Behind the Deed - Learn How to Protect Your Property - Aaron Phillips & Matt Davidson

Sep 05, 2023
 

How do you acquire and manage properties across states without falling into unseen traps? Are you worried that somehow you’ll miss a detail, and what seemed to be a good property deal will start to bleed cash because you didn’t see the small print?

In this episode of The Hidden Money Podcast, join legal experts Aron Phillips of Aron Phillips Law and Matt Davidson of Davidson Law Group, as they explore the world of property protection strategies, including setting up an entity. Discover how to navigate the complexities of state-specific regulations from liability concerns to tax savings, and effectively firewall your assets.

 

In this episode, we discuss

  • Legal protection, liability, and ownership structures for real estate investments, especially connected to short-term rentals.
  • Holding properties in LLCs, managing expenses, and using property management agreements for efficient operations.
  • Challenges of conforming loan rules, need to hold property personally for a duration before transferring to an LLC.
  • Navigating legal uncertainties around property ownership, mortgages, and LLC transfers while minimizing risks.
  • Creating clear agreements between individuals and LLCs to define roles and property management responsibilities.
  • Options like "pocket deeds" for unrecorded property transfers to achieve anonymity and asset protection.
  • Seeking expert legal advice before making real estate decisions to ensure legality and protection.
  • Importance of legacy planning, peace of mind, and safeguarding assets for the future.

To Learn More

Get in touch with Aron via phone (817) 903-1414 or email [email protected] 

You can visit his website at The Law Office of Aron Phillips, PLLC – Fort Worth, Texas (aphillipslawoffice.com)

Connect with Matt at (817) 900-6529 and explore his expertise at Your Texas Legacy | Davidson Law Group

To access the bonus tax content mentioned in the episode, go to https://www.hiddenmoney.com/bonus

To start using the tax code as a tool to grow your wealth, schedule a call with Pine & Co. CPAs: https://www.pinecocpas.com/consultation

 

TRANSCRIPT

Mike Pine: [00:00:00] Welcome to The Hidden Money Podcast. Today, we are super excited to have attorneys on. Normally, we aren't excited to have attorneys involved in anything, except on this podcast and on this recording.

These are two very nice attorneys, which sets them in the top percentile of all attorneys out there.

Aron Phillips is our attorney at Pine and Company.

He's my personal attorney. He's a good friend, and I don't do anything that might involve legal liability without running by Aron first,

and Matt is a friend and colleague of Aron's. He is a asset protection attorney. We would love to delve into some of the hidden secrets, into asset protection, into liability protection, and when it's necessary to set up an entity.

So, thank you very much for being here, Aron, and thank you, Matt for being here.

Matt Davidson: My pleasure.

Mike Pine: So, as Texas attorneys... first of all, I have to say, I'm not an attorney. Kevin's not an attorney. We're not licensed or authorized or qualified to offer legal advice, but you should always speak with and consult with an attorney when it [00:01:00] involves anything involving liability on your side. That being said, do you have a primer for you, Aron or Matt, regarding your disclaimer?

Aron Philips: Sure. I'm just licensed in Texas. My main area of focus for my practice is business law, contracts, various kinds of liability. I can't practice in Wyoming or Nevada or anywhere else that we try to set up an LLC for anonymity purposes.

So, I'll kick it over to Matt for his introduction.

Matt Davidson: Yeah, absolutely. I am also only licensed in Texas. I have enough work here that I don't even have time to go anywhere else. Anything that I talk about on here is not legal advice. It's for educational purposes only. But Aron's absolutely right, I'm an estate planning attorney at the very heart of it.

So, I do everything from simple wills up to complex trust, to asset protection, to anonymity planning, and all of the like.

Mike Pine: Awesome. Well, thank you both for being here. As Kevin and I have discussed many times, there [00:02:00] is hidden money in alternate investments. There is hidden money in starting a business. At least in tax savings, there is. Aron is my attorney - when should I consider setting up some kind of legal entity to afford me a corporate veil of protection?

Aron Philips: If you are conducting any sort of commercial enterprise that might create liability, you should consider it. And then also, to your professional area of expertise, if there could be some tax savings in operating that commercial enterprise by being able to deduct expenses, or create some sort of tax mechanism where you're going to be taxed in a lower bracket, or to some of the things that you might collaborate with Matt on, if you can defer taxes by sticking it in a trust of some kind.

So, most of the time when you're doing any sort of commercial enterprise, you should at least consider forming an entity.

Mike Pine: Or at least call our attorney and discuss it with him correctly.

Kevin Schneider: Yeah, as CPAs, we know enough to be [00:03:00] dangerous when it comes to here, just like you all know enough to probably be dangerous in taxes, but we really want to stay in our lane and really focus on what we know, and so, that's why we network really well with attorneys such as yourselves because there could be a ton of hidden money,

and on the backside, hidden money by not losing your shirt in court. So, making sure everything's structured right, making sure you're protected, your family's protected, but also getting the best tax structure possible given your situation because every situation's different. And so, having that pinpointed personal consultation with both a CPA and an attorney to get a personalized plan, because LegalZoom is great,

it's just not going to get you to where you need to go because every situation's different. So, it's like you don't want to Google your health issues. Web MD's going to say you're going to die tomorrow. You got to reach out to somebody. So, that's why we value you guys. Thank you so much for being here.

Aron and Matt, because a lot of our listeners could be all over the country, how do you walk [00:04:00] through a client who has a legal issue? As a Texas attorney, how do you walk through something in another state? Are you even able to handle those kinds of issues?

Or do you all have a network where you all even breach out to other attorneys saying- we have a legal issue in North Carolina.. How do you all tackle those?

Matt Davidson: I'll go ahead and take this first. So I often do have to deal with other attorneys in other states because when I do trust planning or LLC planning, a lot of times my clients own properties in multiple states, and so I'm almost always having to reach out to other attorneys to have them deed those properties into the LLCs or the trust that I'm developing,

and almost always, they have ancillary legal issues or they have a brother in California that needs something, and so I'm part of a national network of estate planning and elder law attorneys. That's a very well known network, and I can just hop on to my search and I [00:05:00] can find an attorney pretty much anywhere in the United States from my clients and the types of issues that they're working with.

That's usually what I do, and I like to be the quarterback even if it's an issue in a state that I can't handle. To me, customer service is not just making a referral, but it's kind of quarterbacking the whole ordeal, and so that's the approach that I take is 

finding the attorney, making the warm introduction, and then following through to make sure that their needs were met in those other states. 

So that's the way that I handle it. Like I said before, I don't have time to practice anywhere but Texas, but I can definitely quarterback it for my clients who need things in other states.

Mike Pine: That brings up an interesting point, and Kevin and I experienced this a lot in taxes. When you just need to go get your annual checkup, it's okay to go see your GP and your primary care physician, but if you have something very weird going on in your brain, or in your stomach, you want a specialist in that area, you don't always want a generalist.

And Kevin and I specialize in specific areas of tax. How important is it and when do you realize, or how can you [00:06:00] realize when you need a specialty attorney versus a general 'do everything' attorney? 

Matt Davidson: Yeah, I just have strong feelings about this because I practice in an area where almost every type of attorney thinks that they can do what I do. Almost every type of attorney thinks that they can type up a simple will for someone, but the problem is that if someone's doing a divorce in the morning, a DWI in the early afternoon, if I was wanting my estate plan done, I would not want to see that attorney at 3:30. 

My area of law is more than just drafting up simple documents. There are so many areas of case law, legislative changes, congressional changes, tax changes, things that we have to keep up with, and if they're in family court in the morning, in criminal court in the afternoon, there's no way that they can keep up on those things.

So, on one hand, it's interesting because a lot of those people make me a lot of money on the back end, because I have to fix all of their work after the person dies, but I would rather see the [00:07:00] client taken care of on the front end. So, specifically in my area of law, it's... another thing is a lot of people think- Oh, I can do it myself.

Oh, I can hand write it. Oh, I can go to LegalZoom. But once again, I'm having to fix a lot of those on the back end. So I would say that in the area of estate planning, I would definitely not see a general practitioner. That's all we do, and I definitely recommend seeing someone that that's all that they do.

Mike Pine: So I guess our listeners could be in any state listening to this. So let's say Wyoming appears to be a very pro-state to register your LLC in, but let's say you have a rental property in Nevada. I guess this is 'be a blanket advice' statement- I might be setting you up to fail here, but in this example, does somebody need a Nevada LLC because the property's located there?

Kevin Schneider: Or can they just get a Wyoming LLC for any business that they operate in the United States? Is there different pros and cons to having[00:08:00] that actual state LLC where your property is?

Matt Davidson: Yeah. And Aron can dive into this too after me, but I am of the opinion that you could have a property anywhere in the US- in an LLC or a corporation, anywhere in the US. As a matter of fact, for the longest time, for many tax reasons, people would incorporate in Delaware for businesses all across the US. Nevada has some extra creditor protection,

so people who are extremely concerned about getting sued, a lot of times they'll do Nevada LLCs, and then Wyoming has the anonymity. So the general answer to your question is based on the specific situation of the client. There are certain aspects of certain states that are better, and so, we might consider certain states depending on the situation, but no, it does not have to be in the same state where the real property is.

Go ahead, Aron.

Aron Philips: Yeah, I think, legally, everything Matt said is pretty much on point. My 2 cents would be in relation to filing. There's extra filings that are going to have to happen [00:09:00] if you're in multiple states, and so that may be something that the client wants to look at, is what's the administrative cost versus the advantage?

So if there's a real concern about creditor protection, then a Nevada LLC might make sense. Or the anonymity- they want a Wyoming LLC, but if they're not concerned about that, then I think a lot of the times it makes more sense to have an LLC in the state that they're going to be in because otherwise you have to have a foreign entity filing.

In every state that you own property... so let's say you have a Texas LLC, but you own property in Oklahoma, now you're paying the Texas formation fee. You're also paying the foreign entity registration fee in Oklahoma, which might be twice what the domestic formation fee is. So you're paying a fee two or three times over, and then you're also, because the entity is in Oklahoma, you're generating revenue in Oklahoma, you're going to be filing

some sort of return in Oklahoma related to the Oklahoma income with the Oklahoma Comptroller's office, or whatever their tax collection entity [00:10:00] is called, and so multiply that out times every single state that you've got property in. A lot of times, people find it simpler if they don't have other extraneous concerns that would lead them to need a Nevada LLC, or a specific state for specific reasons, to just have

the entity formed in the state where the property is located.

Mike Pine: Let me ask you a follow up on that, Aron, and make it practical so you can answer it. So let's say I have an Oklahoma LLC, but I buy a short term rental here in Texas. I buy it through my Oklahoma LLC. I never register as a foreign LLC here in Texas, so Texas Secretary of State doesn't know me, and then one of my tenants comes in and sues me for something or sues my LLC in Oklahoma.

Do I have any liability protection in Texas, if I haven't registered in Texas as a foreign LLC?

Aron Philips: You should still have liability protection. You would not have certain administrative rights, potentially, [00:11:00] or rights to complain about. For example, if they sued you and collected a default judgment against you, because you didn't register in Texas, so you don't have a registered agent in Texas, and so they couldn't 'find' you in Texas-

that could be an issue. You may have a suit that proceeds along without you being notified, and the court would basically say, 'You had the property in Texas. You were supposed to have somebody for service of process in Texas. You didn't because it was a rental property. We showed up there multiple times trying to serve you and you weren't there,

and so sorry, now there's a default judgment against you.' So what you potentially have is a situation where you have the liability protection of the LLC, but that property's more at risk because you didn't do what you were supposed to do administratively, and now you didn't even know that there was a judgment, a lawsuit against you, and you end up getting.. taking a judgment against you.

Mike Pine: So your advice to me would be- register in the state that you're doing business in, whether your LLC's in that state or not.[00:12:00] 

Aron Philips: Yeah, because whether your LLC's 'in' that state or not, I'll I'll put that in quotes because where you form is not necessarily where that LLC is doing business, if you've got a rental property in Texas, then your LLC is doing business in Texas.

Mike Pine: It makes sense. Thank you for your sage advice Aron.

Aron Philips: No problem.

Kevin Schneider: Has anyone ever formed in California on purpose?

I'm kind of taking a jab at California, but we had an employee we really wanted to hire in California. Basically he said 'No', because it was going to be a remote position. It was going to open the door for our Texas firm with a lot of issues with California, that's not a fun state to do business in,

and actually prevented us from hiring somebody in that state. Surely they're aware of the costs, they're aware of these things. I just don't know why they're not changing. What's your experience of working in California? And is that the most aggressive state? What are the worst states to register, or do business in?[00:13:00] 

Matt Davidson: All I can speak of is the experience of the mass exodus of people that are moving here and becoming my client, once they move here, and so, we're trying to transition a lot of their documents over to here, whether it be their trust or corporations or LLCs or non-profit corporations. I got a big one right now that's trying to get out of the red tape of California. It's a nonprofit. 

The answer is that a lot of people form there because that's where they live, because the weather, or whatever, but as people move here, my experience is that it is really complicated, and that they... I don't know what the answer is as to why they won't change it.

There's probably a few that we probably shouldn't even get into on here, but my experience is transitioning people out of California to here- yes, it's very complicated and a lot of red tape.

Mike Pine: 

Kevin Schneider: Yeah. I probably should have asked this towards the beginning, but I guess the general consensus is, if you have a business or a real, a for-profit business, it needs to be in some sort of [00:14:00] entity, but let's say someone's listening to his podcast, and they have five rental properties they own, and they're- 'Now what?' They've owned it personally. They're just doing the best they can, trying to make good investments, but they really haven't come across liability issues yet, haven't been sued, haven't been threatened to be sued. It's never been on their radar. What would you tell someone in that situation, and how do they solve for that problem? Or is that something to be solved for?

Aron Philips: I'll jump in on that. First, I would say- Thank God, that they haven't run into a liability situation yet. And that means it's not too late, because generally, if you've run into a liability situation and you haven't set anything up, it's too late. So, if they haven't, and the question is, 'Now what?' Then, go see an attorney as soon as possible and start setting that up.

If you have five rental properties, you can afford to set up at least one LLC and stick them in there, so that way, it's at least separate from your personal assets, and then we can talk about whether or not [00:15:00] it makes sense to get a couple of LLCs, or how far you'd like to diversify, but as soon as possible,

and also get commercial insurance, if you don't have that, because if you're operating short-term rentals or long-term rentals, getting some sort of insurance on the properties is important, and making sure it's correctly done is important, because insurance- their professionals are not paying, so if you just think your homeowner's policy is going to cover your rental properties, you are definitely mistaken.

You need some sort of commercial liability policy, commercial property and casualty policy, because then, it'll be correctly identified, correctly insured, and at least, more likely to pay out. You never know with insurance companies, so then, get on it before a liability situation comes up.

Mike Pine: Have you ever had the situation where a client or potential client comes up to you and says, 'Someone's suing me. Can you help me protect myself by setting up some entities?'

Aron Philips: Yeah, that's happened before, and generally, it's too late. It's like somebody that comes to me with a bad contract and says, 'Hey, can you help me out with this [00:16:00] situation?' and then, I look at the contract, and all I have is bad news for them, unfortunately. You get an attorney to help you review this on the front end.

I had a client that came to me once. Their business was going way under- they'd gotten into a franchise situation, and they had paid seven figures, total, to get into this franchise, to develop this business, and they were losing. The franchisor had lawyers and so they thought, 'There were lawyers that were part of the process, so I thought I was taken care of.' but they didn't have their own lawyers.

So they paid seven figures developing property, developing this business, and getting into this franchise, but didn't hire their own lawyers. So, I wasn't really able to help them much. They'd already signed everything and were pretty much stuck. I said, 'Here's a bankruptcy attorney's information, because at this point you're bleeding cash and running out of it.'

Mike Pine: Yeah, so just because you have lawyers involved, if they're not involved for you, if they're representing the other person you're signing a contract with, that should make you want to get your own lawyer, because they're serving their clients, right? You have a [00:17:00] fiduciary duty to serve your client, and even if there's someone else that you're trying to help, you owe that duty to your client, not the other party.

Aron Philips: Yeah, a hundred percent.

Kevin Schneider: In staying with rental properties, I come across this issue a lot, and clients always ask me, and I always have to defer out, but let's say they own a property and the deed is in. They can't close on a property in an LLC because there's no history there. The lender won't lend to an LLC the amount that they need to put to buy the property.

So they buy the property personally. They hold onto the property, put it in an LLC as quick as possible. What are the logistics there? Because I always get asked, 'Can I just continue to hold the property in my personal name?' But legally, it's in the LLC on paper, but I guess you have to really dot all your i's and cross your t's to formally get the deed over, get the mortgage moved over.

How detailed do they have to get in that specific instance?

Aron Philips: Well, [00:18:00] a lot of times they'll end up holding the mortgage in their personal name, but feeding the property into the LLC, so then, it's legally owned by the LLC. And then, in my experience, so this is certainly not legal advice or not binding on whatever the mortgage company wants to do, but in my experience, as long as the mortgage is getting paid on time, the mortgage company doesn't look too closely under the hood because they're getting their money.

Now, if there's some sort of financial crisis or something, they may come back around and say- What's going on here? Why isn't this owned by you personally? Or why is the appraisal district saying this? And the fix there is relatively easy- you can deed it back out to yourself and say- Okay, if that's that important to you, mort-controller, I will just deed it back to myself and hold it personally.

But generally, the loan is held by them personally. Now, one potential fix- if they have the LLC in advance, and are talking to a bank or a mortgage company that's sophisticated enough, is just to offer a personal guarantee. So then, the mortgage is held by the LLC, but [00:19:00] guaranteed by them personally,

and then everything is lined up where it's owned by the LLC, the mortgage is in the name of the LLC, and then the individual is still liable on that mortgage, but everything from a accounting standpoint and ownership standpoint, you don't have to go buy it over here, and then transfer it in.

It's just all done in the LLC. Matt, do you have any thoughts?

Matt Davidson: Yeah, I generally agree. I mean, technically, the mortgage company could call the note according to most mortgages, and so I usually warn my clients- technically, this is possible, but I've never seen it happen, and my mentor has never seen it happen and add 30 years to my 12, but yeah, we usually do the same thing as well- forgiveness over permission,

and then if they throw a fit, we move it back out. But that's not legal advice, specifically that, but that's generally what we do as well.

Mike Pine: Yeah, I'll just add on to that. Our plan is to buy [00:20:00] a short term rental. Where we're going to buy it, we're trying to do it for 10% down, so it's a second home loan, and what I've been told from the mortgage people I'm working with, is the Fannie Mae, Freddie Mac rules or conforming loan rules say you have to keep the deed in your name for 365 days, but then, you can quit claim it after that. The mortgage will probably stay in our name. We will quit claim with Aron as soon as we can into our LLC, but I'm hoping by having the contracts and the name of the LLC, any bit of business functioning is going to be in the name of that LLC.

I'm hoping that's going to give me good enough legal protection. Would you say it will, Aron?

Aron Philips: So, just to paraphrase back to you and make sure I'm not missing anything, during the 365 days, you're going to, essentially, operate that as a rental under the name of the LLC, but it'll be owned by you personally. So, during that period of time, I'd say you're definitely in a gray area, because unless you have some sort of operational agreement [00:21:00] or management agreement, property management agreement, then for all intents and purposes, you're just conducting business out of there.

So, I think, ideally, you'd want to make sure any expenses are being paid by the LLC, so put, contribute some amount of money, $10,000 or something, or if you're renovating it, even more into the LLC. So, anything related to the business operations comes out of the LLC's bank account, and then, ideally, maybe paper that up with some sort of basic property management agreement where you

contract with the LLC to say we want you to operate the short term rental on our behalf, find rentals, renters, manage the property itself, make sure the property's kept up properly, clean it after people leave, and find renters for us.

Matt Davidson: Occasionally, Mike, we'll do a pocket deed where we'll execute a deed to the LLC, but not file it in the land records, and just keep it in the binder with the LLC. And then, if [00:22:00] you did get sued, then record it, because in Texas, deeds don't have to be recorded to be effective. There are certain elements that do have to be there for it to be an effective deed, but it doesn't have to be recorded.

So sometimes, we'll utilize that if the client's really concerned about putting it into the LLC and recording it in the deed record. So that's not legal advice, but it is something that we often do if the client's really concerned about it.

Mike Pine: As soon as, assuming Beck and I are actually able to find a property, before we make that offer, we'll be talking to both of you, Matt and Aron. So thank you very much.

Kevin Schneider: Well, how can people reach you guys? You all are, obviously, very knowledgeable in these areas, and not only in real estate, but just in normal business as well in estate planning- each of you all have your own little niche here. So, Aron go first, and then Matt follow up. How do people reach out to you if they need a consultation, and go forward with you?

Mike Pine: They can reach out to our office by phone at (817) [00:23:00] 903-1414, or they can email myself or my admin. My email address is aphillips, that's- A P H I L L I P S- @aphillipslawoffice.com and my admin is admin- A D M I N @aphillips- that's with two Ls- lawoffice.com. How can people reach you, Matt?

Matt Davidson: Yeah, I had my website up here. It's got a lot of information on it. It's yourtexaslegacy.com. At our firm, we believe that we're all about legacy, helping you steward your legacy, giving you peace of mind for your family. So you can visit yourtexaslegacy.com and there's an info submission on there.

All of our information's on there, but you can also contact the mothership. We have offices all over North Texas, but the mothership is in Fort Worth, and you can contact us there at 8 1 7 9 0 0 6 5 2 9, but I would encourage you to go check out the website, because it has all kinds of information that you might find interesting, [00:24:00] if you enjoyed

what you heard today. And also, I'll just mention that we do free consultations, so feel free to make one of those consultations, and we can tell you what we think and what we advise, and then, if you say- Let's do it, then great. If not, then we part as friends. So, yourtexaslegacy.com for Davidson Law Group.

Mike Pine: Awesome.

Aron Philips: So, Aron Phillips Law, we're located in the Stockyards in Fort Worth, and you can reach us at 8 1 7 9 0 3 1 4 1 4, and we can set you up with a complimentary, quicker consultation, or if you want a longer one, then we'll get a discounted rate for those, and then my email is there. That's probably the easiest way to reach me.

I do try to respond to things relatively quickly as long as I'm in town, and we also have a title company, so if you are buying property in Texas, we can close on that and issue title insurance and help you make sure everything runs smoothly for that close.

Kevin Schneider: Beautiful.

Matt Davidson: This was a lot of fun.

Mike Pine: Awesome. Thank you guys.

Kevin Schneider: Good work guys.

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