Charging Orders - Does Your LLC Have Them?

what's up guys hey in this video we're going to be talking about that all-important charging order that needs to be incorporated into your limited liability company to make sure you're protected okay let's get started now hey you've probably heard about charging order protections if you haven't you're about to understand exactly what they are and why they're so important so when you're thinking about asset protection we always get tend to get focused on this setting up a company a limited liability company right here putting a property into it we're going to be the owners of this limited liability company and the reason we set it up is so that let's say we got a tenant in there that's mixing some meth and he disabled the smoke detectors and he burns himself up we don't want to get sued for that so we have the llc as a shield so the liability stays contained inside of here hence why i tell people you only want to put one property per llc because if a lawsuit like that developed all of those assets are at risk now that is the focus many times when it comes to asset protection i hear professionals tell people to do this as well why you want to set up the llc but what most people don't consider in my experience is what happens out here meaning if you get sued and they might go well why am i going to get sued i don't do anything really you don't drive a car you don't enter into agreements with people to have work done maybe on your personal residence you don't apply for loans where you have to sign on the loan as a guarantor of that loan you do that stuff and anything like that can go bad if it does then you are personally liable if you have children you're going to be liable for their actions as well so we want to make sure that whatever we're setting up we wouldn't lose it in the event of a lawsuit and the way you ensure that your assets that are held inside of the llc are going to be protected is by making sure that you have what are referred to as charging order protections all right now you're probably not familiar with this term as we talked about so what does that mean charging order protections with a limited liability company it's like this so let's have this llc set up it has a rental property in there it has ten thousand dollars in cash that's collected in rents and i'm down here and i'm involved in a lawsuit and now a judgment is entered against me for six hundred and seventy five thousand dollars so i have to i owe the creditor the plaintiff 675 000 so here's what that plaintiff is going to do they're going to bring me into court and they're going to make me disclose all of my assets so i'm going to have to tell them everything that i own up until that time until they get a judgment against me i don't have to tell them anything about my assets that's why i talk about anonymity so much in my videos is because if you're being sued of course the plaintiff's attorney wants to know what you're worth because if they know you have a lot of stuff they're like hey payday right here let's go after this guy or the other guy that doesn't appear to own anything like meh i don't know let's just settle for their policy limits and go away because we're not going to collect on anything so when anybody's important you don't have to disclose your assets until they get that judgment against you once they do then as i said you have to come in you have to show them everything so if you had an llc set up and you had a house in there and this house is worth 675 000 and you have 10 000 cash you're going to tell them you have the llc now what can the creditor do with this information knowing that you have a limited liability company well depending on where you set up your llc see this is important now it comes to down to the state where you set it up and it comes down to your operating agreement as well you know that that thing that you're supposed to sign that you draft after you file your llc and i know some people have never done this before they file the llc with the secretary of state and think hey it's good i got a limited liability company i got these articles back from the state no you need an operating agreement that operating agreement needs to provide language that states you have certain protections from outside creditors so it's a two-prong approach here first we look at the state level then we're going to look at your operating agreement to see what it says so we need to make sure we've got this in our in this at the state level and the in the operating agreement so what does that mean well if the creditor comes to the court and says all right i'm old 675 this person has a limited liability company the question then becomes can they get that llc take it from you well that llc is set up in a state that only recognizes the charging order that's the only remedy that a creditor has against the members then the answer to whether or not they can take this llc from you is going to be a flat no they can't take your interest they can't force you to distribute the assets and pay off the debt they can't take control of that company they can't do anything the only thing that they're going to be entitled to are your distributions right that's the only thing that the court will award them what do i mean by that if you distribute money to yourself you got to pay it over here to your creditors what they'll tell you hey you want to take out 10k you got to give it to your creditor until this debt's paid off so a charging order is like a lien on your membership interest and that is if you take money out as a distribution then it goes to your creditor until that debt's paid off now the thing about this why this is so important is that a lot of states are kind of sneaky the way they put their statutes together they'll say the charging order is a remedy is a remedy available to a creditor but then they'll go on they'll say also a receiver can be appointed and then also we can foreclose on an interest so you can work down through and what it means like this hey first thing court is you go forward as a charging order but if you put a charging order on this interest and then the people who run it you automatically decide i'm not making an issue distribution if i issue a distribution got to give it to my creditors heck i'm going to hold on to all this money and so your creditor stands around there going your honor it's been two years you awarded me a charging order i've never been paid i want to move down to have a receiver appointed or maybe they do it at the outset as well someone to look over this llc to see what the hell's going on up here with these assets because when you have the assets inside of the llc and you're in control of your own llc you still have access to the money people don't get that they say what do you mean if i take money out clint i can't i don't have access to it's got to go to my creditor only if you take the money out as a distribution but let's be creative right who runs a company you do so should you get paid for running your own company why not so let's call that a management fee all right so now you can pay yourself for running your own llc and who sets the management fee well you do so you set your own management fee so that's one way to pull money out that's not coming out as a distribution that's coming out as a payment but maybe you don't want to take out a management fee like i don't need more taxable income uh active income okay how about this do you trust yourself because if you do why not loan yourself the money so you can loan yourself the money so now you enter a ten thousand dollar loan to yourself yeah you got to pay yourself back but that's another way to get the money out so as you see here there's ways to get access to these funds and plaintiffs attorneys know this and so they're going to have a receiver appointed that's going to say nah you can't do a management fee and this loans bs we're not going to permit that so now your money stays locked up inside of there and eventually people say well we just got to get rid of this and they capitulate or worse yet they give them foreclosure so then they do just like they would in any foreclosure they come in they take your interest and they sell it to a party who bids at it at an auction you have a bunch of people down here bidding on your interest take over your llc proceeds get paid to pay off this loan and in some instances let's say they foreclose in your llc and they collected 400 000 it still doesn't relieve you the debt there's still another 275 owing so when you're setting up your llc this is what's key you want to make sure that the state where you set it up where the where you own it not where you set up where you own it the llc that you're owning the charging order is the exclusive remedy that means there are no other options to the court the only thing they can do is issue a charging order on your interest which means the creditor's never going to get paid there's no receiver involved here there's no auctions going on down here you're back to taking loans and management fees up here creditors down here never getting paid and either that thing's going to expire in 10 years and you're going to be able to go back to things as normal or they're going to want to settle with you and so how do you do that well if you live in a state such as california that does not offer charging orders as a sole remedy california allows you to foreclose and to appoint a receiver washington state similar you just don't own the llc so when i set up a washington or california llc here i'm not going to be a member in that thing i'm going to have a wyoming llc down here here's my wyoming llc it's going to be owned this will will be owned 100 by my wyoming llc and i'm going to be a member of this wyoming limited liability company just like this so if they sue me all right let's say you've got three llc set up right three of these there's a california one which should have been statutory trust but say you messed up and here's a utah llc again they don't offer charging orders as a sole remedy so you get down here and you've got these three llc's set up but what do you own do you own utah washington california no you own wyoming and so when the judge brings you into this supplemental procedure and say what do you own clint i own a wyoming limited liability company well we see here that you have these other ones set up yeah i manage them but i don't know i only own this so the only thing that they can work on now is your membership interest here and the wyoming under wyoming statute the charging order is the exclusive remedy that's similar to nevada delaware they have these exclusive remedies so this is important when you're setting up the structures that other side of the equation not just what happens up here it's also what happens down here we have to be on the lookout for and i've talked to so many people over the years where they tell me hey i lost everything i even had llc set up but the court took them all away from me because i got sued over this or that my kid hit a hit another student made him a paraplegic i mean things like that occur in life and you risk it all the other benefit of this type of structure is that everything above this line here i mean once this is set up if they put a charging on your interest and they don't settle with you fine you can still create more llc's for your investing all held by your wyoming llc you can move money all over the place but as long as it's not coming out to you as a distribution your creditors they ain't ever getting paid and this is one of the most important things when it comes to asset protection planning because it's what puts you in a position now of being more in control and forcing that other side to the table and you can say listen i know you won a judgment against me but it's only it's not worth the paper it's written on because it's not about how much you win it's about how much you collect and prevent them from collecting is what a charging order is for and that's why you need that in your limited liability company oh by the way your operating agreement better contain language like i just described stating that that is the sole remedy available to a creditor and they can't take your interest from you it's not enough just to have in the statute you also got to have that in your operating agreement we have a great language in our operating agreement that we've refined over years of putting these things together to make sure our assets or our clients assets are protected from their personal creditors hey guys like the video hit the like button be sure to describe because i got ton more content coming out to you and i wish you all the very best [Music] [Music] bye

Channel: Clint Coons Esq. | Real Estate Asset Protection

Views: 20,257

Keywords: anderson advisors, anderson business advisors, asset protection, business for sale, llc, llc operating agreement, real estate, real estate attorney, real estate investing, real estate investments, real estate lawyer, real estate llc, wyoming llc

Id: 2NvRbsC1qEI

Length: 12min 53sec (773 seconds)

Published: Mon Jan 17 2022