LLC For Real Estate Investing: Pros, Cons & Best Practices
We discuss the pros, cons and best practices of LLC’s for real estate investing with Brian T. Bradley, who has been voted America’s Best Attorney for 2020!
Googling real estate asset protection will result in pages filled with misconceptions, like that asset protection is only for high net worth investors or that all you need to protect yourself is an LLC. To separate the truth from fiction, we welcome back Brian T. Bradley who, since our last conversation, has been voted America’s Best Attorney for 2020. After summarizing key asset protection strategies and how they act as different layers of insurance, we dive straight into the top asset protection myths. You’ll hear why you should never set up your LLC as a single-member company and how to decide which state to set up your limited partnerships in. From our special focus on LLCs, we explore how anonymity can work in your favor but why it doesn’t offer any legal protection. An important point, Brian highlights that asset protections don’t exist to hide your assets. Instead, they’re a holistic strategy to protect your assets from risks that range from getting into a car accident to someone injuring themselves on your property. We also touch on the power of offshore trusts and how Quantum Living Trusts can offer incredible protection for families who have under one million dollars in net worth. Tune for real insights into asset protection and to learn the asset protection questions that you should be asking your attorney or CPA.
Key Points From This Episode:
- A warm welcome back to Brian T. Bradley, America’s Best Attorney for 2020.
- Brian provides an overview of asset protection and how it leads to peace of mind.
- Unpacking the first asset protection misconception; that all you need is an LLC.
- Why you should never set up your LLC as a single-member entity.
- Hear the answer to the common question — “In which state should you set up your LLC?”
- Setting up your limited partnership in a state with strong charging order jurisdictions.
- Why a lack of case law doesn’t necessarily mean that you should create a series LLCs.
- The limits of anonymity and where it can work in your favor.
- How asset protection is designed to protect your investments, not hide them.
- The powerful protection that comes from setting up an offshore trust.
- How a Quantum Living Trust can afford incredible protections to families with under one million dollars in net worth.
- Changing your asset protection strategies and the ease of converting to a bridge trust.
- Why you should be wary of any law firm that only talks about selling you an LLC.
- How your assets can be threatened by circumstances that aren’t related to your business.
- Important questions that you should ask your asset protection attorney.
Links Mentioned in Today’s Episode:
Ritter on Real Estate Episode 16
Multi-Family Global Investment Summit
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Thanks for listening!
—Full Transcript Below—
[INTRO]
BB: There’s this idea out there, like even when you read online where it sounds like you want to hide your assets. It seems like that’s what you’re trying to do with all this is set up these LLCs and these different things, so that you’re hiding your assets, so that they can’t see what you have. In reality, what you’re saying is very different. In reality, when you get into that situation, you have to disclose what you have. Otherwise, as you said, I mean, you’re going to be lying to the court. You’re going to be in perjury. The right way to approach this is totally the opposite. I think people need to be thinking about it in a different way. You’re not trying to hide what you have. You’re trying to just be transparent with what you have, but you’re layering these protections on, like these walls, this armor. So that the folks can’t get to these different levels.
[00:00:47] KR: Exactly. It’s like, you’re not hiding your castle. I have a big castle. I just have a really cool moat around it with a really big fence and really good archers up there that are sharpshooter archers. We’re not trying to pretend we don’t own a castle. You want to look at it through a litigation standpoint. You want the optics to be good. Hiding is a one-way ticket for a fraudulent transfer argument.
[00:01:10] KR: Welcome to Ritter on Real Estate, the show about how to passively invest like a pro. On each episode, I interview real estate experts who give their top investing advice, strategies, and tools that break down the insights and the practical steps to avoid the pitfalls and make better investments. I want to help you passively invest like a pro. This is Ritter on Real Estate, and I’m your host, Kent Ritter.
[EPISODE]
[00:01:33] KR: Welcome to Ritter on Real Estate, where we teach you how to passively invest like a pro. We’ve got a returning guest today and very excited to have him back on. His name is Brian T. Bradley and he was recently just voted America’s Best Attorney for 2020. That’s a pretty awesome credential. Very happy to have you here today. If you guys remember from the last episode, I believe that was episode 16, Brian was on. And he was talking with us about asset protection, which is one of the most important things you can think about as an investor.
Oftentimes, we focus on — “How do we get this money? How do we get the money coming in, the cash flow coming in? Even just as important is how do you keep that money and how do you limit your liability and how do you make sure that you’re protecting yourself as you’re building your wealth?
Brian wanted to come back on today, because they have a new product out that I think is really interesting for folks. A little more accessible to folks that aren’t quite in that high-net-worth category, but are starting out and still need protection. We were just talking before the show, I think again, that there continues just to be misconceptions around asset protection, especially around LLCs. What you need, what you don’t. We’re going to dig into that a little bit more too and clear up some of the misconceptions there. Brian, thanks for coming on again and appreciate you coming back on the show.
[00:02:54] BB: Yeah. Thanks, Kent, for having me back on. I really appreciate it. I’m excited about this for your listeners and we’re going to blow up some more of the status quo and clear up more misconceptions that I see a lot of clients that call-in have. Specifically about LLCs and then talking about this new trust for that under the 1 million net market, where I see a lot of potential problems coming in.
[00:03:17] KR: No, that’s awesome. On the last episode, we really ran through the whole gamut, right? You went through from start to finish, different types of LLCs and trusts and different products. I think as we went through that, it’s a good overview, but now we can dig in a little bit more right to some of the things that we’re hearing day to day. Why don’t we start there? Why don’t you give us a recap to get everybody back thinking about asset protection and then we can start to dig into some of those specifics.
[00:03:46] BB: Yeah. I think you hit the start of it pretty well of, as investors, we’re looking at return on investment. Where’s the next deal at, caps, all of these metrics, but we’re not thinking about, okay, what happens when it’s not sunshine and rainbows? What happens if we do get sued? And I’m building up this legacy, I don’t want to lose it all.
Asset protection really is — just a recap, it’s about peace of mind. Then we do that through different legal tools; LLCs, limited partnerships, and asset protection trust. The idea really is just how collectible you are. Either just saying like, in human nature, you want to be as pretty as possible to attract the best mate as possible. In the legal sense and asset protection, we want to make you as ugly as possible. It’s counterintuitive, but it’s just the way that the system is set up.
What we’re using again are LLCs, limited partnerships, and these asset protection trusts. It’s just like layering. You want to create different layers at different starting points as you go along, just like winter. Think about winter. When it gets really cold outside, you dress in layers. You have a base layer, a mid-layer, and then you have an outer-shell layer. It’s more flexible when things go bad, or you’re hot and you’re skiing, or you’re ice fishing, you can take different layers off. The base layer, the mid-layer, the outer-shell layer. The same thing goes with your asset protection plan. That base layer is your LLC. That’s going to be your holding company for your real estate.
The mid-layer is going to be a limited partnership management company that’s going to own those LLCs. Then your outer-shell layer is going to be an asset protection trust. We went over the different types; offshore, domestic, and then the hybrid bridge trust as the different options there in the last show. But there’s a lot of misconceptions just about LLCs. Especially charging orders, jurisdiction shopping of different states, series LLCs, and a really big one — anonymity, that we fall into.
I think we really need to clear up some of these misconceptions that people hear from their CPAs, or Google searches, or just, unfortunately, law firm salesmen. Because law firms have just become sales industries. They’re just selling a product. Here, we’re just trying to educate you on and clear up these misconceptions.
[00:06:02] KR: Yeah. I think that’s a really good way to frame it, how you line those up, those common misconceptions. I can just speak to my own personal experience. When I set out to be an investor, I knew enough to think that I needed an LLC, because if you’re going to start a business, you need to set up an LLC, or some structure. As I got online, exactly like you said, not only was there conflicting information, but there’s just so many options and so many different ways to go. Like you said, “Should you incorporate in a different state? Should you do your own state?” All and all the different ways of doing all the different law firms to set it up.
My head just started spinning at a certain point. And didn’t really know which way to go. I think that’s where a lot of people start. Something you said to me that really struck home before we started recording was, it’s really those folks that are starting out and are less sophisticated, that are prone to make more mistakes and really need that protection. It’s like, this group that’s starting out, there’s really not a system of layers, like you said, set up for them. It really caters more to the high net worth folks. I appreciate you helping us clear up some of this.
All that being said, I just feel, because I went through the same process of trying to figure it out. Let’s start at the beginning, what’s the first misconception and how can we bring some clarity?
[00:07:25] BB: Yeah. Let’s just start with, because everybody wherever you start, the foundational layer is an LLC, a limited liability company. All you ever hear about is sunshine and rainbows of them, and thinking, “Well, I’ll just get an LLC. Liabilities completely gone away.” They don’t really listen and learn that — what’s the first word? First letter? L, limited. They say it point blank in the name. This is limited liability.
The common issue with LLCs is that they can get pierced. Piercing the corporate veil, alter egos. They’re really, really easy to pierce. Rule of thumb, when you’re creating an LLC and you’re just starting out, the LLC should be created in the state where the assets at, because you don’t transfer state laws. I’ll break this down in a second, but we just realized when you’re creating an LLC, the lawsuit’s going to be coming when you’re challenged in the state where that assets at. So it’s going to be that state law that applies.
The problem with LLCs is, when they’re created, you’re generally calling your CPA, or a real estate attorney, or a business attorney. Not someone who’s dealing with asset protection and liability. And your CPA is looking at it for what? To maximize or minimize your taxes. They’re going to say, ‘S-Corp’ or something like that. That’s just a tax strategy. That’s not protecting any assets.
Generally, you’re creating them when you’re just starting out in your own personal name. The problem is that courts have a tendency to completely disregard single member LLCs. They’re basically worthless. I’m fine and comfortable with a single member LLC, but what you want is that single member LLC that’s holding your real estate to then be held, or owned in a multi-member, limited partnership. Not you personally. What you’re doing when you’re doing this is you’re now properly layering your protection system, just like your clothing when you go outside.
Then the next big issue in confusion is what we call charging orders. People really have a lot of confusion on where to set these LLCs up in. You said it yourself, you’re researching, you’re getting all this different information. Do I go to Delaware, Wyoming, Nevada, Arizona, Florida, Texas, all over the place?
What a charging order is referring to is how much a creditor can collect from you, the owner of the LLC. Good state charging orders have the charging order being the sole remedy. Basically, a creditor with a judgment against you is going to be entitled only to the limited remedy of that order. They’re not going to be able to bleed into other assets, or under your personal assets and extend beyond that. That’s not how things really work in reality, because of, I think we touched upon last time. The court’s superpower that they have, which is a court of equity. They can do whatever a judge wants to do for an order, just to equalize rights and wrongs.
The question comes down to do I set up these LLCs in Delaware, Wyoming, Texas, Nevada? That’s generally what clients want to ask and want to know when they call, “Okay. I’m in Oregon, but I want to create Texas, or a Wyoming LLC.” You hear about the states and they’re really good about protecting their LLCs and some have privacy, like anonymity. They say, “Oh, it’s better to do that, so I’m just going to go do that, because my CPA or somebody on the internet told me to.”
It’s really not that simple. What really matters is what are you holding. Let’s say, for example it’s California real estate and you’re holding and setting up a Wyoming LLC, because your CPA, or something you saw on the internet told you to do that. And you think it was better. And you go ahead and hold a piece of California real estate in this Wyoming LLC, and now you’re paying California franchise tax. What you’ve done is just convert your Wyoming LLC to a California LLC, because you’re doing business in the State of California. Not only are you going to be paying the franchise tax in California, but if you ever have a liability issue in California, or any other state that’s not Wyoming, which means you’re getting sued in that state where the asset’s at. A judge in California or whatever state it is isn’t going to apply Wyoming law. What law are they going to apply? The law of the state that the assets in. California, because that’s our example.
A judge in California, or any other state doesn’t care that your LLC is in Wyoming and registered in Wyoming. It means nothing in the damage laws, tort laws, injury laws, and judgments. That’s the state that the assets in. So for assets, like I said, that are real estate specifically, we recommend using the state that the real estate is located, because you’re not gaining anything by using another state. You’re literally just doubling your maintenance cost.
Now you also have to maintain the LLC in two states. Just keep it simple. Then as you level up, you have those LLCs owned by a limited partnership. Those tax filings and K-1s flow through to that limited partnership, that management company. It’s still only one tax filing. You’re simplifying your tax system. You’re making the optics of it look better. Again, you’re not filing multiple tax returns at that point.
[00:12:31] KR: Is that limited — I understand about, you should have the LLC that owns the property in the state where the property is. I think that is one big misconception, because that’s what everybody on the internet is selling to you. Do your Delaware, your wherever, Wyoming, Nevada. Yeah. That’s great to clear that up, because that’s the first thing people always seem to always misconstrue. Then the limited partnership, where should that exist?
[00:13:01] BB: That is a second-tier level. That’s where you actually want to start looking for strong jurisdictions, like Arizona, Nevada, Delaware. It’s simply because you’re starting to look for another barrier of entry for a lawsuit. Your first one’s the LLC. Make the optics easy. We’re not transferring laws, so don’t double up your maintenance costs. The next level up, because you want to create a jurisdictional separation, should be in one of those strong, charging order jurisdictions. The issue is because of the US constitution full faith and credit clause, it’s not going to offer much more protection. You’re just making the person suing you make another argument and pay more fees.
The real strength of it comes when you add in an asset protection trust, but you need a limited partnership to do that, because limited partnerships are different than LLCs in the sense that they have dual classes of ownership. One is a general partnership that holds assets and manages them. The other one is the ownership portion and control of it. That ownership portion of it would be the bridge trust, or an asset protection trust.
You don’t have the split personality of ownership with an LLC. That’s why that management company that owns all these LLCs should be a limited partnership, because of the dual classifications of management, versus ownership.
[00:14:23] KR: Got you. That’s really helpful to understand. The state and jurisdiction actually does come into play. People just really aren’t typically applying at the right level. They’re applying at the LLC level. They need to be adding the different, the additional layer. Then you’re putting the sweater on and making sure that they’ve got that extra layer of protection. Then the state really does matter. You want to look for states that have what did you call it? A stronger —
[00:14:49] BB: — Stronger charging order protection for the member managers. Yeah.
[00:14:53] KR: Perfect. States like that, I heard you say Arizona, Nevada.
[00:14:57] BB: Yeah. We like Arizona for the limited partnership, because they have really strong charging order protection for limited partnerships, specifically a specific statute for limited partnership charging order protection. Then you have your standard flavors of Delaware, Wyoming, Nevada. That second layer is where you want to use a stronger jurisdictional option. Yeah. Then the next big issue that I hear, because they’re just so — I see a lot of salesmanship on series LLC, but not a lot of information that’s being talked about the series LLC.
[00:15:32] KR: Yeah, I’ve heard a lot about these.
[00:15:34] BB: Yeah. The big misconception when it comes to the series LLC, the issue is that they’re very young with no case law to rely on if that series separation is even going to be upheld. There’s a limited number of states that even have series LLC statutes. For example, both coasts, like California, Oregon, Washington, like the other east coast. Most states don’t have and recognize the series LLC structure.
What this means if you’re living in a state that doesn’t recognize the series LLC, you won’t get the benefit that’s intended of them. These states like California will charge you the franchise tax on each child series that you’re creating. But for liability, they’re just going to disregard each child series and treat it as a traditional single LLC. There’s no stopping the bleeding of the lawsuit. It’s just completely going to be a disregarded entity. Once the veil may be pierced, which is easy to do, all the assets are up for grabs now.
[00:16:32] KR: Got you. Okay. I actually didn’t realize that. What you’re saying is the series LLC, which is a new fancy thing, it just follows the same logic as a traditional LLC where you’re saying, it really depends on the laws of the state. If you have a series LLC set up and like you’re saying, California doesn’t recognize that, so they’re going to look at that like a traditional LLC, like everything’s bundled together and you’re not going to have that protection that you think you have by feeling you have these properties in different child LLCs under the series. In reality, they’re going to look at it all as one bucket.
[00:17:08] BB: Correct. In California, of course, they have already come out and said this. This is just the big misconception. I like series LLCs. I use them situational. Everything needs to be situational. I only recommend a series LLC if the asset is in a state that recognizes series LLC, then have series LLC legislation. And you the client live in a state that has a series LLC recognition. Because yeah, you can own Texas properties and live in California, but by you being a resident of California, you have liability in California just by driving your car and living and breathing and moving around in your business.
What happens if you personally get sued for something that’s not related to that Texas property? Now, that series LLC is completely worthless again. That’s where you need to look at what happens in court. Do these states recognize them? Am I having a false sense of security, or do I have a real sense of security that actually is going to work?
I sit there and I hear people say, “Oh, well there’s no case law on the series LLC. That’s a benefit.” I’ve heard that argument. I’m a trial lawyer. I’ve never heard in a single situation where a judge says, “Where’s your brief?” And there’s no case law on this that I’m going to say, “Well, that’s a strength, your honor.” I have nothing to say. I have nothing to present. That’s not a strength when, for example, asset protection trust. I can go in with 40 years of case law and say, “Well, here, here, here, here in this case, Anderson Case, Grant Case, this case right here, here’s the ruling, here’s the holding, here’s the analysis.” But why? Here’s how it’s applicable to our situation. You can’t do that with a series LLC.
[00:18:42] KR: In that case, it’s really leaving much more up to that individual judge’s opinion, right? Because there’s really nothing for him to have to follow.
[00:18:51] BB: Exactly. That’s a really good analogy on that, because now it’s the judge’s superpower in the court of equity to make the decision. That’s what you don’t want. You want to be able to maintain strength in your assets and that’s what’s taking away jurisdictional options and a court superpower. Then the next big misconception that I get with LLCs a lot is this whole theory of anonymity and how it even works.
The thought that you can just create an anonymous LLC and that you just completely disappear, it can never be found. The basic thought is that you can create this anonymous Wyoming LLC, where you, the LLC member’s name, is not available to the public. Then you can just completely avoid a lawsuit altogether. That’s just completely false. When your LLC is sued, you’re going to be legally required to appear and defend it, or a default judgment is going to be entered against you. Then the complaint will simply be, once it is in litigation, amended. Once you’re forced to appear and then your name is going to be added personally into that lawsuit.
[00:19:54] KR: You’re still going to get served, no matter what.
[00:19:58] BB: No matter what.
[00:19:58] KR: Whether your name’s on or not, right?
[00:20:00] BB: Exactly. There’s a person of service that could be attached to that LLC in Wyoming. The sole purpose, that guy’s job is to take a legal document that he’s been served and say, “Hey, Kent. Here’s the service. You’ve been served. Now you need to go find a lawyer to defend it.” That you can’t just pretend that it doesn’t exist. Otherwise, you’re going to have default judgment entered against you.
[00:20:21] KR: I mean, that makes total sense. I guess, what’s the case for the anonymity? Anonymity, there we go. What are you advertising about it? Because I mean, that makes total sense. They’re going to find you.
[00:20:36] BB: Yeah. The benefit of it is in its functionality of day-to-day running a business to where you’re not going to be personally harassed. Your home residence or wherever it is, people won’t have access to that by just googling you and looking you up. It just cuts down on the personal harassment of angry clients, or people. But once you’re served, you’re served, then the lawsuit commences. What’s even worse is that if you want secrecy to even work, this is also known as lying under oath. That’s just a one-way ticket to jail. An example of this is —
[00:21:06] KR: Doesn’t sound like something you want to do.
[00:21:08] BB: No. It’s very shortly after a judgment is entered against you, the individual, the creditor, the person that sued you has the legal right to demand information about the assets owned by you. The courts enforce these rights very strongly and very broadly. At this point in litigation, the only way to keep an asset anonymous, or a secret is to lie about them and commit perjury.
That’s why we don’t advocate for hiding. We just prefer to have full disclosure of proper — and a proper asset protection plan in place and just set it up to work as it’s intended. And have very strong layers as you need them and build up. We do that. That’s the first two layers, like the LLC, that limited partnership that owns those LLCs. Then it works best when you add that outer-layer shell, asset protection trust, or a bridge trust that combines the offshore power of the Cook Islands with statutory non-recognition, but it’s built back to be classified by the IRS as a domestic trust by maintaining IRS compliance.
[00:22:12] KR: That’s like putting the big goose down on, if we’re talking about layers. That’s the big boy. It’s really going to protect you. I just want to say, I do want to talk about that, but I had a question going back to the idea we’re talking about. Like the anonymity and these different things. You’re getting sued. You’ve been served. It seems to be — the point you made, as I’m coming back to this now is, like, there’s this idea out there, like even when you read online where it sounds you want to hide your assets. It seems like that’s what you’re trying to do with all this. Is set up these LLCs and these different things, so that you’re hiding your assets, so that they can’t see what you have.
But in reality, what you’re saying is very different. In reality, when you get into that situation, you have to disclose what you have. Otherwise, as you said, I mean, you’re going to be lying to the court, you’re going to be in perjury. The right way to approach this is totally the opposite. And I think people need to be thinking about it in a different way. You’re not trying to hide what you have. You’re trying to just be transparent with what you have, but you’re layering these protections on, like these walls, this armor, so that the folks can’t get to these different levels right down.
[00:23:26] BB: Exactly. It’s like, you’re not hiding your castle. I have a big castle. I just have a really cool moat around it with a really big fence and really good archers up there that are sharp shooter archers. We’re not trying to pretend we don’t own a castle. You want to look at it through a litigation standpoint. You want the optics to be good. Hiding is a one-way ticket for a fraudulent transfer argument and that’s not good. When the optics are good and we’re not doing things to hide, or hinder, or delay the rights of a creditor, now we’re in a good position of strength.
Then when we have strong jurisdictional choices, depending on where you’re at and especially when you start using asset protection trust, now you have potentially the strength of statutory non-recognition. That’s where we don’t care if you’re suing us. We don’t even care if you got a million-dollar judgment against us, because you are not collectible. The assets then, at that point, we dropped the domestic compliance, went offshore. If you want a penny from us, we have to agree to it, because they’re safe and secure in the Cook Islands, until we tell them to transfer it.
And that won’t even work, because in the Grant case, US Vs. Grant, the wife instructed the offshore trustee to give the government, I think it was 36 million dollars back. And that offshore trustee said, “No, because this is under duress and we’re protecting the assets from duress, even against the IRS and the government.” Because it was out of her control at that point, she couldn’t be held in contempt of court and the assets just sat there safe.
[00:24:54] KR: Interesting. I’m just curious about that example. How does that play out a year, a couple years down the line when you want to access your money and you’re living in the US? How does that play out?
[00:25:08] BB: You still get access to live and invest and your money. What it is is the judgment creditors have no access to it. What would happen is like, “Oh, I’m being sued.” You would get served. You’d be panicking. You would call me and my partner Doug. First, we’d try to calm you down and be like, “It’s not as bad as you think. It’s like a home flipper walking into a wreck and seeing goldmine.” Most people walk in and be like, “Just get the heck out of this property.” There’s no way you want me to buy this. We’re used to this, just like you guys are used to train wrecked properties.
Nine times out of 10, it’s not as bad as you think. Now, let’s say you’re the one percenters and like, “Hey, it is bad and we agree, we should trigger the trust and migrate the assets over there.” That’s where we, the attorneys, would declare a state of duress, not you the client. You would just acknowledge that we’re doing it. We would sign, literally, a document and just write me, Attorney Brian Bradley, declaring a state of duress to the lawsuit. Send it over to the offshore trustee who’s in second position in the Cook Islands, and then that would remove you as the primary trustee. That offshore trustee then steps in as a primary trustee and that happens within about two days.
Now you’re no longer in compliance with the IRS codes to make it classified as a domestic trust, because you’re removed as a trustee. Now it’s a purely foreign offshore asset protection trust at that moment.
[00:26:26] KR: You still have access. You still have access to the money.
[00:26:30] BB: Yeah. Then what we do at that point, because it would probably be needed, is we would start deciding — “Do we need to actually set up offshore bank accounts and do we need to start transferring equity, or not? What’s the status of this?” We start tracking the case and see if we need to take it to the next step and actually start taking equity and moving it offshore.
[00:26:48] KR: Got you. Got you. Appreciate that. I mean, this is really good. This is really enlightening. I mean, it’s definitely all very interesting. It sounds like there’s all these layers. I mean, it sounds pretty complicated. I think you do a great job of breaking it down pretty simply, but still, there’s — we talked about going offshore and doing these things. It sounds like something that’s built for somebody that’s multi-multi-millionaire.
[00:27:15] BB: Yeah. It’s the allure of it, I think, because we’re so not used to understanding doing things offshore. It’s actually an easier systems, because everything, like banking is online. It’s really quick. There’s a lot of checks and balances in the system. We’re just not used to it, because we’re just used to go into Chase down the street for our local family mortgage guy. It’s the same process. The processes don’t change. It’s just, because it’s an offshore trust, it doesn’t mean that it’s just like any other type of trust that you’re investing in and out of, or your LLC.
The system is actually more streamlined, because now instead of having a bunch of parts that you have to manage independently, they’re all bundled up into one nice area and it’s cleaner. Banks actually can look at this if you wanted, to look at it and understand the system a lot better. They’re actually more comfortable with the system now. It actually cleans things up.
Most clients we find, if they ever do have to transfer and want to go offshore, they never want to bring it back, because they realize it’s stronger and it’s more functional and easier for them to use and manage. Because generally, once the lawsuit goes away and we force a settlement, like a penny on the dollar, you have the option to re-instill the domestic portion of the trust and have it back to being classified domestic. Most clients choose not to, not because they’re panicking, but because they realize this a lot easier and cleaner.
[00:28:33] KR: Interesting.
[00:28:34] BB: Yeah. Most don’t actually re-instill the domestic options. The cost of it of going offshore, really high. Generally, $50,000 plus. The hybrid option, the bridge trust. $30,000 generally with the asset management limited partnership. Doug and I were like, “Well, people that — 1 million below in net worth, they also want an offshore component for stronger protection than just being in an LLC, or anything purely domestic for the reasons that we discussed already today and on the show before.
We believe that this segment of investors shouldn’t be left out of the dark. We ended up creating what’s called the Quantum Living Trust. It’s opened up the doors to who can actually afford really strong, layered asset protection with an offshore component to their planning. The Quantum Living Trust basically gets you into an offer component of the asset protection planning world, that would only be available to the high net worth clients at affordable entry spots.
For about the cost of a traditional living trust, which is around $8,000, plus an AMLP, like the limited partnership, 6 grand, you now have an offshore component like the bridge trust as you start and scale up. The quantum living trust is like its big brother. The bridge trust, the quantum living trust is a discretionary, irrevocable trust with very strong creditor protection, with spendthrift provisions.
In layman terms, what this means is that it’s an asset protection trust that protects the beneficiary, you, from creditors. Is created by you, for you, as your own beneficiary. Unlike a standard trust, a Quantum Living Trust is connected to a fully offshore — what’s called a primary trust. That’s the Quantum Trust. The way it’s connected is by what we call a sub-trust. That’s the derivative of the primary trust. We have the primary trust offshore. We create a secondary sub-trust domestically, which is a derivative of it. The primary offshore trust is that offshore component.
Now, if we compare the Quantum Trust to the bridge trust, unlike the bridge trust, the Quantum Living Trust is not individually registered offshore. That’s the limitation. What this means is that the Quantum Living Trust cannot, by itself, be triggered across the bridge if you’re sued, since it’s not registered offshore at all. The Quantum Living Trust has to rely on that primary offshore quantum trust for its offshore defense.
You’re paying the extra money for the bridge trust, because it’s registered offshore by itself from day one. It is a full offshore asset protection trust, Cook Island foreign asset protection trust from day one, registered and all. Then we build the bridge back. The Quantum Living Trust has to rely off the quantum aspect of it.
It’s because of the limitations of that — that the sub-trust not being registered offshore, that once a client hits 1 million net worth mark or more, it’s essentially, they’ve outgrown the Quantum Living Trust and it’s really worth the additional effort to upgrade to the full bridge trust at that point. And have the trust individually registered offshore without having to worry about sub-components.
Yeah, so for the family with one million in net worth or below, a lawsuit can be even more devastating to you. Now you have a way to get very strong asset protection and add that missing offshore component that you generally only hear like I said, about the high net worth families that have and it’s flexible and scalable.
[00:32:14] KR: Is the LLC and the limited partnership portion, I mean, does that all roll together, so it’s a holistic strategy? Is that —
[00:32:22] BB: It does. The setup would be even with the Quantum Living Trust, would be the same, LLC, foundational base layer, limited partnership owns those. Then that would either go into the quantum living trust, or the bridge trust. Once you outgrow the Quantum Trust, what we would do is just replace the Quantum Living Trust with the bridge trust and then forward the cost to the bridge trust where you’re just paying the difference.
[00:32:45] KR: Got you. If you’re starting fresh, I understand how it can all be set up in the right way and come together. What if people already have a few LLCs, a limited partnership, they’ve got other things going on? I mean, how are those folks going to bring it all together?
[00:33:01] BB: Yeah. That’s how most people come to us, is they have 15 LLCs. They may have a revocable living trust. Sometimes they have a management company, sometimes not. We look at what they have. Generally, we’re not going to try to recreate the whole wheel. We’re going to use what you have. Those LLCs would then be merged into and held into the limited partnership. And then we would come in and add the asset protection trust to that. And then connect the revocable living trust to the asset protection trust just for being able to identify beneficiaries and death directives and financial directives for afterlife and stuff like that.
If they already have the management company, maybe they’re missing the asset protection trust. Or, like I’ve had a couple high net worth clients that had a domestic purely asset protection trust. And they were California residents with aNevada asset protection trust and we had to go through the whole Kilker vs. Stillman 2012 conversation to where, “Hey. Sorry, California doesn’t recognize out-of-state asset protection trust.” Then we just ended up dropping the domestic asset protection trust and replaced it with a bridge trust.
[00:34:07] KR: Man, it just seems like it doesn’t seem that complicated when you lay it out, where it’s like, LLCs in the state where you’re operating, then limited partnership somewhere that has the most protection. There’s a few states that work. But when you go online, or when I just talk to people and to see what they have set up, it just seems so much more complicated. There are so many situations where people are like, “Oh, yeah. I’ve got the Wyoming thing going on over here, or I went to this seminar in Las Vegas and I signed up for this Nevada LLC, or whatever it is.”
I mean, in those situations, I guess, what’s the right thing to do if you’re like, “Well, I bought one of these and now I’m hearing this conversation and I’ve realized that really it’s not doing me any benefit. It might actually be doing me some harm.” How do you unwind and start over in the best position?
[00:35:01] BB: That’s a great question. We try to salvage what we can. Sometimes, we just have to dissolve a worthless LLC, because why are you just — you’re just going to keep spending money to not use it, or you’re going to force yourself to use it when there’s something better. That might be a better decision just to dissolve it, right the ship, and get it in the right direction. If we can salvage it, we will.
I think part of it is just — I look at it as insurance. A lot of law firms run themselves like a business, like insurance. They’re not trying to learn everything, because it’s really hard to learn everything, so they try to cast a large net. What’s the largest net you can cast nationally? An LLC. Then you can stuff everybody into an LLC, no matter where they’re at. And then just say, “Hey, here you go,” and then they make their money.
Be careful when you talk to law firms like that. If they’re not doing a whole breakdown over your liability, your risk, how you own it, what you own, the position you own it in, do you own it personally? How much equity do you have in it? Where’s your personal risk coming from? Do a whole structured analysis of you Kent personally, Kent’s business, Kent’s investments and all of it. I would be really cautious on if I’m going to do business with that firm or not.
Are you only talking to me about an LLC? Maybe that’s where you need to start, which is fine. What other options are there? Because there’s lots of ways to skin a cat. We’re just trying to find the one that fits for your situation at that time. And then give you direction on where, as you grow, you’re going to go to. Because that system is going to have to change as your buckets change. As you get more successful, you’re going to add more buckets of assets and income coming in. We have to make sure that the buckets, as they grow, are properly protected and scaled up and easy to manage, so you want it to be flexible.
[00:36:39] KR: Let me ask you a simple question. Should you hold any assets in your personal name?
[00:36:44] BB: No. Rich people don’t, so why would you?
[00:36:47] KR: Okay. Simple answer. Yeah.
[00:36:51] BB: If it has a key and can go boom and you have to have insurance on it, no. Separate it out. At least, foundational LLC. Separate it out. Just too much in life and hiccups can happen. You want to take away one layer as you can and then add more protection. If you want to be rich, copy the rich. The rich don’t hold things in their personal name. They get the beneficial use and enjoyment of them, but their business entities own them. Their trusts protect them. Mimic the people you want to be like that and do it at a high level and just go from there.
[00:37:24] KR: Yeah. “Success leaves clues,” right? That’s the famous Tony Robbins quote.
[00:37:27] BB: Yeah, I love Tony Robbins. I’m diving deep into his stuff right now.
[00:37:32] KR: Well, that’s a whole another episode, because I’m a fan too. Yeah, there’s a lot of great stuff in there. I had another question. Now we’re talking about Tony Robbins, now I forget the other question. So yeah, LLCs, don’t hold assets in your own name.
I know what it was. I guess it’s more of a statement is I think, probably the last episode, you got me thinking about this in a different way, because I always thought about the risk of — what’s the risk — if I own a property, what’s the risk that somebody gets hurt on that property, or something happens involving that property and because of that, I get sued?
But really, what you’re thinking about is so much more holistic than that. It’s, in your daily life, as you’re driving, or interacting with people, or heck, somebody’s at your personal home and they slip and fall, or whatever. Some of those things are covered under insurance, but what’s happening in your daily life can affect all of your assets that you own. And that’s what you’re trying to really protect against is —
[00:38:31] BB: Exactly. The whole spectrum. You may not have a lot of risk from your asset, but you may have a lot of risk from your business. Your business, your day job, doctor, depending what kind of doctor you are, you can have a lot of risk. Or maybe you don’t have much, but you have a lot of risk from your assets. You may be investing in passive syndications. You don’t have a lot of risk in that passive syndication, but then if you’re the one sponsoring it, now you do.
If you are driving your car and you T-bone somebody, generally, the liability comes from the places that you don’t think about. That’s what wipes you out, the stuff that’s negligent. You’re not trying to prepare a plan for it. When you think of a pie chart, I always — when I do these teaching seminars and things is, there’s the things you know, the things you don’t know and the things you don’t know that you don’t know. Most people’s liability when they start out are in the ‘I don’t know what I don’t know,’ because if you know things, I don’t need to ask you a question. If I know I don’t know something, I can be like, “Hey, Kent. What do you think about this? I need an answer to that.” Thanks.
If I don’t know that I don’t know something, I would never be able to answer a question to get to help you out. That’s where most people get wiped out from. We try to shrink that amount as much as possible.
[00:39:38] KR: That makes total sense. I think that’s a really good way to think about this. I think you’ve done a great job of breaking this down. In a very simple way, it really isn’t complicated if you just — it’s like, keep it simple stupid and just —
[00:39:50] BB: It really is.
[00:39:51] KR: — Set it up. With those three layers — I like what you said again about when you’re talking with a law firm, what are some of the questions that they should be asking you, so that you know that they’re looking at you holistically, right? I think that’s really good. Are there questions that you would recommend that people ask the law firm, so they can get down to that?
[00:40:13] BB: Absolutely. I would just look at what percentage of your clients do you represent that are just asset protection? Or is this just something you dabble in or do a little bit on the side? Because then, they’re not going to really know the gamut of everything. They’re going to just go to — “I went to a seminar. I did a continuing legal education course and they told me about LLCs. Everybody should use an LLC.” That’s what they’re going to pump and push out.
That’s their sale. Okay, that’s great. Doesn’t mean they know much about asset protection. They just took a course and they know how to set up an LLC and get a quick thousand bucks out of it. Are they doing a full risk analysis over every aspect of your life? What kind of products do they have for asset protection that they’re knowledgeable of? With your personal profession and your asset and investment strategy, how many clients do they have that match that person type? Because some people don’t want to deal with any real estate investors and they do different types of clients for asset protection. That’s what they’re really good at.
Then if you have a real estate investor with a lot of real estate, what’s their network like? Who do they affiliate with? Do they also work with wealth management guys and CPAs? Because some clients to me come — they don’t have a wealth management team. They don’t know about cost segregation. They don’t know how to do anything to manage decreased tax mitigation strategies. It’s like, let’s steer you to these guys and get the CPA. What team do these guys have? Then it shows how much they dive into the topic of asset protection, wealth preservation and then you know, they’re probably — if they don’t have an answer, their team will find an answer real quick.
[00:41:47] KR: Yeah, it goes back to this idea of specificity. You can’t be good at everything. You have to think about lawyers the same way, maybe you think as doctors. They have different specialties. They don’t do everything. They specialize in something, they focus on — lawyers are the same way. Maybe that’s something that a lot of people don’t understand.
[00:42:04] BB: It would and a good example is, “Oh, this guy knows a lot about asset protection. I’m in a real estate deal. Can you negotiate my real estate transactional document?” — “No, I’m not a real estate attorney. I’ll protect what you have. Yes, we’ll go through that analysis, but I’m not going to draft up your agreement. I’m not going to negotiate your real estate closing and things like that. That’s not what I do.” Same thing. Don’t ask your real estate attorney to create an asset protection structure for you. Don’t ask your business attorney to do that. Don’t ask your CPA, because they’re not a lawyer. All they care about is taxes, but they shouldn’t be giving you legal advice. You got to go to the right specialist to get the right answer.
[00:42:41] KR: Yeah. No, I appreciate that. We talked a lot about building out your team, what’s the right team. I mean, asset protection, that’s just another arrow in the quiver, another teammate you need to have on the team. That makes total sense.
Well Brian, I mean, thanks so much for coming back today and continuing to demystify this topic that there’s just so much misinformation out there. Appreciate you being the source of truth. People want to learn more, or want to see more of your education, how do they get a hold of you?
[00:43:08] BB: Yeah, they can jump on my website, www.btblegal.com. Email me, brian@btblegal.com. I’m on LinkedIn a lot. I just liked to go in and I’m in a lot of groups and investment groups and answering people’s questions. We do free consultations, because I just like to get people to have education, whether you use us or not. I just rather have you make an educated decision.
Then the cool thing is if you guys have the time, if this goes out in time, also October 14th to the 17th, we’re going to be — I’m one of the presenters on the first day, Thursday the 15th at the Multi-Family Global Investment Summit.
[00:43:48] KR: Fantastic.
[00:43:49] BB: Yeah. You guys can register for that and learn from a lot of really top-notch professionals, as well as go through the presentation with us.
[00:43:58] KR: Oh, very good. I’ll make sure I check that out. It sounds like a great summit. Make sure we include all that in the show notes, so that folks can get a hold of you, because I think you’re just a wealth of information. Again, thanks for coming back and continuing to help the audience.
[00:44:12] BB: No problem. Thanks for having me back.
[00:44:13] KR: Thanks, Brian.
[END OF INTERVIEW]
[00:44:14] KR: Thanks for listening to another great episode of Ritter on Real Estate. Hit the subscribe button and make sure you don’t miss out on the content that will make you a better investor. Also, visit kentritter.com for articles, videos, and tools curated just for passive investors. Until next time, this is Kent Ritter with Ritter on Real Estate. Now, go out and invest like a pro.
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