Texas has an established history of being a haven for debtors. For more than a hundred years, there has been a saying “So-and-so has gone to Texas.” Sometimes this meant that someone had physically relocated to Texas; just as often it meant that he had left town to avoid his creditors. This grand (if somewhat ethically dubious) tradition continues. The Texas Property Code, the Texas Business Organizations Code, and the Texas Constitution make it possible for individuals and businesses to shield substantial income and assets (particularly equity in real property). Together, these are among the most favorable asset protection laws in the United States. 

Texas offers unique protections for individuals that should be integrated into any asset protection plan. These “homestead protections” are principally contained in Art. XVI, Sec. 50 of the Texas Constitution and in Chapters 41 and 42 of the Texas Property Code. They apply to both income and assets. In other states, a judgment can put you on the street without personal belongings or even your clothes - but not in Texas.  If a lawsuit is anticipated, or if a judgment creditor is expected to attempt collection, then it is wise to review and maximize these protections.  It is even wiser to formulate an asset protection strategy long before these adverse events occur.

Sec. 28 of the Constitution prohibits garnishment of wages, which protects the income of a person who receives a salary or wages.  A creditor cannot touch either one.

As to real property, the homestead is the crown jewel.  It is protected from forced sale for purposes of paying debts and judgments except in cases of purchase money, ad valorem taxes, owelty of partition (divorce), home improvement loans, home equity loans, and reverse mortgages. No matter how much the home is worth, an ordinary judgment creditor cannot force its sale.  Furthermore, an attempt by a creditor to place or enforce a lien against the homestead can be defeated using the procedure in Texas Property Code Sec. 53.160.  See our companion article, Lien Removal in Texas.

It is also possible to move safely from one homestead to another. The Property Code provides in Sec. 41.001(5)(c) that “The homestead claimant’s proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.” This expressly permits homestead equity to be rolled over from one homestead to the next. Taylor v. Mosty Bros. Nursery, Inc., 777 S.W.2d 568, 570 (Tex.App. - San Antonio 1989, no writ). However, beware of the propensity of title companies to collect judgments upon sale of the homestead in disregard of Sec. 41.001(5)(c).  In such cases, the seller should aggressively assert the statute; if the title company insists on collecting for the judgment, change title companies.

A considerable amount of personal property is also exempt from execution. Property Code Sec. 42.001 et seq. specifically lists the amount and types of exempt personal property, including a vehicle for each licensed driver in the household; home furnishings; and the debtor’s IRA or 401(k). In keeping with Texas’ frontier spirit, you can even keep two horses if you wish.

Cash is the most vulnerable of all assets, even in Texas. Property Code Sec. 42.0023 protects $5,000 in cash, but this is not much comfort if you are sitting on $50,000 or $500,000.

Note that only individuals (not corporations, LLC’s, or partnerships) may take advantage of homestead protections. In most cases, this means converting non-exempt assets (cash, for instance, or investment real estate) into exempt assets. As an example, one might consider paying off the homestead or primary vehicles. The conversion process can be tricky, particularly if a lawsuit is pending. It is best accomplished with the guidance of an attorney knowledgeable in this field. Our companion article, Homestead Protections in Texas, offers more detail on this subject.

Clearly, if one owns more than one’s home or has investment property, the statutory homestead protections are not enough. The next level of protection is achieved by forming a Texas Series LLC which accomplishes two critical goals: it creates a liability shield for the protection of member-owners; and it creates individual “series” or compartments which, when properly implemented, insulate each series from the liabilities associated with the other series (details below). The benefits? Simplicity and economy. An investor no longer needs a dozen LLC’s and corporations to safely do business.

Our core recommended asset protection structure involves two LLCs – one to hold assets and the other to manage them. The “holding company” may either be a Texas Series LLC or a Nevada Series LLC. It stays quietly in the background. The management company is a separate, stand-alone entity that does business with the public (and therefore attracts lawsuits).  It is a disposable shell.

All LLC documents - beginning with the Certificate of Formation (Texas) or Articles of Organization (Nevada) and continuing with the company agreement - should be drafted with an eye toward asset protection. It is critical that company documents discourage creditors from attempting to seek control of any member’s interest.

Part of asset protection is deterrence. For instance, the company agreement should provide that any creditor succeeding to a membership interest by means of assignment, collection action, or execution on a judgment will not be able to vote that interest; not be able to serve as a manager or officer; not be able to direct that assets of the company be sold; and not be able to alter or reduce the company’s ability to do business.  Who would want to spend time and money suing a company when they know in advance that even victory would be worthless? For more detail, read our companion article The Texas Series LLC.

One of the first goals is to transfer investment property into the company.  In the case of real estate, this is done by means of a general or special warranty deed; if the asset is a business, then a bill of sale is used. 

Are due-on-sale clauses a problem in the transfer of real estate? Almost never, in spite of what your lender or internet alarmists may tell you. Lenders have their plates full with monetary defaults and generally do not accelerate a performing a loan in such circumstances, especially if the property is being transferred to borrower’s personal company. In fact, this author has never seen that happen. Refer to our companion article, Due-on-Sale Clauses in Texas.

Tenants, creditors, vendors, and the public should be instructed that they are doing business with your LLC (or, if you are utilizing our preferred two-company strategy, with the shell management company).  They should invoice this LLC and make payments to it. When a W-9 is required, it should contain the LLC’s tax identification number. There is an old rule of thumb that people tend to sue the person or entity they write checks to . . . so ideally, your personal name, address, or social security number should never appear anywhere on any paperwork or documents executed with third parties.

Once a company is formed, it must be maintained with appropriate actions and documentation. There are minimum actions and formalities that must be observed in order to order to preserve the LLC’s liability barrier – which is the main reason one forms an LLC in the first place. These include proper organizational documents; issuing membership shares; holding annual meetings; obtaining a TIN number and filing tax returns; having a company bank account; and other actions which establish the independent nature of the entity. Failure to do this sort of routine maintenance is a common mistake. It can make your company vulnerable to a “piercing the veil” suit and therefore be fatal to your asset protection plan.

Asset protection strategies fall into two groups – strategies implemented in advance of collection action and suit by a creditor/plaintiff; and strategies that can be put into effect afterward. It is by far preferable to plan ahead and be prepared, since the range of pre-suit alternatives is much greater.  After suit is filed, depending on the circumstances, options are reduced by laws relating to “fraudulent transfers” – moving assets around to defeat the legitimate claims of creditors – and courts are on the lookout for these. After suit is filed, the Texas defendant may be limited to converting assets to homestead-exempt items (one’s primary residence, cars, etc.), moving depository accounts into cash and USPS money orders, and pre-paying certain key items (taxes, attorney’s fees, and the like which are unlikely to be questioned as fraudulent). 

Once litigation is commenced, your actions may be subjected to scrutiny by the creditor/plaintiff and its attorney. Obvious attempts to maneuver and manipulate your assets will likely be detected. The creditor/plaintiff may then ask the court to set aside or unwind the transaction as a fraudulent transaction (i.e., specifically intended and designed to defeat a creditor’s legitimate claims). Fraudulent transfer rules allow courts to reach back up to two years. Such transfers are generally indicated by so-called “badges of fraud,” including transfers to a family member; whether or not suit was threatened before it was filed; whether the transfer was of substantially all of the person’s assets; whether assets have been removed, undisclosed, or concealed; whether there was equivalent consideration for the transfer; and whether or not, after the transfer, the transferor became insolvent as a result (e.g., made his cash disappear all at once).

In post-suit strategy, it is important to move assets in such a way that you can utilize “the ordinary course of business” defense.  In other words, you need to be able to convince the court that the action in question is something you might legitimately have done anyway, for good reasons that are independent of avoiding your creditors’ claims.

How do creditors that are suing you find out when you move your assets around? By using the discovery process (interrogatories, requests for production of documents, and depositions - all under oath) to inquire into your transactions. The scope of this process can be wide indeed, reaching back several years. Failure to fully respond is grounds for contempt – although “fully respond” should never be interpreted as supplying more information than is absolutely necessary. Creditors may do research on you – particularly if the debt is very substantial – but most of the time they have only the information that you give them in pre- and post-judgment discovery.

The most pernicious discovery occurs post-judgment, since creditors can then go beyond the facts of the case and compel disclosure of sources of income as wells the location and value of assets – even assets that are legally exempt and cannot be touched. This can be a headache since creditors may nonetheless attempt to go after the exempt assets, forcing a debtor to seek protection from the court. You can see why it is important that your attorney make a creditor fight vigorously for every bit of information that is provided in responses to discovery. 

An investor should consider setting up a management or operating company that is unaffiliated with the asset-holding LLC and which will serve as the front line of defense against tenants, creditors, and plaintiff’s attorneys. This entity is intentionally designed as a shell or pass-through, without substantial assets. Many people already have an LLC or corporation and wonder what to do with it now that a series LLC is available in Texas. Utilizing the existing entity as a management company is an excellent option, so long as it is “clean” - without judgments, unpaid taxes, extensive contractual obligations, or other adverse baggage.

The management company should own no substantial amount of real or personal property – it should lease everything, including vehicles.  It should also hire and pay employees.  The public should do business solely with your management company and not even be aware of true underlying ownership or the location of assets – which are of course held in your Texas or Nevada Series LLC.

Why this structure? In addition to its management duties, the role of the management company is to serve as a target that is deliberately put “out there” to draw fire away from the owners and their assets. If anyone sues and obtains a judgment against the management company, it will be uncollectible.  If the management company becomes burdened with lawsuits, then it should be abandoned and a new one formed. 

What is to keep the creditor/plaintiff from suing the holding company? The legal doctrine of “privity.” Since the holding company has not signed leases or contracts or done any direct business with anyone, it is highly unlikely that legal action can be successfully maintained against it. Any such suit would be subject to dismissal on a motion for summary judgment.

1. establish a Texas Series LLC to own and hold (but not manage) investment properties and businesses (the “holding company”);
   
   
2. form a separate Texas LLC to act as a “shell” management company (which owns no significant assets) for dealings with tenants, vendors, contractors, and the public - income passes through to the holding company;
   
   
3. file assumed name certificates (DBA’s) for the holding company and for the management company and utilize these names on checks, letterhead, cards, etc.;
   
   
4. transfer properties held in personal names into individual series of the holding company (Series A, Series B, etc.) using properly-worded warranty deeds;
   
   
5. separate homestead and other execution-exempt items from investments, then reduce debt on these items in order to maximize protections afforded by the Property Code and Texas Constitution;
   
   
6. form a living trust for the homestead to avoid probate, transfer the home into it, and then execute a “pour over” will to transfer other assets to the trust upon your death, thereby eliminating legal hassles for your heirs.
   
   

1. establish a Nevada Series LLC to own and hold (but not manage) investment properties and businesses (the “holding company”) achieving a measure of distance and anonymity from Texas plaintiffs;
   
   
2. form a separate Texas LLC to act as a “shell” management company (owning no significant assets) for dealings in Texas with tenants, vendors, contractors, and the public - income passes through to the Nevada holding company;
   
   
3. file assumed name certificates (DBA’s) for the holding company and for the management company and utilize these names on checks, letterhead, cards, etc. printed that way;
   
   
4. transfer properties held in personal names into individual series of the Nevada holding company (Series A, Series B, etc.) using properly-worded warranty deeds;
   
   
5. separate homestead and other execution-exempt items from investments, then reduce debt on these items in order to maximize protections afforded by the Property Code and Texas Constitution;
   
   
6. form a living trust for the homestead to avoid probate, transfer the home into it, and then execute a “pour over” will to transfer other assets to the trust upon your death, thereby eliminating legal hassles for your heirs.
   
   

Trusts come in all shapes and sizes – do not be fooled, there is no “standard form” of a trust that is good for all purposes in all states.

An appropriately drafted trust can be useful because it can provide:

(1)  anonymity, since underlying ownership need not be revealed in the deed of a property into the trust;

(2)  ease and anonymity of transferability, since beneficial interests can be privately assigned without necessity for recording a deed or other instrument; and

(3)  probate avoidance, since the beneficiaries acquire their interest automatically without probate proceedings or the intervention of a court.

Note, however, that a trust does not have a liability barrier as does an LLC – so trusts standing alone are insufficient for asset protection.  Trusts are merely one tool in the toolbox.

How do an LLC and trust work together? Once the LLC is established, it can choose to transfer its investment properties to an “anonymity trust” which indicates nothing of record about real underlying ownership.  Example: title to property is transferred from “ABC LLC” (an entity of record with the Secretary of State) into the name of the “Main Street Trust” (a private entity that has no public information available).

Note: it is a myth that one must even name the trustee in the deed, since county clerks gladly record such deeds. Anyone seeking to know who the principals are and what assets they may have has their work cut out for them.

Under Texas law one must actually create a written trust agreement for this strategy to work. There are two good reasons for this: first, a title company will want to see a copy of the trust agreement before transferring title out of the trust to a new buyer; and second, courts are likely to ignore the existence of an alleged trust that has no written agreement behind it.

Apart from investments trusts, there are also living trusts (or inter vivos trusts) which are a valuable probate-avoidance device for the homestead and should be considered by everyone who owns a home and has a family. Anyone who has probated an estate is familiar with the procedural nightmare that occurs when dealing with attorneys and judges who will happily reduce the estate “castle” to rubble.

Do not be deceived into purchasing so-called standard trusts off the internet. Firstly, there is no such thing as a “standard trust form,” in any state; secondly, Texas has very particular trust laws which can be found in the Texas Trust Act (part of the Property Code). Consult a Texas attorney experienced in trusts to be certain that your trust will not only be valid in Texas but will accomplish what you want it to do.

More information on investment trusts is available in our companion article, Land Trusts in Texas. Information on probate-avoiding inter vivos trusts for the homestead an be found in Living Trusts in Texas.

One’s goal should be to achieve maximum anonymity combined with the liability barrier created by one or mores series LLC’s.  Such a strategy creates legal, practical, and psychological obstacles to a potential creditor/plaintiff.

Anonymity is an important aspect of asset protection. An LLC can provide a certain measure of anonymity depending on the amount of information that is furnished to the Secretary of State when the initial document (the “Certificate of Formation”) is filed. The Certificate of Formation requires three names and addresses: the registered agent (physical address only), the initial manager(s), and the organizer. This firm acts as our clients’ organizer and, for an additional fee, as registered agent.

A word about the company’s registered address: some people go to the trouble of forming an LLC but then list their home as the registered address. This hardly enhances anonymity, nor does it prevent a constable from knocking at your door at 5:30 a.m. to serve a lawsuit. A physical address (not a box) is required, since the constable cannot serve a mailbox. Recently, the Secretary of State has become more aggressive in checking whether or not registered addresses are really mailbox stores. They occasionally even Google the address. If they think it is a box, the Certificate of Formation will be rejected.

Either use your office address, if you have a physical office; use your attorney as registered agent of the company ($250 annual charge); or make another arrangement for a real street address and suite number (which cannot contain the words PMB, POB, Box, or a double suite number, which is an obvious indication of a box). 

Tenants, vendors, contractors, and the public at large should never have your homestead address. 

It is often asked if obtaining liability insurance alone is sufficient. The answer is a resounding “No.” Insurance is a passive measure.  One needs to be more proactive to achieve true asset protection. All legal experts recommend a sensible mix of insurance and active asset protection measures, such as forming an LLC. The principal reason is that insurance companies are in the business of collecting premiums and denying claims – thus every effort will be made by the insurer to exclude or avoid coverage in case of loss (particularly if a creditor/plaintiff alleges fraud, which is never covered). It may then become necessary to sue the insurance company. 

Also, even if the insurer concedes coverage, extravagant claims made in lawsuits may (and often do) exceed available limits.  Moreover, the existence of a sizable policy and umbrella may in and of itself encourage a lawsuit because it will be perceived by the plaintiff’s attorney as a tempting target!  Nonetheless, having adequate insurance is a necessary evil.

Bankruptcy – Chapter 7 in particular - is the “nuclear” option in asset protection. Even so, rules against fraudulent transfers (called “preferences” in the Bankruptcy Code) apply in this area as well. The court can reach back up to a year. Also, false information in a bankruptcy petition may be investigated by the FBI; and of course bankruptcy does not discharge taxes (although the IRS may be more likely to work with you on a payment plan), child support obligations, student loans, and any items that a debtor fails to list on the petition.

The Bankruptcy Code allows a debtor to choose between the federal exemptions (i.e., list of exempt assets) or the state ones – and in Texas we always choose the state exemptions since they are so favorable. 

By and large, filing bankruptcy is an admission that your previous asset protection strategies have failed.  The bankruptcy trustee and the court assume control of your life.  It is a last resort.  This office does not handle bankruptcy – we recommend obtaining a board-certified lawyer in the field. 

Your lifestyle should be consistent with maintaining an effective asset protection strategy. In addition to all the other suggestions contained in this article relating to anonymity, creating a liability shield, maximizing protections under the Texas homestead laws, and the like, you should:

There are many other asset protection devices and entities that are beyond the scope of this introductory article.  Included among them are:

Family Limited Partnerships There is much discussion about family limited partnerships (FLP’s) in states other than Texas.  For Texas asset protection, this author prefers LLC’s and/or trusts. Texas FLP’s (like LLC’s) must be filed with the state and pertinent ownership information is revealed; also an in-state registered agent must be designated to receive service of process if the partnership is sued. So why not just form an LLC (especially a series LLC if assets are in real estate) and then move title to assets into a land trust?  The result is superior liability protection and anonymity. Another drawback of the FLP is its concept of a “friendly lien” on the homestead, which is not workable in Texas. 

Limited Partnerships with an LLC General Partner. These vehicles are more complex and expensive, usually used in larger commercial transactions, and are beyond the scope of these comments.

Internet services allegedly provide “self-help legal services at your specific direction.”  This is internet huckstering. All LLC’s are not created equal. Your goal should not be to merely “set up an LLC.” Your goal should be to establish a Texas Series LLC that includes sophisticated asset protection provisions beginning with the very first document that is filed. At best, internet services provide a “plain vanilla” company with no bells or whistles; there is no focused effort to maximize asset protection. Here is what such services do not provide:

Additionally, the documents provided by such services are simplistic and barely above the level of junk. This office spends a fair percentage of its time cleaning up the inadequacies in companies formed this way. 

Absolute, true “bulletproof” asset protection is probably not achievable in the real world – even in Texas – in spite of claims made by internet and seminar “gurus” who have never spent time in a real court of law in front of a real judge. However, one can come close this ideal by using the correct structure.

Asset protection is ultimately about preparation and advance planning that have the effect of establishing a sound structure, deterring lawsuits, and exhausting your opponent’s determination and resources. If you can make it difficult to find your assets and make it unacceptably expensive and time-consuming for a plaintiff and his attorney to reach them, then your asset protection plan has done its job. Every dollar of cost that is imposed on a potential plaintiff or his attorney makes your income and assets incrementally more secure and makes it less likely that you will have to endure the living nightmare of a lawsuit and execution on a judgment.  

Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely.  The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences.  Consult your tax advisor as well.  This firm does not represent you unless and until it is expressly retained in writing to do so.

THIS DOCUMENT IS NOT INTENDED TO BE USED, NOR CAN IT BE RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES IMPOSED UNDER UNITED STATE FEDERAL TAX LAWS. THIS DOCUMENT DOES NOT CONSTITUTE DOES NOT CONSTITUTE A TAX OPINION OR OTHER ADVICE TO WHICH CIRCULAR 230 IS RELATED.

Copyright © 2011 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information on this and other topics is available at his three web sites, http://www.LoneStarLandLaw.com and http://www.TexasSeriesLLC.com and http://www.TexasAssetProtection.com.