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How can I protect my membership interests in LLCs that own my real estate?

You would use most of the same strategies you'd use to increase your lawsuit protection as a shareholder of a corporation or limited partner in a limited partnership. For example, you can assess your membership interest; give voting proxies to third parties; grant options to the LLC to redeem your membership interest; encumber or lien your membership interest; or dilute your membership control by selling additional ownership interests. You can also more protectively title your membership interest. For instance, LLC membership interests owned by spouses can be titled as tenants-by-the-entirety in states that protect this form of marital ownership from lawsuits against one spouse. An international trust can also own your LLC membership interest in the same way an international trust can be the limited partner of your limited partnership (LP). Or a limited partnership can be the member of your LLC. We particularly recommend this in those states that better protect LP interests than LLC memberships. Frequently, living trusts are members of an LLC. This doesn't add lawsuit protection because a living trust isn't a protective entity, but the living trust allows the membership interest to pass to the trust's beneficiaries without probate upon the member's death. Irrevocable domestic asset protection trusts (DAPTs) provide greater protection, but their disadvantage is that they're not revocable.

For maximum protection, your LLC should have at least one member aside from the lawsuit defendant member. Courts are reluctant to expand upon a creditor's charging order remedy when non-debtor members would be affected. Conversely, courts are more likely to liquidate a single-member LLC, or allow foreclosure or surrender of the LLC interest, when the debtor is the sole member. You also need a well-drafted LLC operating agreement. Don't use an LLC 'off-the-shelf' operating agreement. You want an absolutely lawsuit-proof operating agreement for your LLC for optimum protection. Few standard operating agreements include these more protective provisions. And this is an important point. The protection afforded an LLC membership interest or limited partnership interest depends on whether the operating or limited partnership agreement contains these protective provisions. Yet they can mean the difference between keeping or losing your ownership interest to the entity. You definitely need a good asset protection attorney to prepare and to periodically review these agreements.

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The Presser Law Firm, P.A. - Asset Protection Attorney
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