Legalwiz Wealth Protection Blog

Pension Plans - Legally Protected from Creditors

According to CNN.com, O.J. Simpson draws $25,000 a month on the $4 million pension set up when the former pro football star, actor and ad pitchman was making millions.  Is this legal?  In a word, "Yes"!  Under federal law, pension plans, IRAs, 401k's, and SEPs are protected from creditor attachment.  Thus, the more you dump into your plan, the more cash you have protected from creditors.

Insurance Doesn't Cover Everything

Insurance is like the robe the doctor gives you to wear when you get a checkup.  Fron the front, you're all covered, but what's hanging out the back?  Your ASSets!

Insurance is your first line of defense, but insurance doesn't cover many things.

Contractual Disputes

Any breach of a contract, promise, warranty or guarantee in your business is not generally covered by insurance.  As a matter of public policy, insurance carriers don't cover such risks.  This would include a breach of warranty on a title insurance policy.  Most sellers assume they are covered for this risk, when in fact it is the BUYER who is insured.  Once the title insurance company pays out the buyer on a warranty claim, they turn around and seek subrogation (sue) the seller.  Surprise!  This is why you should never sign personally on a warranty deed, but instead use a land trust for each property.

--->>> Click here for information on land trusts

Intentional Acts

No intentional act is covered by insurance as a matter of public policy.  If someone claims you did something intentionally, such as an assault, act of fraud, or intentional misrepresentation, your insurance may not cover the claim. 

Claims Beyond the Limits of the Policy

It's great having a million in insurance coverage, but what if you are sued for two million?  Five million?  It seems that nobody sues for small potatoes these days - look at the judge who sued his dry cleaner for $67 million over a pair of pants! 

Don't Cancel Insurance

Don't get the idea that I am saying insurance is NOT necessary, it is; however, it is not enough by itself.The bottom line is that insurance is your first line of defense, so you need to have a plan better than just insurance that includes corporate entities like LLCs, corporations and limited partnerships.

--->>> Check Out the Wealth Protection System

Beyond the Handshake - How to Invest in Real Estate With a Partner

Working with one or more partners on a real estate deal is frequently a wise decision, if not a necessity. For beginning investors, taking a partner helps offset the risk of even a small investment. More experienced real estate investors may want to take on partners for the same reason, since as the deals get bigger, the risk becomes greater. Furthermore, individual investors can often benefit from the wisdom, experience, and diverse perspectives that partners can bring to the table.

But of course, there are pitfalls to the concept of partnership. Many friendships and even familial relations are ruined due to misunderstanding, negligence, incompetence, or just plain bad luck associated with doing business - not to mention the financial impact of partnerships gone wrong. To avoid these dire consequences, you should always have a formal partnership agreement drafted by an attorney, and you should always establish your partnership as an official, legal business entity.

General Partnership - Just Say No!

A general partnership is established by the simple act of doing business. It does not have to be registered with any governmental body, although it can be formalized with a written agreement. Legally, there is protection for you from the liabilities your partnership creates, which means that your personal assets could come under attack by litigants against your business. Furthermore, your business assets could could be seized for actions related to the misdeeds of your partners. In other words, do not operate as a general partnership if you engage in a continuing business relationship with any partners.

>>> Read more at legalwiz.com

There's Two Parts to An Insurance Policy - Do You Know What They Are?

There’s TWO parts to an insurance policy, the LOSS coverage and the LIABILITY coverage.

The LOSS COVERAGE is the expensive part, because it will pay for damages or loss to your property. The liability portion covers you if you get sued.

The average jury verdict involving a landlord case is $1.2 million. You know what the problem is? Most investors don’t carry that much liability insurance! They don’t even give it a thought. For a cheap property, they only care how cheap the policy is, that is, what it will cost to replace the property if it burns downs – they only care about the LOSS COVERAGE. The thing is, you are just as likely to get sued for $1 million on a $50,000 house as you are on a $1,000,000 house.

If you are readying this, I bet on your last property you called up your insurance agent and asked, “How much for the policy?” But what you never asked was how much LIABILITY coverage you got for your money, did you? So if you didn’t ask, what do you think you got? The STANDARD policy! Do you know how much the standard property insurance policy is for your insurance carrier? Is it more than $1 million? Do you even know?

Find out! Call your insurance agent!

THE LAW IS NOT ABOUT FAIRNESS. IT’S ABOUT TECHNICALITIES!!

If you are naïve enough to think that something like this won’t happen to you because you are a nice person who treats people right, you are kidding yourself!! Get your head out of the sand, and pay attention…

There is a litigation EXPLOSION in this country and landlord are VERY easy targets. Attorneys LOVE to sue to sue landlords, why do you think that is? Who do you think makes up the jury pool? And when they get a landlord like you into court, it’s payback time!

Everybody hates their landlord! And if you’ve got employees, too, you’re in double trouble, because everybody hates their boss, too!

Where do I Incorporate? Nevada? Not so fast...

A question often asked when incorporating is, “where do I incorporate?”  There are many promoters of various jurisdictions, such as Delaware and Nevada and even offshore.

Nevada and Delaware have favorable corporate laws which limited the liability of Directors.  As you may know, corporate directors are often sued for breach of fiduciary duty.  Since the law applied in the case of a lawsuit involving the internal workings of a corporation is the state of formation, DE and NV offer maximum protection from director liability. Nevada is a particularly favorable jurisdiction because it has no personal or corporate state income tax.  Shareholder privacy is protected in NV because there are no state corporate income tax returns filed and no information sharing with the IRS.

In most cases, the benefits described above will not apply to your decision to incorporate, since you will be doing in business in your own state.  If your corporation does business in your own state, it must register as a “foreign” corporation with your Secretary of State.  This involves paying an annual fee in both the state of incorporation and your home state.  In some states, such as Texas, the filing fee for a foreign entity is substantially higher than a domestic corporation.

In addition, income earned in your home state is taxable and the corporation must file a tax return. You cannot earn income in a foreign state with a Nevada corporation and expect to avoid paying income tax there.  And, once you file a tax return there, this will require revealing the identity of the shareholders. 

The only remaining benefit will be limited director liability, which is little consequence if your corporation is made up of you, yourself and you. Thus, in most cases, your best choice for incorporating your small business is your home state.

So why do radio advertisements push Nevada and Delaware corporations as the place for everyone to incorporate?

Take a wild guess!

Personal Property Trusts

If you have been reading my articles, you are probably familiar with the concept of creating and using land trusts for privacy and protection of your real estate.  However, what about your ownership of notes, mortgages, deeds of trust, leases and options that may appear on public record?  What about cars, boats, mobile homes and other items that are registered and recorded in public places?  Good news . . . there is a special trust just for that purpose!

The "Personal Property Trust" agreement is basically the same as a land trust in that the trustee is essentially a nominee title-holder acting at your direction.  Like the land trust, the paper trust is a revocable, living trust.  The same rules for tax reporting apply - there is no gift tax or income tax consequence of placing title to your paper in the paper trust. You still retain full control of your trustee, so no fiduciary tax return is required. 

Like the land trust, the primary purpose of using the personal property trust is to keep your name off the public records. Let's examine a few documents that are generally recorded and how we can use them with the personal property trust:

MORTGAGE OR DEED OF TRUST

One of the most practical uses of a trust is for holding a mortgage or deed of trust.  A mortgage is an asset, like any other, that can be found by searching the public records. Using separate trusts for each mortgage will help you keep a low profile.  As in the above example, you could record mortgages against your properties in the name of a trust to make your property appear encumbered. Make certain that there is at least some consideration for the mortgage or you may be found guilty of filing a fraudulent document.

LLC INTEREST

The names of the members of a limited liability company are public record for everyone to see. Consider forming your LLC using a personal property trust as the member (you being the beneficiary of the trust).

TRUST "STACKING"

You can combine a personal property trust with a land trust for greater privacy.  Since the beneficial interest in a land trust is personal property, it can be held in the name of a personal property trust.  Thus, you could form a self-settled personal property trust of which you would be the grantor and beneficiary.   The personal property trust would then create a self-settled land trust of which it would be the grantor and beneficiary.  This "stacking" of trusts might be appropriate in states which require the public disclosure of the grantor (HI, MS and AZ) or in situations which an uncooperative lender or title company insists on such disclosure in writing.

You can find information and forms for creating personal property trusts in my Land Trust Home Study Training Course.

Release Yourself From Liability

People settle claims out of court all the time, and that is often the smart thing to do. But, most people forget the one simple step that is crucial to the process. This simple step, if omitted, can result in a future lawsuit against you, even if you allegedly settled the claim.

Consider the act of settling with a tenant who his behind on his rent: you accept the keys, waive his back rent and he moves out quietly. But, the tenant can always come back and sue you years later regarding damage to his property because of a leaky pipe. There is a simple way to avoid this lawsuit from happening.

Consider the times you may have accepted or given an earnest money deposit on a real estate contract. The closing never happened, and you either kept or forfeited the earnest money. Does this mean you can't be sued in the future for breach of the contract? Don't bet on it!

Consider the times you may have settled a claim with your neighbor regarding any controversy that may have allowed him to sue you. It may have been a situation where he fell on your property and was injured. You offered to pay his medical bills and he gratiously accepted. However, two years later, what is to stop him from suing you for additional damages for pain and suffering? The answer: nothing!

Ok, so now you are begging me to reveal the secret of how to avoid future liability on transactions such as these. The answer is simple: you need to get a written release of liability. A release, also known as a "general release," is a simple document by which someone agrees to release you from all liability. A properly drafted release will prevent the signor of the document (the "releasor") from bringing any claims against you in the future that he had as of the date of the release. Keep in mind that the release will not prevent the releasor from suing you for new claims related to events that arose after he signed the release.

So, whenever you have a dispute with any other party that is settled, make sure you have that party sign a general release form before you give any money or consideration. And, speaking of consideration, there must be consideration given for the release to make it legally binding. In other words, you can't just get someone to sign a release with nothing in return. A promise to waive your own legal rights against the releasor is sufficient consideration (i.e., you may have to sign a release against the other party as well). If you can't think of any consideration, consider any counterclaim you may have against the opposing party, and threaten legal action to create a "dispute." For example, if someone threatens to sue you over monies owed for services, consider questioning any part of the services provided that may have been performed inadequately.

Of course, you may have to visit with a lawyer to determine what claim, if any, you may have against the party threatening you. In other words, don't lie or make something up. Do what lawyers do: use your imagination, find a creative argument that might hold water, then bluff! Even if you have a very small chance of winning on your counterclaim in court, it is sufficient consideration to waive that claim in exchange for the opposing party waiving their own claim.

For a sample "general release" form, click here.

Is Your Corporation in Trouble?

Studies show that most small, closely held corporations would not withstand the challenge of a lawsuit or IRS audit. "Why not?," you may ask, "I thought a corporation would protect me from liability." A corporation will protect you from liability, but only if you follow the "corporate formalities."

Use the following as a checklist:

• Did you hold organizational meeting and appoint a board of directors?
• Did your board of directors appoint officers?
• Do you have written minutes of these meetings?
• Do you have a Federal Tax ID number?
• Did you physically issue the shares of stock?
• Does your corporation have its own bank account?
• Do you "commingle" your personal funds with your corporate funds (i.e., do you use the corporate checkbook to purchase personal items and vice-versa)?
• Does your corporation have a business license?
• A telephone in its own name?
• A physical office address with a written lease?
• Do you have annual meetings of the shareholders and board of directors?
• Do you have written minutes of these meetings?
• Do you sign all of your leases, contracts and letters in the capacity which you are acting? (e.g., "President" or "Secretary").

Your failure to follow one or more of these formalities may result in a "piercing of the corporate veil." This is a legal expression for the process by which a court can actually penetrate the invisible wall of protection between you and your corporation and permit a creditor to go after you personally. Let me ask you a question . . . do you think IBM violates any of the above mentioned items?

The lesson here is that if you want to be treated like a legitimate corporation, then act like one! Go dust off that big, black corporate minute book that you tossed in the closet years ago. Look through the forms. It's not "rocket science" . . . it's simply a matter of keeping records in case of a lawsuit or IRS audit. You don't need to run your corporation with rigidity, you simply need a "paper trail" to justify what you are doing.

Here are a few tips:

If you use your spare bedroom as an office, have written lease between you and your corporation. Make it a "net" lease, so that your corporation can pay you for its share of the utilities, taxes and insurance on your home.

If you a constantly "funnel" money between your personal and corporation bank accounts, draw up a line of credit agreement between you and your corporation. That way, the "piecemeal" payments that go back and forth will appear perfectly normal (after all, isn't that what you do with a credit card account?).

If you need a legitimate office and phone, consider an "executive suite." There are companies that will rent you an office address with answering service for as little as $75/month. This will not only give your corporation legal legitimacy, but it will give you a place to meet an occasional client

. Do not wait until you are sued or audited to "backdate" the paperwork! If you get caught (and you will), you'll find yourself in a legal mess that attorneys just drool over! An ounce of prevention is worth a pound of regret!

For complete "do-it-yourself" information for incorporating, order my complete home study course "How to Create a Bulletproof Corporation."

Get That Property Out of Your Name!

There are over 80 million lawsuits filed every year in the United States. Landlords and real estate investors are especially susceptible to liability. Are you a target? Are your assets easy to locate? Is your real estate titled in your name?

You wouldn't walk around with a financial statement taped to your forehead would you? So why would you have your most valuable assets exposed to public scrutiny? Anyone can go down to the county courthouse or recorder's office and look up the owner of any property. Real estate records are now computerized, so all of your real estate holdings can be located at the touch of a button!

Any mortgages on your property will be recorded as well. Most recorded mortgages will state the amount of the original principal balance and the date the mortgage payments began. All one has to do is figure out the balance of your mortgage and subtract that amount from the market value of your house. Bingo! Now they know how much equity you have and hence whether suing you is worthwhile.

If a tenant or creditor is contemplating suing you, he will make an appointment with a lawyer. Unless he can afford an attorney by the hour ($150 and up), he will likely seek a "contingency-fee" lawyer. A contingency-fee lawyer does not charge by the hour; he charges a percentage of whatever he collects. Most contingency-fee lawyers will not take a case unless there is something upon which to collect. If you have no real estate in your name, then finding out your ownership interest will not be easy for a typical lawyer. It's not that lawyers are lazy. It's simply a matter of allocation of resources; lawyers focus on cases they can win and collect. If they don't find any assets in your name (and there is no other apparent "deep pocket"), they probably won't take the case. As you can see, appearing "broke" is the best lawsuit-repellent money can buy!

There is another problem with owning real estate in your own name. If a judgment is obtained against you and filed in any county in which you own real estate, all real estate in that county will have a lien attached to it. You cannot sell or refinance any property in that county, since no title insurance company will guarantee a clean title. You're stuck until you pay off the lien.

Some people use a corporation or limited liability company to hold title to their real estate. While these entities will protect you, they will not protect your property. If you own all of your properties in one corporation, a judgment against the corporation will create a lien on all property owned by the corporation. Furthermore, the directors and officers of a corporation are public record, so a corporation will not hide your ownership.

The solution for holding title to real estate is a land trust. A land trust is a revocable, living trust used to title ownership of real estate. Title to the property is held in the name of a trustee, who is forbidden to reveal the beneficial owner. The beneficial owner or "beneficiary" can be an individual, corporation or other entity for further protection.

Land trusts were first used in Illinois, hence the nickname, "Illinois Land Trust." In nine states (AL, FL, GA, HI, IL, IN, ND and VA), land trusts are specifically recognized by statute. In most other states the validity of land trusts are supported by common law and general trust principles (land trusts are not recognized in TN & LA).

A land trust, if properly setup and implemented, will hide your name from the public records. No one will know who owns the property but you, your attorney and the trustee. If a judgment is entered against you, a lien will not automatically attach to the property, since title is not in your name.

A transfer of realty into a land trust virtually no income tax consequences. A land trust is considered a revocable "grantor" trust under the Internal Revenue Code, so it does not require a separate tax identification number or income tax return. Thus, you continue report the property for income tax purposes as though you still own it. Furthermore, a transfer of property into a land trust will not usually trigger the "due on sale" clause of your mortgage.

So What are your waiting for? Get that Property Out of Your Name! You can find information and forms for creating personal property trusts in William Bronchick’s Land Trust Training Materials.