Real Estate Joint Venture Trust Agreement

I’ve got the knowledge, you’ve got the cash, let’s make lots of money … er but wait!  How do we structure this deal so everyone’s expectations are met and our new business venture does not end up in the hands of attorneys looking to profit from our misery?  Simple.  Slow down and explore your options.  In a past post I discussed the problems with poorly drafted joint ventures structured as limited liability companies. (Read the post here: Poorly Drafted Joint Venture)  However, for certain short-term investors with many deals and money partners, a limited liability company may be to complex, expensive, and overly burdensome.  (I typically recommend the use of a limited liability company when the joint venture parties can expect an ongoing relationship.)  For the investor looking to flip properties and use different money sources, an alternative approach might be appropriate.

Consider the case of Josh and Ben who want to flip properties together.  Josh has the knowledge and connections while Ben has the financing.  Josh approaches Ben with the following offer: If Ben agrees to invest $200,000 with Josh in a short term real estate deal, Josh will pay Ben simple interest of 8% on his money plus 6% of the appreciation when the project sells.  This deal could be structured several different ways.

Option 1 – Participating Note

Josh could offer Ben an equity participation note secured against the project.  Equity participation notes give the lender interest plus a piece of the appreciation when the project sells.  The strength of this arrangement is its simplicity.  Josh would provide Ben a deed of trust against the property to secure a note.  Ben will receive his payment when Josh sells the house.  However, such a situation gives Ben indirect control over the project via his note.  If the project takes longer than expected and Ben’s note matures, he could demand his money and foreclose on the property.

Option 2 – Limited Liability Company

As stated earlier, complexity is key when using a limited liability company with structured payments.  Here, Josh would create an operating agreement with two classes of interest.  Ben, a Class B Member, would receive his interest plus a stated percentage of the company profits.  Josh, a Class A Member, will receive the remainder.   These percentages could change.  After the deal is complete the company would be dissolved.  If Josh is engaged in several projects, he could keep a solo practitioner attorney busy for months filing, drafting, and dissolving limited liability companies.

Option 3 – Joint Venture Trust

A trust could solve the issues presented by scenarios #1 and #2.  Josh could structure his trust similar to a limited liability company with a primary and secondary beneficiary.  As the primary beneficiary, Ben will receive his $200,000 back plus the interest (note: if there is more than one source of money you can have multiple primary beneficiaries).  Josh and Ben would each be secondary beneficiaries with different percentages for the sharing of profits; Ben has 6% and Josh holds 94%.  Distributions would be set in the trust agreement to occur immediately after the sale of the property.

Joint Venture Trust Details

The typical joint venture trust is set up with all the joint venture parties as Grantors.  Like the personal property trust or land trust, the Grantor is the person who initially transfers assets into the trust.  One of the Grantors is appointed as the Trustee.  Typically, the Trustee will be the real estate investor who is putting the deal together e.g., Josh.  The Trustee will have complete control over the investment of the trust’s assets which, would be outlined in the trust agreement, e.g., to purchase and rehab the property located at…

All of the Grantors will be trust beneficiaries.  Depending on how the joint venture trust is structured, you could have differing payouts for the Beneficiaries based on contribution amounts, past investments, etc.  The flexibility of this business form is in its execution.  The trust can be created as needed without the necessity for any state filings.  When a deal is complete, the trust is shut down and the funds are distributed per the beneficiary schedule (this information is private and does not get filed with any state agency).  As with the land trust or personal property trust, this trust can be used over and over again with changes only being made to the trust name, date, and parties on each deal.

The following is a chart of the above 3 options:

For more information on creating a trust agreement for your next real estate joint venture contact me directly with this link:  Schedule a Conference Call with Clint

Personal Property Trust Webinar

Here is a recording of a recent webinar I gave on using personal property trusts to keep your personal and business affairs private. On this webinar I discussed how to hide the ownership of vehicles, bank accounts, business interests, and real estate.

The Many of Flavors of Trusts for Real Estate Investors

When it comes to structuring investments or business activities, attorneys typically think in terms of Limited Liability Companies or Corporations.  Most never consider the benefits of using trusts to enhance protection, provide anonymity, or to craft a joint venture.   The reasoning for ignoring this tool most likely centers around the typical trust’s lack of asset protection benefits for its owners or lack of the drafters understanding of its potential uses as an ancillary tool.

Benefits of Using Trusts

• A trust is not registered with the secretary of state or other governmental agency – PRIVACY
• No filing fees, resident agent fees, or other costs – INEXPENSIVE TO MAINTAIN
• Many do not require a tax return or EIN number – INEXPENSIVE TO MAINTAIN
• The parties to the trust are not available to the general public – PRIVACY
• Trusts can be created, dissolved, amended, or transferred via resolutions – SIMPLICITY
• Enhanced control over select real estate transactions – OPERATIONAL EFFICIENCY

Personal Property Trust

As many of you already know, the majority of states require the LLC members or managers to disclose their information to the secretary of state when the company is established. This information is made public to anyone with access to the internet.  To combat this lack of privacy, experienced real estate investors will use a structure similar to the following:

The holding entity is established in a jurisdiction such as Nevada, Wyoming, Delaware or Alaska with a nominee manager to hide your control and to serve as the member of your real estate LLC formed in the state where the property is located.  As the single member of your real estate LLC, the holding LLC will keep your involvement private. (Keep in mind, some states, like New Mexico, do not ask for member or manager information so your involvement is protected by default)  Some potential drawbacks to this type of structuring are cost and complexity.  When an investor is creating his first LLC, should he incur the added expense to form a Nevada holding LLC?  In many instances the answer is no unless there is an overriding concern for outside liability protection.  Thus, the real estate investor is forced to settle for protection without privacy.  Once created in this manner the investor’s information is forever part of a public record regardless of future changes to the LLC.

If you ask a local attorney if there is any way around the aforementioned dilemma, he might ask why you care (this answer is obvious and the posed question should seriously make you reconsider your choice of legal counsel) or he will tell you no.  I am writing to tell you there is and the solution is a personal property trust.

Just like the name implies, a personal property trust is used to hold personal property.  The trust is a grantor trust set up by an individual to hold title to his personal property.  The trust does not offer asset protection nor is it a business for tax reporting purposes.  The trust is merely a title holding vehicle, if properly drafted, set up to hold assets for the benefit of a grantor without publicly disclosing this information.

Consider my recent client Glen who engaged me to create a California LLC to protect 2 rentals he recently acquired.  Glen expressed a desire for asset protection and privacy but he was unsure how to create such a structure in California.  His local attorney told Glen California requires each LLC to file a Statement of Information listing the managers or members of the LLC.  If Glen wanted to manage his LLC then his information must be made public.  This statement is correct in so far as the manager must be made public but Glen’s name does not need to be disclosed.  In other words, Glen can manage his LLC without providing his name on the Statement of Information.

In Glen’s situation, we created Pacific Ventures, LLC.  After waiting the usual 2 to 3 months for California to file his entity, we then established Blue Fin Trust.  Blue Fin Trust is a personal property trust wherein Glen is the Grantor, Beneficiary and Successor Trustee.  I was listed as the initial trustee.  Pacific Ventures, LLC was set up with Blue Fin Trust as its sole member.  When the Statement of Information was filed with California, I listed Blue Fin Trust as the member and I signed the form on behalf of the trust.  After the Statement is filed, I resign my position as trustee and Glen becomes the undisclosed successor trustee.

The personal property trust is a private document not filed with the state or the county.  When set up with an initial trustee who subsequently resigns, the trust offers the LLC owner privacy without a complicated multi-tiered structure.  When creating multiple LLCs, I recommend the use of a separate property trust for each LLC to avoid anyone discovering a common ownership link between your various companies.

Part 2 of this post will discuss the use of trusts in joint ventures.

What is the Cost of Not Choosing the Best Protection?

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Last weekend I spoke at an event where people, tired of tenants and toilets, were turning to hard money lending for a source of income related to real estate investing.  Without a doubt, I can tell you the banking training was incredible and some of the strategies I taught to put these deals together were truly …

March Seminars

For those of you who would like to learn more about the information I cover on this blog I have some upcoming events you may be interested in attending.

 

Real Estate Strategies for The New Economy Seminar

2 Days Real Estate Strategies for The New Economy Seminar on March 9, in Hawaii Convention Center (Honolulu).

For more information click on the link:

http://www.andersonbusinessadvisors.com/seminar/detail/100

 

Stock Traders Seminar

2 Days Asset Protection and Wealth Preservation Seminar for Stock Traders on March 15.  The seminar will take place inside Marriott Las Colinas in Dallas, Texas.

For more information click on the link:

http://www.andersonbusinessadvisors.com/seminar/detail/101

 

Wealth Preservation and Asset Protection Seminar

3 Days Wealth Preservation and Asset Protection Seminar on March 21 in Boston, MA.

For more information click on the link:

http://www.andersonbusinessadvisors.com/seminar/detail/102

 

DIY Asset Protection – Why Take the Risk

The less you know the more you will owe!

Do-it-yourself asset protection planning has grown in popularity with sites such as legalzoom, and rocketlawyer, et.al.  These sites tout cost effective personalized planning but bury disclaimers such as (We are not a law firm or a substitute for an attorney or law firm. We cannot provide any kind of advice, explanation, opinion, or recommendation about possible legal rights, remedies, defenses, options, selection of forms or strategies).  Like everything tax and asset protection oriented, “the more you know the less you will owe.” A recent case in California is illustrative of why do-it-yourself asset protection planning seldom works; some people do not understand the subtle aspects of asset protection planning.

In this case our do-it-yourselfer, Stillman, was an engineer who designed residential construction.  Concerned about liability in his profession and personal exposure to potential lawsuits, he created his own asset protection structure for his assets.  In this particular situation, Stillman created a Nevada asset protection trust with an initial trustee, his brother as the beneficiary, and himself as the “managing director” i.e., he wanted to maintain control of the assets he transferred into the trust and the trustee had no powers.

Several years later Stillman’s fears were realized when he was sued by a homeowner and a settlement was entered in favor of the homeowner.  Stillman never paid so the homeowner filed a fraudulent transfer claim to pierce the trust.  This is a typical claim used by many plaintiffs to pierce a defendant’s asset protection structure.  A plaintiff can succeed on this claim if he can show the defendant set up his plan and transferred his property with the intent to hinder, or delay a creditor, or to put such property beyond his reach.  At the hearing, Stillman testified he set up the trust for asset protection purposes – OUCH!

This testimony coupled with the following findings regarding how Stillman managed his plan resulted in the court ignoring Stillman’s plan and seizing his assets.

• Stillman operated his business out of the property owned by the trust, rent free;
• Stillman and his trustee lived in another property owned by the trust, rent-free;
• Stillman was the “managing director” of the trust (whatever that means) – “He makes deposits and withdrawals; writes checks; opens bank accounts; buys, sells and trades real property and other property of” the trust; he “lends or borrows money in the name of” the trust; he buys, sells and trades stocks and bonds; he selects tenants and signs leases for the rental of trust property.
• Stillman’s brother is the beneficiary of the trust (but not Stillman himself);
• Even though Stillman was not the beneficiary, “Stillman used [trust] funds to pay his personal expenses, including his XM radio bills, newspaper and National Geographic subscriptions, and personal attorney fees; and
• Stillman had not been in contact with the original trustee since 2005.

There are a few lessons here. Never state in your trust, LLC operating agreement, or other entity your purpose in creating the plan was asset protection.  Always state a legitimate business purpose e.g., asset consolidation, real estate investing, hard money loans, etc.  Similarly, never testify this was your purpose. Do not set up a structure lacking economic substance i.e., it does not serve a legitimate purpose.  Be attuned to how your entity should be operated to maintain its separate existence. Finally, follow the terms of your trust or operating agreement.  Acting outside or contrary to what is stated in your documents will give a court reason to pierce your plan. Finally, don’t try to do this yourself- it’s harder than it looks. I am sure Stillman had confidence in his plan up until the end because he didn’t know any better.  Unfortunately, ignorance of the law is not a defense.

 

Anderson Business Advisors Merging Companies

Anderson Business Advisors is merging companies with Acorn Corporate Services and BOSS Business Services in order to be a new uniform entity.

Why the change?

For years, the ownership group has been acquiring complementary service companies and discussed merging the various companies together.  This summer, they finally agreed to take the plunge and become one.  The merge will benefit all three since each company offers an additional service the other does not from tax services to registered agent services.

“We wanted to create a uniform experience for our clients and provide them with the up most services available for small business owners, and the three companies working together under a single name is the best option” says Toby Mathis, President of BOSS Business Services and Partner with Anderson Law Group. “The current clients of BOSS Business Services, Acorn Corporate Services and Anderson Law Group will not be affected at all whatsoever, as the transition will be seamless.”

Anderson Business Advisors will now provide additional services from business taxes, virtual offices, bookkeeping, registered agent services to phone answering programs.  We have two locations: Seattle and Las Vegas.    

Washington                                                

732 Broadway, Suite 201

Tacoma, WA 98402

1(800) 706-4741

Nevada

3225 McLeod Dr.

Las Vegas, NV 89121

1(888) 969-2677

Wealth Preservation and Asset Protection Seminar

Attend our 3 Day Free Wealth Preservation and Asset Protection Seminar in Boise, ID inside the Silverstone Plaza on 1/31/12.

Who Should Attend?
Lawsuits, taxes, and death are all inevitable. You can’t ignore them. You can lose everything in a lawsuit. The government gets most of what’s left when you die. However, you do have an alternative. You can take action and take control of your life and your business. As an active real estate investor, someone who owns real estate, or would like to begin acquiring real estate, this seminar will give you the confidence to invest with protection.

Why You Should Attend?
You are working hard to secure your financial future — that is why you owe it to yourself and your family to protect your investments and gain the peace of mind that can only come from solid planning.

During the seminar you will learn:
• Asset protection techniques used by the wealthy
• Different forms of real estate ownership and how they can help or hurt you
• The benefits of Land Trusts and what they will or will not do for you in your investing
• When a Corporation will benefit an investor and when it should be avoided
• Learn the impact a Limited Liability Company versus a Limited Partnership can have on your investing and asset protection
• Retirement plan options that will expand your investing opportunities and potentially save you thousands in taxes
• What is the appropriate entity for your particular form of real estate investing
• How to avoid Real Estate Dealer Status
• How to reduce tax liability
• How to shield your assets from problems, and turn those problems into solutions
• Foolproof techniques to ensure your family’s financial future
• Eight essential estate planning techniques that will protect your family and avoid probate
• Those states that offer great asset protection and those states to avoid
• Tax planning for your real estate investing
We’ll cover the ins and outs of corporations, limited liability companies, partnerships, land trusts, living trusts, retirement plans, and help you understand what is right for you. After participating in this interactive event, you’ll have designed your personal wealth plan, understood each part, have reviewed it with your instructor.

Click on the link to RSVP and for more details:

http://www.andersonbusinessadvisors.com/seminar/detail/97

Tax Considerations in Writing a Purchase and Sale Agreement

“Language is a tool adequate to provide any degree of precision relevant to a particular situation.” Kenneth L. Pike

When purchasing real estate, how important is it to allocate your purchase price to various components of your real estate purchase? Very much if you would like to take specific deductions that will hold up in an audit. Consider the recent Tax Court Decision in Norman vs C.I.R. TC Memo 2012-360.

In Norman, the taxpayer borrowed $1.8 million to purchase a new residence and an adjoining parcel of property that he intended to develop by subdividing it into seven lots. For tax purposes, Mr. Norman allocated $800,000 to the purchase of the adjoining property and $1 million to his residence.

From a tax standpoint, this allocation made perfect sense because the I.R.C. limits the deductibility of qualified residence interest to $1 million in acquisition indebtedness. In turn, interest paid in the acquisition of an investment, i.e., the adjoining lot, is deductible as investment interest expense.

During the audit, the IRS disagreed with Mr. Norman’s allocation and the Court agreed by denying Norman’s $17,951 investment interest deduction, finding that he failed to show an adequate evidentiary basis to support his claimed allocation. More specifically, nothing in the purchase and sale agreement referenced such an allocation or intended use.

Customarily, when a purchase and sale agreement is entered into with a seller, the recital typically contains the all encompassing term “real property,” when in reality much more is being purchased beyond the land, buildings and things physically attached to the buildings, i.e., fixtures.

In residential sales, it is customary for most free-standing appliances, carpeting, decorative lighting, sidewalks, fences, docks, certain landscaping, and window treatments in the property to convey to the buyer, even though they are generally personal property items or land improvements and not specifically listed as such in the purchase and sale agreement. Sometimes, specific pieces of furniture are also included in the sale. In a commercial context, the list is greatly expanded to include certain wiring and related property, special plumbing, or machinery.

For some investors this is an overlooked opportunity to increase their cash flow by taking advantage of faster depreciation deductions. Assets allocated into the land improvement or personal property categories can be depreciated faster under an accelerated depreciation schedule (over 5 or 7 years) versus the straight-line approach adopted by most CPAs that allocates 80% to building and 20% to land and depreciates over 27 ½ or 39 years.

This is an opportunity not to be overlooked when purchasing real estate. However, to avoid a result like Norman, you may want to consider including more specificity into your real estate purchase and sale agreements and assigning agreed upon values to certain aspects of the real estate you are purchasing. This added specificity would buttress any position taken by your CPA with respect to accelerated allocations.

New Tax Rates for 2013 – Congress Kicks the Can on Cuts

Taxes are going up and spending cuts are on hold until March. As predicted, our elected representatives in Washington D.C. are unwilling to deal with the reality of our budget deficits. We have a financial crisis that no amount of tax increases will solve unless we make serious spending cuts. This assumes our elected officials have the intestinal fortitude to put the country above their own self-interests i.e., re-election. So our government has done the one thing it is great at – kick the can down the road and let someone other elected representative deal with the problem while this country buries itself further in debt. I digress. Having received numerous emails and calls today regarding what transpired this morning here is an explanation of some of the most significant aspects of H.R.8, the “American Taxpayer Relief Act” (the “Act”):

Personal Income Tax Rates. For tax year 2013 and thereafter, any income in excess of $450,000 for joint filers, $425,000 for heads of household, $400,000 for single filers and $225,000 for married taxpayers filing separately the tax rate will increase to 39.6% for any income in excess of this rate.

Capital Gains/Dividends. Long-term capital gains and “qualified dividends” will increase to 20% for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). When combining the Obama Care 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall will be 23.8%.

For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends. (Note that your capital gains tax rate is determined by adding your capital gains into income to determine your ordinary income tax rate then applying the appropriate capital gains rate.)

Estate and Gift Taxes. The Act retains the 2012 estate and gift tax exemption amount of $5 million (adjusted for inflation) but increases the federal estate and gift tax rates on transfers in excess of this amount from 35 to 40 percent. For 2013, the inflation-adjusted exemption amount is expected to be $5.25 million. The Act also continues the portability feature of the estate tax law, which allows a surviving spouse to utilize his or her deceased spouse’s unused exemption amount.

PEP limitations to Apply to “High-Earners. The Personal Exemption Phaseout (PEP), which previously had been suspended, is reinstated with a starting threshold of adjusted gross income (AGI) above $300,000 for joint filers and surviving spouses, $275,000 for heads of household, $250,000 for single filers and $150,000 for married taxpayers filing separately. Under the phaseout, the total amount of exemptions that may be claimed by a taxpayer who is subject to the limitation is reduced by 2 percent for each $2,500 (or a portion thereof) by which the taxpayer’s AGI exceeds the relevant threshold. These dollar amounts will be inflation-adjusted for tax years after 2013.

Pease limitations to Apply to “High-Earners”. The “Pease“ limitation on itemized deductions, which had previously been suspended, with a starting threshold of AGI above $300,000 for joint filers and surviving spouses, $275,000 for heads of household, $250,000 for single filers and $150,000 for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3 percent of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80 percent of the otherwise allowable itemized deductions. The Pease limitation affects all deductions, including the charitable donation deduction and the deduction for home mortgage interest.

Example
Single filer with no dependents and AGI = $300,000: AGI exceeds the phaseout threshold by $50,000 (= $300,000 – $250,000); 3 percent of $50,000 is $1,500. Itemized deductions may be reduced by $1,500, up to a maximum of 80% of itemized deductions.

Alternative Minimum Tax (AMT). The Act provides some permanent AMT relief for tax years 2012 and later by retroactively increasing the applicable exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. Also, prior to the Act, nonrefundable personal credits, other than the adoption credit, the child credit, the savers’ credit, the residential energy efficient property credit, the non-depreciable property portions of the alternative motor vehicle credit, the qualified plug-in electric vehicle credit and the new qualified plug-in electric drive motor vehicle credit, were allowed only to the extent that the individual’s regular income tax liability exceeded his tentative minimum tax, determined without regard to the minimum tax foreign tax credit. Retroactively effective for tax years beginning after 2011, the Act permanently allows an individual to offset his entire regular tax liability and AMT liability by the nonrefundable personal credits.

Exclusion of Small Business Capital Gains. Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2011, the exclusion is 100 percent and the AMT preference item attributable for the sale is eliminated. The Act extends for one year the 100 percent exclusion of the gain from the sale of qualifying small business stock through 2013.

Other Miscellaneous Deductions and Credits.

The Act also extends for five years the American Opportunity Tax Credit. For many taxpayers this dollar-for-dollar credit is worth up to $2,500.

The Act also would extend for five years the current versions of the Child Tax Credit and Earned Income Tax Credit, which are claimed by many lower-income workers making up to approximately $50,000.

The Act includes a one-year extension of current “bonus” depreciation rules, which allow businesses to deduct up to 50 percent of the cost of a wide variety of property and equipment, excluding real estate.

Additionally, the Act extends through 2013 the exclusion of certain income from the discharge of qualified principal residence indebtedness.

The Act also extends several energy-related tax credits for an additional year, including a wind tax credit and a credit for certain plug-in electrical vehicles.

Increase in Employee-Paid Payroll Taxes. The two percent payroll tax holiday that taxpayers have enjoyed for the past two tax years is allowed to expire under the Act (the reduction had decreased the rate from 6.2 to 4.2 percent). For an individual earning the maximum 2013 cap of $113,700 or more, this increase will amount to $2,274 in 2013.

Unemployment Benefits. The Act includes a one-year extension of unemployment insurance benefits.

Spending Cuts. Under the Act, the $1.2 trillion in automatic spending cuts that were scheduled to take effect and would have affected the Pentagon and many other domestic programs are delayed for two months, paid for by a reduction in the discretionary spending cap for 2013 and 2014.