handled in a one-on-one conversation between you and an experienced Trust Specialist.
Want to schedule an hour-log call to talk about your situation, your goals, and how proprietary trusts can protect you in ways LLC’s and corporations just can’t – and/or about the tax planning opportunities those trusts can provide by themselves, or in conjunction with other tax planning tools like 1031’s, Monetized Installment Sales, Delaware Statutory Trusts, etc.?
Then call or text me (Barry Bruce) at (443) 536-3331, or email me at Barry@deferthegainstax.com. The Consult is free. The protection and the tax planning opportunities might well be priceless.
5 McPherson, R.