Garrett Sutton, who is a member of the elite group of “Rich Dad Advisors” for Robert Kiyosaki, assists entrepreneurs and real estate investors to protect their assets and maximize their financial goals. He accomplishes this by leveraging legal loopholes from a tax and legal standpoint. In fact, his best ever advice is, “With loopholes for the tax side, you want to open those and take advantage of them, and on the legal side, you want to close them and protect yourself.”
In our recent conversation, he explained one legal loophole that helps investors accomplish LLC asset protection, which is transferring assets from a personal name into an LLC.
Why Transfer Real Estate Into an LLC?
If you purchase a piece of real estate as an investment and keep it in your personal name, from a legal standpoint, you are leaving yourself and your personal assets open to attack.
For example, “When someone’s looking to sue over the property at 123 Elm St.,” Garrett said, “and they go to the county recorder and it’s in your name, that’s an easy path for them to get at your personal assets.”
On the other hand, Garrett said, “When the county recorder says 123 Elm St. is held by [fill in the blank] LLC, an attorney is going to think twice about suing, especially on a personal claim against you.”
The reason why LLC asset protection works is because they’ll go after a property under a personal name rather than an LLC, and, if the business is structured properly, it’s going to be difficult for the attorney to penetrate and get to the asset.
How Do You Transfer Real Estate Into an LLC?
A common concern to transferring property titles to an LLC is, “Well Joe, what if I have a loan against a property? Won’t transferring the title to an LLC be considered a transaction and trigger the due on sale clause?”
According to Garrett, it is not considered a sale. “You’ve just transferred it from your name to your LLC. You haven’t sold the property,” Garrett said. “And in most cases, 999,000 out of a million, it’s just not going to be an issue. The bank will not call the note.”
In order to ensure that you don’t fall into the 1,000 out of a million who has their note called, Garrett says, “Here’s the magic language you use if it’s an issue… It’s called continuity of obligation.”
What continuity of obligation means is when you purchase, let’s say, a duplex in your personal name, you were required to sign a personal guarantee on the loan. Also, you had to give the bank a first deed of trust against the property. When you transfer the title to the LLC, there’s a continuity of obligation. The bank still has your personal guarantee, and they still have the first deed of trust against the property, so the obligation has not been diminished through the process of LLC asset protection
Continuity of obligation, Garrett said, is “the language you’ll use. But it’s rare when you see a bank actually call a note.”
Continuing, he said, “Banks are getting more understanding of people holding title to their real estate in an LLC. What my clients say and what I’ve had in my experience is the banker will say, ‘Well, I can’t tell you that you can do that, but if you do that, we’re not going to bother you.’ That’s what they’ll say. They’ll say, ‘I’m not going to advocate it. We want you to take the title when you buy the property in your individual name, but you know, after you buy the property and transfer it into an LLC, we’re not going to bother you.”
Overall, Garrett recommends transferring property titles to an LLC after purchasing the property, pay your mortgage payments on time, and explain “continuity of obligation” if the lender has an issue with receiving checks in the name of the business.
One Extra Step…
One additional step you’ll need to take after the LLC asset protection process is to notify your insurance company, because the policy will remain in your personal name unless you change it.
Garrett had a client denied coverage because they failed to notify the insurance company about the title transfer. He said, “We had a client [who] before they came to us, they were in Los Angeles. They had a duplex. The insurance was in their individual name. They transferred title to the LLC. There was a fire, and the insurance company said, ‘Well, we’re not insuring the LLC. We’re insuring you,” and they denied coverage.”
Now, when you’re asking the insurance company to ensure the LLC, they may say they’ll have to charge you a higher premium. Garrett said that is nonsense. “It’s the same risk. Here’s how you skin the cat. You tell the insurance company, ‘I’m going to keep the insurance in my individual name (so you get the lower premium), but I want you to list the LLC as an additional insured.’ That’s how you do it.”
Conclusion
By transferring an investment property’s title from your personal name to a business, it provides an extra layer of legal protection if you were to be sued by a tenant (or someone else).
Upon purchasing a property, Garrett always recommends transferring property titles to an LLC. If the lender has an issue, your rebuttal is the magical phrase “continuity of obligation.”
Make sure to notify the insurance company about the title transfer. If they try to charge you a higher premium to insure an LLC, ask to keep the insurance in your personal name and add the business as an additional insured entity.