Avoid “Fraudulent Transfers” When Conveying Rental Property to LLC’s

This is a guest blog post written by Atty. Dave Espin of Pettit Law Group S.C.

In light of the recent Koble Investments v. Marquette decision, it is now more critical than ever for landlords who hold rental properties in their personal names to consider transferring them to limited liability companies. If a tenant files a lawsuit (or a counterclaim in an eviction action) against you, landlords who hold properties in their personal names could face large money judgments against them in their individual capacities. This could result in the holders of such judgments levying against personal assets like your home, vehicles, bank accounts, wages, or business interests in order to collect on such judgments. 

If a rental property is properly transferred to an LLC (and any relevant leases are also in the LLC’s name), those suing the LLC can generally only seek to collect on a judgment using the LLC’s assets rather than the owner’s personal assets. However, one crucial factor that often goes overlooked is the timing of such a transfer to prevent it from being deemed a “fraudulent transfer” that could void the conveyance altogether.   

A transfer can be deemed a voidable “fraudulent transfer” if it is made with “actual intent to hinder, delay, or defraud any creditor of the debtor.” In Wisconsin, there are several factors, often referred to as “badges of fraud,” that a court may consider when determining whether a transfer meets this definition. Two of the most critical factors are (1) whether, before the transfer was made, the debtor had been sued or threatened with a lawsuit, or (2) whether the transfer occurred shortly before or shortly after a substantial debt was incurred by the debtor.   

So, if you have been threatened with a lawsuit, served with an actual lawsuit, or a judgment has been entered against you, it may already be too late to transfer your property to an LLC to protect your personal assets. Thus, it is vitally important that if you own rental properties in your personal name, that you speak with an attorney about setting up an LLC and transferring your rental properties to it before you are hit with a demand letter or lawsuit. Otherwise, you may be putting your personal assets at risk.

Blog post written by Atty. David Espin of Pettit Law Group S.C.