For the most part, it’s pretty easy to transfer assets into a properly formed asset protection structure. That’s especially true of our asset protection plans. Nonetheless, there are some occasional complications and difficulties that arise with the funding of various California asset protection strategies. For example, California state laws present some challenging burdens compared to other states. The purpose of this article is to provide some practical tips for funding your a California asset protection plan and to offer some general advice for making sure that your plan gets funded quickly and with the lowest possible cost.
California Asset Protection & Franchise Tax
If you live in California, state law requires that you pay a franchise tax for each business entity that you own. That’s true no matter where the business entity was formed or exists. For example, if you live in California and you form a California limited liability company, you’ll be required to submit the appropriate tax forms and remit the franchise tax payment. The same thing is true if you own a Nevada limited liability company or limited partnership. The tax still applies. It’s important to keep all this in mind when formulating an asset protection strategy.
Avoiding Reassessment of Tax Base
California asset protection law is quirky in another way too. The state can can (and will) reassess the value of real estate for tax purposes upon any transfer of title. Effectively that means you could end up paying much more in taxes if you don’t fund your asset protection plan properly. Since many plans involve holding real estate in limited liability companies which are themselves owned by a Family LLC, it can be tricky to transfer property into your plan without incurring additional taxes.
In short, there are no reassessments for “Transfers between an individual or individuals and a legal entity or between legal entities, such as a cotenancy to a partnership, or a partnership to a corporation, that results solely in a change in the method of holding title to the real property and in which proportional ownership interests of the transferors and the transferees, whether represented by stock, partnership interest, or otherwise, in each and every piece of real property transferred, remains the same after the transfer.” See https://www.boe.ca.gov/proptaxes/faqs/changeinownership.htm#4
Here’s what you need suggest for funding your California asset protection plan:
- If you plan to transfer property into a limited liability company, make sure that company is owned by the same people and in exactly the same proportions as the property is owned right now.
- Check with the recording clerk in the deed office to find out what (if any) disclosures are necessary.
- Transfer the property into the limited liability company via a special warranty deed.
- Follow-up with the clerk in the deed recording department to make sure that you have adequately disclosed to them that the property is still effectively owned by the same people and in the same proportions as it was prior to the transfer.
- Transfer the limited liability company into your Family LLC.
The same rules apply regardless of whether you are transferring property into a limited liability company, a family limited liability company, a family limited partnership, or an asset protection trust.
By carefully following the steps outlined above, you can avoid having your property reassessed inside of a California asset protection plan, which could cost you thousands of dollars every year. If you have questions about this, call me. I’ll help you lawfully protect your hard earned assets with minimum impact in terms of tax liability.