In early March 2020, my long-term client, Pei-Pei, called me with a concern about a bank loan she had personally guaranteed. Pei-Pei owns a successful and fast growing staffing company. Two years ago, she borrowed $3 million from her business bank to grow the business. The bank had required her to personally guarantee the loan. With annual gross revenues of $10 million, Pei-Pei had no problem with the personal guarantee.
However, due to the COVID-19 pandemic, Pei-Pei had seen her revenues plummet. She was forced to furlough most of her staffing work force and was running the business on a skeleton crew. Lastly, Pei-Pei confided that she was barely able to make the monthly payments on the bank loan and was no longer meeting the loan covenants. Pei-Pei was concerned about her home and rental real property assets in light of the personal guarantee. She owned a home in San Marino and two LLCs to hold rental real properties that our firm had set up several years ago.
This is what we did to protect Pei-Pei’s rentals and San Marino home:
Equity Strip
I helped Pei-Pei protect her rentals by stripping out the equity in the properties by encumbering the rentals and recording deeds of trust in favor of a friendly party. Potential judgment credits will not likely pursue a judgment when they realize there is little or no equity in the rental properties.
Irrevocable Trust
We transferred Pei-Pei’s San Marino home worth over $3 million to an irrevocable personal residence trust for the benefit of her children from a former marriage. Because the trust is irrevocable, it is treated as the owner of the house, although Pei-Pei retained significant control through our proprietary drafting methodology. Title records show that the trustee of the trust holds title; not Pei-Pei. We also drafted a lease agreement to allow Pei-Pei to pay rent to the trustee to continue to live in the house. Rent payments were enough to pay the mortgage, insurance, and property taxes on the home.
The entire structure was set up and running within two weeks.
Leticia Balcazar (J.D., LL.M.) is a U.S. and International Tax, Business, and Estate Planning attorney based in the Los Angeles San Gabriel Valley. She has advised business owners in the San Gabriel Valley with ties to China and Southeast Asia on structuring international and domestic investments for over 20 years. If you are concerned about personal guarantees on loans for your small business, reach out to Leticia by email or phone today, +1.562.665.0512, and she will be happy to help.
