NYC real estate asset protection

Full transcript

0:10 Hi everyone, welcome back. I'm Max Dilendorf, the founder of Dilendorf Law Firm, based in New York, and today I want to discuss one of the most critical and most misunderstood decisions real estate owners face when purchasing or holding New York properly, and that is choosing the right legal structure for asset protection and long-term estate planning. So when evaluating ownership structures, it's important to look beyond the default LLC model and consider family limited partnerships or FLPs.

0:50 In many cases, FLPs offer much better protection than both a single-member and a multi-member LLC company, especially for high-value New York real estate.

1:05 And almost every week we speak with clients who believe that putting real estate into a limited liability company automatically provides them with bulletproof protection.

1:18 But under New York law that assumption is actually incorrect.

1:22 In fact for New York real estate, limited liability companies and single member LLCs in particular are often the weakest structure you could choose for your asset.

1:34 And let's start with the structure that most people default to, the single member LOC.

1:40 And so under New York law, specifically section 607 of New York lineability law, a creditor can obtain a charging water against the owner's membership interest.

1:53 But in New York, that's only the beginning.

1:56 Creditors don't usually stop there.

1:58 Once a creditor has a charging order, they can ask the courts for additional remedies.

2:05 In New York, courts routinely grant these types of requests and so a creditor can ask a judge to issue a turnover or force the assignment of the entire membership interest or even collapse the LLC to get to the underlying real estate.

2:24 If the owner lives in the property, treats the LLC, you know, casually fails to keep proper corporate records or doesn't pay rent, the LLC company courts will have no trouble disregarding the entity altogether.

2:40 And so, at this point, many clients think they can fix the problem by perhaps adding the second member, a spouse, a friend or even a shell entity to convert the limited liability company into a multi-member structure.

2:58 In theory, that extra member is supposed to make it harder for a credit card to reach the asset, but in practice, the courts across the nation have repeatedly collapsed multi-member LLC structures when that second member let economic substance or the LLC did not follow proper formalities.

3:21 Here is a deeper issue, LLC law is still relatively young, New York's LLC law dates back in 1994 and the case law is still evolving.

3:35 Judges have brought discretion and creditors know how to exploit those legal loopholes.

3:42 So this makes LLC weaker for asset protection and estate planning especially in New York.

3:49 Now compare that with the family limited partnership.

3:53 Partnership law has existed for over a century.

3:56 New York's partnership law dates back to 1919 that was built on the Uniform Partnership Act of 1914 and so New York courts had over 100 years to litigate, test and enforce partnership rules and regulations.

4:14 In FLP the general partner controls the management, while limited partners fold only economic interests. And so if a creditor wins a judgment against a limited partner, they are limited to recharging water and so with that charging water they can't vote, they can't force a sale and they cannot take over the property owned by a limited partnership.

4:36 And so courts rarely disregard FLPs because the distinction between general and limited is deeply embedded in statutory law and long-standing precedent and FLPs aren't just for real estate, these structures work for holding crypto, brokerage accounts, stocks and other financial assets.

4:57 By placing diversified assets inside of the same FLP, families can actually consolidate management, enhance privacy and extend the same strong layer of creditor protection across their entire portfolio. FLPs are also great for estate planning. Parents and senior family members act as general partners, keeping full control. They can gradually transfer limited partner interests to children, grandchildren or a trust. And the IRS long-recognized valuation discounts for for these transfers, allowing families to move significant wealth out of taxable estate while maintaining management control.

5:47 Now, one crucial point for any of this stuff to work, planning must be done proactively, before any lawsuit, accredited demand, or even a potential claim appears on the horizon.

6:01 If you wait until a dispute has already started or a claim is reasonably foreseeable, transferring the property into FOP or any other structure can be challenged as the fraudulent conveyance on the New York data and credit law.

6:17 And so if a court finds that a transfer was made during pending litigation or even in anticipation of litigation, the transfer could be voided.

6:27 So that means the asset goes right back into your name and becomes fully exposed.

6:34 So timing is everything. Estate and asset protection planning is about building the structure before the storm, not during it. So when you compare holding structures side by side, conclusion is clear. A single member LLC in New York are pretty vulnerable.

6:52 Multi-member LLCs often collapse under scrutiny and LLC law is still itself pretty unsettled.

6:59 In comparison, please rely on a sanctuary of partnership law, be offered better rules, better protection from predators and superior estate planning benefits not just for real estate but also for crypto, stocks and other financial assets. If you have any questions, please reach out to us.

7:22 Thank you for watching and I will see you in the next episode.

A transcript of the recording, so it reads as speech rather than as prose. It explains the law in general terms and is not advice on your own situation, which turns on facts this video cannot know.