Why DYI Asset Protection Is a Bad Idea

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One of the inevitable questions anyone has when they’re either educating themselves on asset-protection in Texas or developing a plan for it is whether or not to go the do-it-yourself route. The proliferation of DIY legal websites the past several years has made it easier to cut out the middleman and forge ahead solo. While this method can save serious money from the frugal-minded, it can also cost you more money later on.

Sometimes, the best money you spend is upfront, when you’re designing an asset protection plan with Texan expertise, will save you more money down the line. When it comes to asset protection, you do not want to mistake frugality in legal blueprints for something that unnecessarily cheap. Asset protection done wrong can cost a person far more than just upfront cost, it can open up those assets to legal liability.

This article is will walk you through many of the typical problems and pitfalls that many Texans face when protecting their assets, from real estate, personal property, and more. Do-it-yourself solutions are still an option, but you should use them with a full understanding of the legal risks involved. Good decisions early on can save you later on. Or as the old idiom goes, you don’t want to be penny wise, pound foolish.

Different laws for different states

It may seem very basic to point out that all 50 states and American territories have different laws, but it’s an important point. Some of these differences provide vastly different experiences, both if you’re a domestic company (formed in-state), or a foreign company (formed outside the state). It’s not uncommon for an upstart business, investor, or person with asset protection in mind to “forum shop” for the laws best suited for their situation.

One of the reasons people look to move their personal assets to Texas is due to friendly laws for debtors. Texas is potentially the most debtor-friendly state in all of America, making it an ideal location for protecting assets like real estate, and personal property connected to that real property. Texas provides homestead exemptions, personal property protection, and constitutional provisions that explicitly make it harder for creditors to seize assets. But these are only one of the areas where you can see differences in Texas and the rest of the country.

State tax laws can impact your asset protection plan

The main difference for most states is their tax schemes. For instance, right now, Wyoming is one of the better states, in terms of tax code, to have a business. They have zero percent rates for both corporate and individual taxes. Property taxes there are among the lowest in the country. The worst, using that same measure, would be New Jersey, which has a litany of high taxes any person has to contend with in any corporate structure.

And that’s just measuring things like income tax and corporate taxes, which are the most basic form of taxation. If you’re putting together a full asset protection plan, you need to take into account other things like personal property taxes, retirement accounts, real estate, and more. Both California and New Jersey have tax codes that allow them to assess a tax if you plan on leaving those states. If your asset plan includes investment real estate, these exit tax states can create especially thorny issues that no DIY form can straighten out.

Moving from one of these heavily taxes states to a state with a light taxation code, like Texas, can mean carefully and methodically shifting assets and property around to avoid getting hit by pernicious tax laws. And as more and more people are looking to move to tax haven states like Texas, regulators in high taxation states are looking for ways to catch people leaving.

Finally, some states can also assess taxes on personal property, which can involve everything from personal family heirlooms to vehicles. If your asset plan includes personal property in it, and a homestead with all the personal property to run it could fit the description, then including those kinds of assets are important.

Taxes aren’t the only reason to set up shop in one state or another, most states have some kind of program to favor domestic businesses or residents. But taxation is unquestionably a factor, especially if investments are a key part of your asset protection plan. If protecting assets from creditors is more important, Texas rises to the top of the list. One of the first steps to take when designing an asset protection plan is figuring out what is most important for your specific needs. Not every situation is the same. DIY forms can point the way, but they cannot tailor an asset protection plan to your specific needs.

In short, having a smart plan can help you do two things. First, a smart asset protection plan helps you avoid paying more than legally required. And second, a smart asset plan can help you take advantage of various tax breaks afforded to residents.

Different tools for different asset plans

One of the reasons state laws vary is because of the wide variety of options in organizing property. Depending on your specific needs, assets can get placed into everything from corporations, limited liability corporations (LLC), one of many kinds of trusts, a simple will, and Medicaid benefits can get separate protection too. The variety of tools available for asset protection creates one of the most common pitfalls for the DIY asset planner: choosing the wrong legal structure.

For instance, one of the top options available on sites like Legal Zoom for asset protection is the LLC. They have articles on their site describing the LLC as “an important first step to protect your personal assets from being used to pay business creditors.” And while those articles have many caveats, the real answer to the question of the best vehicle for asset protection is: it depends. It depends on what assets you’re protecting, what your end goals are, and where you want to live.

In Texas, for instance, if your goals are to simply protect your home from creditors and get wage garnishment protection, the best course of action is to set up a homestead. The Texas Homestead exemption provides protection from almost all third-party creditors. When combined with Texas’s laws against wage garnishment, a person seeking debt relief can set up a quite comfortable lifestyle, if a bit cash-strapped, with the home and many personal assets, protected.

For Texas residents, the LLC comes into play once a person is stepping beyond protection in their personal life and moving towards asset protection of business and investment assets. The goals for an LLC allow for broader protections: “it creates a liability shield for protection of member-owners and, in the case of a series LLC, it creates individual compartments or series which insulate each series from the liabilities associated with other series and the company at large.”

Different kinds of LLC’s

Simply saying LLC isn’t enough though, there is a broad array of LLC types that can achieve different ends. We’ve already mentioned two, the member-owned LLC and series LLC’s; there are more. For a flavor, here’s a list of the different kinds of LLC’s available:

  • Single-member / Sole proprietorship LLC
  • General Partnership LLC
  • Family Limited Partnerships
  • Series LLC
  • Restricted LLC
  • L3C LLC
  • Anonymous LLC
  • Professional LLC (PLLC)

Some of these kinds of LLCs are offered across all 50 states, while others are limited to only one state. If one structure is particularly appealing, that might involve moving to that jurisdiction. Knowing all options available and choosing the right vehicle for your specific needs can dramatically impact legal liabilities, risks, and the kinds of taxes and fees owed.

Privacy, anonymity, and asset protection

For some people, the most important aspect to their asset protection plan is privacy. If this is true for you, New Mexico offers the anonymous LLC — the only one of its kind in the United States. While most states require some public filings as a part of their LLC formation process, New Mexico allows residents to file a completely private LLC, with no public disclosures.

New Mexico doesn’t require you to list your name or other LLC members in a publicly searchable database. There are no required annual reports required like most other states, and the one-time fee to start one is only $50. An anonymous LLC only has to “maintain only the registered agent for the LLC to remain in good standing.”

One of the complications with an anonymous LLC is getting a federal tax ID number (FEIN) and holding a bank account. With no publicly available information, banks and the federal government can provide hurdles to maintaining complete privacy and anonymity. Getting around these hurdles requires working with a qualified third agent and a New Mexico based attorney to ensure complete anonymity gets protected.

Other states, like Nevada, Wyoming, and Delaware promise privacy as part of their LLC formation. But you can still get stuck providing some publicly available and searchable information to the state government. If privacy is important in your asset protection plan, it’s worth looking at states to determine the best option for you, and working with professionals to ensure that privacy gets protected.

Using multiple states to maximize asset protection

For larger asset protection strategies, those who own real estate, restaurants, apartments or more, the best option might not be to use one state’s laws, but multiple. If asset protection is most important, then using multiple states and company structures can help separate assets from the activities performed on them. In the event of a lawsuit, it can prevent, or seriously hamper, any attempts to take the assets.

One law firm in Texas uses the laws of Texas and Nevada to accomplish this task, usually in situations involving investment properties.

A sound asset protection structure for a real estate investor involves two LLCs, one to hold title to assets (a holding company) and the other to manage them and engage in business generally (a management company). The holding company should be a series LLC while the management company may be either a traditional or series LLC. We prefer Texas and Nevada as states of formation.

A series holding company will have multiple compartments or series that are insulated from one another. For example, if there is a lawsuit affecting an asset in series A, then series B, C, and so on are not affected. The holding company stays quietly in the background, avoiding contractual or transactional privity with anyone. Few people, especially tenants, should even know that it exists. The holding company’s name should not even be similar to the name of the management company and, of course, neither name should provide a clue to the identity of the investor-owner.

In contrast to the holding company, the management company is visible and active. It collects rents, signs leases, deals with contractors and vendors, employs personnel, leases office furniture and vehicles, and otherwise engages with the public. It also enters into earnest money contracts to buy property on an “and/or assigns” basis. It is a separate, stand-alone entity with no real assets, an intentional target for litigation. If sued, one remedy is to walk away, form a new management company, and continue business as usual. If the result is a judgment against the old management company (which should have been maintained as nearly an empty shell) the loss to the investor is minimized.

This kind of strategy is highly advanced and requires heavy discussion with an experienced attorney. It’s not advisable for any DIY work, and if this is a goal for your business or investment properties, it’s best to consult an attorney early on.

Corporations and asset protection

After LLC’s, the next most common method to protect assets is to use the corporate structure. Corporations have existed longer than LLCs and require more formality. But if used correctly, they can shield the owners of the corporation from any personal liability and protect personal assets, leaving the corporation to take on all legal risks. The protections a corporation provides are broad:

The appeal of corporations as an asset-protection tool lies in the limited liability provided to its officers, directors, and shareholders (principals). Corporate principals have no personal liability for corporate debts, breaches of contract or personal injuries to third parties caused by the corporation, employees or agents. While the corporation may be liable or responsible, a creditor is limited to pursuing only corporate assets to satisfy a claim. The assets of the corporate principals are not susceptible to claim or seizure for corporate debts. This protection from personal liability distinguishes the corporation from other entities, such as partnerships or trusts.

Like LLCs, there are many different kinds of corporations, and the rules surrounding them vary by state. In general, however, the kinds of corporations available are:

  • C Corporations
  • S Corporations
  • B Corporation
  • Close Corporations
  • Non-profit corporations

C and S corporations are similar in most ways except for two key points. An S Corporation does not pay the corporate tax rate, it pays the personal tax rate. The “S corps allow profits, and some losses, to be passed through directly to owners’ personal income without ever being subject to corporate tax rates.” The S Corp is also limited and “can’t have more than 100 shareholders, and all shareholders must be U.S. citizens.”

Both C and S corporations offer the same kinds of asset protection, the main difference is how states tax each entity. A B Corporation, or benefit corporation, is one where the shareholders hold the company responsible to “produce some sort of public benefit in addition to a financial profit.” Taxation and requirements for B corporations are mostly the same as other corporate forms, although some states may require extra paperwork to prove the benefit status.

Close corporations are typically non-publicly traded corporations that are closely held by a small group of shareholders. The main benefit of a close corporation is that they’re “exempt from a number of the formal rules which usually govern corporations. The specifics vary by state, but usually a close corporation must not be publicly traded, and must have fewer than a set number of shareholders.” The shareholders can usually run the corporation directly, avoiding shareholder meetings and votes. State rules vary, however, and it is best to discuss with an attorney of the state you are wanting to incorporate in if this option is best for your asset protection plan.

Finally, non-profit corporations probably wouldn’t be an asset protection vehicle for most people. But if you’re looking at running a non-profit, incorporation can provide legal protections to protect personal assets. It depends on the situation and assets involved.

Wills and trusts in asset protection

Wills and trusts are mostly used to handle personal assets and estates but in different ways. The easiest way to think of how wills and trusts work pretty simple. A will sets out your personal desires for how all the assets of your estate should get disseminated in the event of death. It’s a set of instructions for people to follow. A trust sets out how everything should get handled while you are alive, and sets out protections for assets in the present time.

Trusts are often a very effective way to protect assets and avoid the time and cost of probate court. The benefits for a trust are usually broad:

Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.

Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.

Trusts can become a vital component of long-term estate planning and can protect many assets both in life and death. A smart estate planner can effectively balance the pros and cons of using something like an LLC or a Trust in forming the best action plan.

Texas trusts and asset protection

In Texas, there are a number of trust vehicles available to pursue, depending on the kind of assets involved and the end goals in mind. The two most common forms of trust that people use are Testamentary Trusts and Revocable Living Trusts.

Testamentary trusts

A testamentary trust goes into effect when the person dies, and the trust arranges how the estate will get dispersed and used. It’s akin to combining wills and trusts into one concept to handle everything after death, and it leaves all the assets free for a person to use as they please during life. Because Texas has a relatively easy probate process, especially in comparison to other states, a well-drafted will and trust can move things quickly.

Revocable Living Trust

The revocable living trust, while well known, gets less used in Texas. In a revocable living trust, the trust gets created “during the lifetime of either an individual or a married couple, and the person(s) creating the Trust is known as the Grantor(s). At the time of the death of either one or both Grantors, the assets held in the Trust are distributed according to the provisions of the Trust agreement, rather than the provisions of a Will. As a result, if all the Grantors’ assets are held in the Trust, then they can completely avoid the probate process.”

Educational trusts

Texas also provides educational trusts, spendthrift trusts, Crummey trusts, and irrevocable life insurance trusts. Educational trusts are a way to ensure that saved money goes directly to educational ends, like college or vocational schools, instead of getting spent on anything else. The common use is grandparents saving up money for grandchildren to use for college. This trust can avoid gift taxes and generally can’t get attacked by creditors.

Spendthrift trusts

Spendthrift trusts “protect the assets of the trust from the creditors of the person(s) creating the trust and also from the creditors of the beneficiaries of the trust, while still allowing the assets in the trust to be used for various purposes of the trust beneficiaries (such as providing for health care, education, supplemental income, housing, etc.).” The most common situation here is when a person giving the money is seeking to protect it from other creditors, or the creditors of the beneficiary.

Crummey trusts

Crummey trusts, named after a Supreme Court case, are a specific kind of trust to get around gift taxes. In Crummey trusts “the beneficiaries of the trust are deemed to have received the gift (and therefore qualify for the annual gift tax exclusion) if each beneficiary is given a limited right to withdraw the gift from the trust after it is made. Once the gift has been made, the trustee of the trust must send letters to the trust beneficiary.”

Irrevocable Life Insurance Trusts

Finally, Texas also provides Irrevocable Life Insurance Trust (ILIT) to provide a way to avoid estate taxes arising from a life insurance policy paying out. The ILIT aims to “avoid the tax problems associated with life insurance policies. In an ILIT, the ownership of the life insurance policy is transferred into the Trust, and the trust thereafter pays the premiums on the policy. When the insured person dies, the proceeds of the policy are payable to the Trust, rather than to the insured’s family. Because the policy is not owned by the decedent at the time of his death, the proceeds are not included in his gross estate for purposes of computing estate taxes.”

Medicaid Asset Protection Trusts

Finally, some states recognize Medicaid Asset Protection Trusts (MAPT). These are specific trusts that seek to protect both a person’s assets and their Medicaid eligibility. Medicaid Asset Protection Trusts “protect a Medicaid applicant’s assets from being counted for eligibility purposes. This type of trust enables someone who would otherwise be ineligible for Medicaid to become Medicaid eligible and receive the care they require be at home or in a nursing home. Assets in this type of trust are no longer considered owned by the Medicaid applicant.” Using a MAPT can protect a person’s assets and their Medicaid to reduce the costs of healthcare.

Laws routinely change on state and federal level

That’s a taste of the myriad number of tools at the disposal of anyone protecting their assets. Some of these options can be combined with other tools, some are incompatible with each other. And sometimes compatibility from one tool with another change from year-to-year as federal and state legislatures pass new laws. Laws do change. On the federal level, Congress passes between 200-500 new laws every year — those are newly enforceable laws that get enacted. The 50 states and outlying territories of the United States all pass their own laws each year — which can make DIY forms perfectly usable one year, but worthless the next if the website doesn’t update its form and instructions regularly.

The most recent change on the federal level came from the Tax Cuts and Jobs Act, signed into law in December 2017, which changed gift taxes and exemptions: “the exemption from federal gift, estate and generation-skipping transfer tax is increased to $10 million, indexed for inflation, for decedents dying, gifts made and generation-skipping transfers made after 2017 and before 2026. This provision effectively raised the exemption on Jan. 1, 2018, to approximately $11.2 million per person, which is the largest exemption from gift, estate and generation-skipping taxes in the history of the federal transfer tax system.”

Limited legal advice available in DIY forms

DIY form sites, if they want to stay up, are prohibited from giving legal advice. The same is true of court systems, like the federal bankruptcy courts, which also offer free forms to the public, but cannot offer legal advice. US Bankruptcy Courts tell pro se filers, those using DIY other free forms:

If you file bankruptcy pro se, you may be offered services by non-attorney petition preparers. By law, preparers can only enter information into forms. They are prohibited from providing legal advice, explaining answers to legal questions, or assisting you in bankruptcy court. A petition preparer must sign all documents they prepare for you; print their name, address and social security on the documents; and provide you with a copy of all documents. They cannot sign documents on your behalf or receive payment for court fees.

They also tell pro se filers that everyone is “expected to follow the rules and procedures in federal courts and should be familiar with the United States Bankruptcy Code (link is external), the Federal Rules of Bankruptcy Procedure (link is external), and the local rules of the court in which the case is filed.” This advice is true for nearly anyone filing without a lawyer or legal help. Meaning, if asset protection is the highest concern, those assets may not get the fullest protection from law if DIY forms and self-research lead you down the wrong path.

Life changes will impact asset planning

Life changes can greatly impact the best asset protection plan for a given situation, whether business or personal. For business owners, “creating and implementing a comprehensive asset-protection plan involves almost every aspect of your business. The goal of the plan is to protect your business assets within the framework of your business operations. Protecting your business is both allowed and encouraged, using honest, legal concepts and entities where appropriate.”

DIY forms can start an asset protection plan, but they can’t steward a plan longterm and revise the plan as situations change. Those changes can be everything from booming business, to bankruptcy; from marriage to divorce; many kids and grandchildren or none; anything can impact the long term way to protect assets. Those changes include new or amended laws that impact the best course of action.

DIY services are a start, but not an end. It’s perfectly fine to start with these services or take the end product they produce to a specializing attorney, accountant, or estate planner. Oftentimes these DIY forms rely on standard boilerplate language that appears in a typical contract. In a study of such boilerplate though, the American Bar Association warns that “[b]lind use of boilerplate in real estate contracts can result in costly litigation in which judges and jurors lacking first-hand knowledge of the parties’ contractual intentions decide the fate of your case based on provisions that were inadequately considered or negotiated during contract drafting.”

There are multiple pitfalls found with people who have relied on DIY forms or filed pro se with clerks and courts. The easiest mistake is choosing the wrong asset protection vehicle for their situation. They believed they got protections that did not apply to their specific situation. Other times, the asset plans were too narrow and didn’t account for unforeseen situations, such as medical emergencies or incapacity. Maybe a deceased person failed to update their will to account for new children or beneficiaries, or maybe the property that could get included in the estate expanded beyond the original will’s goals. Either way, probate court will have to sort the matter out.

In Texas, if you fail to correctly form a homestead exemption, as an example, that can lead to a creditor being able to seize a home to fulfill a debt. The homestead exemption is a constitutional right in Texas, with very broad and low requirements to fill — but there are still requirements to meet. The same is true of any asset protection vehicle you end up choosing.

At the worst end of the spectrum, an asset protection plan trying to protect a business or its assets can have unforeseen holes in it — see things like the COVID-19 pandemic throwing all business plans out the window. Or maybe the business owner is failing to follow requirements that an attorney would inform them about, but the DIY form site doesn’t know or can’t advise the person using the forms. That can lead to the creditors or the state being able to sue and pierce the corporate structure to seize assets — even personal assets — to fill debts.

Conclusion

The best asset plan is one tailored to your specific needs, desires, and adapts to changing situations. A DIY form is a great way to educate yourself on a given topic and explore avenues to protect assets. There are more tools available than any form site can tell you about, and certainly, more than is contained in this article. Exploring those options with a competent professional creating something to match your exact needs, and adapt them as needed, will go a long way towards ensuring you don’t fall into the trap of being a penny wise, but pound foolish.

You may save money on a cheap asset protection plan on the front end, but then lose big in a messy legal proceedings later on. Asset protection plans are not prohibitively expensive, but due diligence is required up front for a great plan.


Daniel C. Vaughan is an experienced attorney who has worked on or consulted in numerous lawsuits for Fortune 500 companies and the top law firms in the country. He’s worked on multi-state class action lawsuits, government investigations, and more. He leads teams of attorneys to bring new technology to bear on legal problems to reduce legal spend and find innovative solutions. He received a law degree from Regent University School of Law and a Bachelor of Science from Middle Tennessee State University where he graduated from the University Honors College.