Category: Finance Tips
Air Date: 08.21.2020
How To Protect Your Real Estate Assets
In the past, real estate investors didn’t need to worry about getting sued. Now, it’s becoming part of the cost of doing business. Asset protection has become the front-line defense against predators who abuse the legal system. Here’s how to protect your real estate assets.
In today’s episode, we dive into the subject with Brian T. Bradley, a leading and asset protection attorney for real estate investors, and high net worth families. Brain explains how the likelihood that you get sued increases the more your business grows. Having talked about the need for investors to protect their assets, we explore the different forms of asset protection that can range from deliberately carrying debt to establishing an LLC in a different state. After touching on how asset protection can get you to the negotiating table faster and in a stronger position, Brian unpacks the practical steps that investors should take to protect their assets. We discuss the pros and cons of onshore versus offshore asset protection and how Bridge Trusts offer the best of both worlds. Brian then talks about why hitting a net worth of $500,000 substantially increases your risk — it’s just enough to get sued but not enough to easily recover from it. We dispel common misconceptions around asset protection and Brian provides step-by-step information on the topic, including what happens to your money when you place it into a trust, and the average costs of asset protection. Tune in to hear more about asset protection. As Brian can attest, there’s no point earning money if you’re not able to keep it.
Key Points From This Episode:
- Exploring Brian’s acclaimed career as an educator and asset protection attorney.
- What ‘asset protection’ means from a real estate perspective.
- Why lawsuits are an increasingly large issue; never have anything in your name.
- Brian unpacks the roadmap for the different forms of asset protection.
- How judges have broad powers to reach your assets, even when lacking legal authority.
- The asset protection steps you should take when you’re an entry-level investor.
- What an asset protection trust is and how it’s different from other trusts.
- The pros and cons of offshore versus onshore asset protection strategies.
- How US courts don’t always acknowledge the precedent of the state your trust is set up in.
- The best of both worlds: setting up Bridge Trusts; a hybrid onshore, offshore model.
- Why hitting a net worth of $500,000 substantially increases your risk.
- Common misconceptions that people have regarding LLCs and asset protection.
- What happens to your money when you transfer it into a trust.
- The four layers of asset protection: LLCs, asset management companies, asset protection trusts, and insurance.
- Limits to insurance companies and how they might “wiggle out” of claims.
- Dispelling more myths around asset protection.
- Why you should always seek professional help when it comes to liability.
- The costs involved in setting up a trust, LLC, and asset management company.
- Hear Brian’s answers to our ‘Keys to Success’ questions.
“You want to decrease that target on your back. So the more visible you are, the bigger your business grows, the bigger the target grows.” — @BTBLegalEsq [0:04:30]
“You get to the negotiating table faster and with a stronger position than you were in before by having stronger asset protection systems and using asset protection trust.” — @BTBLegalEsq [0:09:56]
“It takes most people a really long time to make 500,000 to a million dollars worth of net worth. One lawsuit can completely wipe that out and they’re not going to be able to recover from that.” — @BTBLegalEsq [0:18:25]
“Offshore trusts have been the global standard since the 80s when they were created. And the case law of offshore asset protection trust is solid.” — @BTBLegalEsq [0:27:50]
“Don’t DIY things that carry liability and legal implications especially to this level because you are just going to mess it up so bad.” — @BTBLegalEsq [0:31:07]
Links Mentioned in Today’s Episode:
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—Full Transcript Below—
“You know, the next big principle when it comes to asset protection is just the basic court’s authority or practical authority and it’s a really big point that needs to be understood with LLC’s and real estate investors and so the reality is that a judge can and does do whatever a judge wants. You know, LLCs and LPs, they’re going to be governed by the state statues where they’re created in.
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.
[0:00:46.3] KR: Hello fellow investors, welcome to another episode of Ritter on Real Estate. Where we focus on how to passively invest like a pro. I’m your host Kent Ritter and today we have Brian T. Bradley with us. And he’s here to teach us about asset protection and it’s an extremely important topic to understand, especially as an investor, as you’re going into different deals, you know, how do you protect all of these assets that you’re accumulating and all these investments that you’re making.
Brian’s going to go through this with us today, he certainly has the pedigree to talk to us about asset protection, Brian is a leading educator and asset protection attorney for high-risk professionals, entrepreneurs, real estate investors, and high net worth families. And Brian’s goal is to give you peace of mind, knowing your assets are safe. Brian also acts as the Chief Knowledge Officer for law firms, helping them maximize the value, along with technology integration and Brian was selected to the Lawyers and Distinction list three years in a row, from 2018 to 2020. He’s on the Super Lawyer’s Rising Star list from 2015.
He was nominated to America’s top 100 High Stake Litigator’s List, nominated to 2017 Law Firm 500 award, he also writes and teaches on high-end asset protection. Brian has been featured on numerous investing real estate cash flow finance and coaching shows. Now, including Ritter on Real Estate.
Thank you Brian, appreciate you being here today. And very interested in this topic, this is near and dear to my heart as an investor and I want to make sure that all of our listeners out there are doing the right things to make sure that they don’t run into issues and they can hold on to all these good wealth that they’re accumulating. Thanks for being here.
[0:02:21.6] BB: Yeah, absolutely and thanks again for having me on and putting a podcast together. And you know, like you said, it really is a big topic but it’s necessary. And I hope that these key concepts in the roadmaps, you know, we talk about really help and at the end of the day, I’m an investor also, it’s not a matter of what you have, I always like that saying, it’s what you keep. And that’s what my job is, is to help you sleep better at night and keep more of what you got.
[0:02:43.9] KR: Yeah, I think that peace of mind is essential, especially as you get more and more investing, you get involved in more and more investments. Let’s start from the top, let’s just set the stage, what is asset protection?
[0:02:56.4] BB: Asset protection isn’t traditional state planning. It’s modern estate planning, or more strategic planning. And what we’re doing is placing a legal barrier between your assets and your potential predators, that’s it, you know? It’s just a barrier, like a safe for your gold or your guns, and anything of value, you’re going to want to put behind that barrier so that it’s not easily attached with a lean or reached or attacked with a lawsuit.
Now, for people who grew up with a more old school mindset where lawsuits really never weren’t an issue, back about 40 years ago, you could essentially just have everything in your own personal name or in a family trust. That was acceptable then and you could get away with it about 30 or 40 years ago. But over the past 40 years of litigation landscapes just completely changed, you know, things that didn’t happen in the past or that weren’t allowed to happen in the past like contingency fee lawyers or law firm advertising are completely commonplace now.
Asset protection is now your modern best bet and attempt to level the playing field, by using all the different legal tools we have. And what this does is make it very hard for predators to collect. At the end of the day, you really can’t do a lot about getting people not to sue you because that’s just the legal system. If someone’s going to sue you, they’re going to sue you. But what you can do and have some control over is about how collectable you are and what jurisdictions you setup your systems in.
[0:04:17.6] KR: Very interesting. Sounds like part of it, you’re setting up a barrier, you’re also as you talked about, you know, contingency fee attorneys, things you’re trying to set it up right so that you don’t seem enticing as someone to go after?
[0:04:30.1] BB: Correct, you want to decrease that target on your back so the more you have, the more you get, the more visible you are, the bigger your target grows and grows. What your role in your job is to decrease that target and not be seen so much as a mark to where, even if you are a working mark, whoever that attorney is going to research you, they’re going to say, “Well, this is a big mark but there’s no assets that we can actually collect on. So we’re a business. If we’re going to spend $50,000 suing this person and we’re going to spend that or more to collect on, that’s not a good business structure, we’re going to close our doors really fast and we’re going to move on to somebody else.”
[0:05:05.6] KR: Very interesting. Okay, what are the different forms of asset protection?
[0:05:09.9] BB: Yeah, we can go over a roadmap, you know, a lot of the principles come down to cash flow and inside versus outside liability, as well as some legal practical authorities. And then we got these big guns called asset protection trusts. And so we’ll just walk through this roadmap and kind of lay down the foundation and will just go from there. The goal is the same, no matter what stop on the road that you take, you know, essentially, it’s just to get the assets out of your personal name. Then each stop has different levels of strength to protect you from a tax based on your asset profile and your needs.
The first big concept that comes to protecting real estate is that equity and cash flow are what really matters, you know? It’s not fair market value, real estate, almost always has debt attached with it. What this means is that a building worth 3.5 million dollars and you know, there’s 3.2 million dollars of debt actually is going to have a less net-value to that owner of a building that has $650,000 worth but it’s paying off in full.
It goes to the general saying of gross value is vanity, net is insanity, and cash is king. Why you care about this for asset protection is because, if you have a judgement creditor looking to collect a judgement on you, they don’t care about the gross value of their property, they only care about the net equity and the cash flow that’s coming from that property. And so sometimes, carrying debt as an asset protection barrier, works for you because it’s harder to collect on.
[0:06:38.7] KR: Very interesting. So actually, keeping a healthy amount of debt on your property is that first barrier that we talk about.
[0:06:47.3] BB: Yeah, it could be a first barrier and most people who are just starting out aren’t paying in cash. So they’re going to have a mortgage, they’re going to have an already higher principle than the creditor suing them in an initial spot. And then I would always say, like, have insurance and know the limitations on it. That’s going to be the next entry-level barrier. And then there’s going to be LLCs, that would be your next entry point, you know, like everybody knows who LLC is.
Everybody understands what they are, there’s pros and cons to them, they’re good as an entry point and they’re good to limit some of your personal liability. They’re good because they’re easy to manage, they’re cheap to start with. Eventually, they just become a mess. And like we are talking about before, you can’t transfer jurisdictions with LLCs. If you’re living in California for example and you go buy and create a Nevada LLC or Wyoming or Delaware LLC, whatever state LLC that’s not in a state that you’re at, where is that asset at? That asset is not in California. Wherever that injury comes from — that property, that asset, that’s where the jurisdiction is about lawsuit.
Those are the state laws of torch and damage laws that are going to be used, they’re not going to transfer Delaware to the Court of Personal Injury Loss to California because you formed a Delaware LLC. That really goes into, you know, the next big principle when it comes to asset protection — which is just the Basic Court’s Authority which is a legal authority or practical authority.
It’s a really big point that needs to be understood with LLCs and real estate investors. And so the reality is that a judge can and does do whatever a judge wants. You know, LLCs and LPs — they’re going to be governed by the state statutes where they’re created in. What this means is that, if you created a Nevada LLC and the exclusive remedy against that Nevada LLC or Delaware LLC, is the charging order.
A judge, even in let’s say California, by statute may not issue a remedy beyond that charging order. But that’s just in theory, that’s not how things actually play out in courts. Everybody knows this, everybody knows that theory and practicality don’t mix. Practical authority is what we’re actually working with and this is the power of a judge to actually do whatever a judge wants. This is their power to make decisions and they have a super power called the Court of Equity, which means, even if they don’t like the remedy that’s coming down that they see, that’s backed by case laws, statutes, and codes. Their job is to make equitable decisions so they just want everybody to be happy. Even if there’s some contradiction to those established laws, a judge has very broad powers to reach your assets, like, seizing them, placing a lean on them for closing, ordering sheriff sales, cleaning title, wage garnishments. And the problem is judges, even without the legal authority to do these things, they do them all the time by exercising their super power, the Court of Equity.
That can be done in direct contradiction to all these established codes and case laws. The solution to hinder a judge’s practical authority over your assets is to create an asset protection system so that they can’t circumvent the legal processes themselves. And it helps you protect your assets and settle on negotiating. You get to the negotiating table, a little bit faster and into a stronger position than you were in before and that’s by having stronger asset protection systems and using asset protection trust.
[0:10:09.5] KR: Got you. We talk about some of the entry-level, right? Having healthy debt in your property insurance LLCs. But what’s the next level of things as you really bring this together into an asset protection program? And what does that look like as these things work together?
[0:10:23.4] BB: Yeah, as you can get out into the entry-level, like, you just started investing and now you have, say, like, four or five units and you have a couple LLCs — because you always want to split up the equity into different LLCs in case one asset goes boom. You can’t stop an exploding asset. You don’t want it to drip into the equity of other assets. But it starts becoming a tax filing and CPA nightmare so you want to start consolidating them into what’s called a management company.
You create an asset management and limited partnership, those LLCs, which own your real estate or your other assets are now owned by that management company. And so all the K1’s of those individual LLCs flow straight through that management company so it’s just one easy tax filing for your CPA. So they’re not going to hate you. And then you can manage the business aspect of it through the management company. And then you’re going to have those individual LLCs acting as holding companies in the management company. And then the next level off of that, once you’re like, okay, I’m worth about a million dollars net worth.
There’s values, there’s equity, maybe you’re a doctor who also has malpractice who is also investing in real estate or you’re just a successful real estate investor and have syndications you’re doing, is an asset protection trust. That’s where really the meat and potatoes of asset protection and the true teeth really come into.
But when you have asset protection trust, the big issue comes down to jurisdiction. You know, where do you set these up? and you can either create them domestically or you can trade them off-shore. That’s where the important decisions of this comings and goings.
[0:11:59.1] KR: What is an asset protection trust, just very simply kind of break that down for us?
[0:12:05.1] BB: Yeah, in its basic terms, an asset protection trust is not a revocable living trust. A trust is not a trust and I think that’s a big misconception that a lot of people have is like, well, I have a revocable living trust, I’m good. No, you’re not. A revocable living trust is just to help you avoid probate, identify who your beneficiaries are or when you die, who everything gets passed down to. And to hopefully avoid the state tax if you’re one of those 0.01 percenters above the 25 million dollar, tax amount.
They have no asset protection to them whatsoever. Asset protection trusts are designed specifically to protect your assets, there’s called Self-settled Spend Drift Trust, which means are created by you, for you, as your own beneficiary. And they have a lot of strong statutory protections in them and all asset protection trusts across the board are all these self-settled trusts.
Even the offshore ones and their grant toward trust, which means that you, the person that created them, retains some of the power and benefits of them. You’re not just signing it all away. But the important part of asset protection trust, like I said, is what jurisdiction do you actually set these up in? What jurisdiction means is that the laws and the rules that govern you and trust and business entities, they’re going to be different from one jurisdiction to another. This means from one state to another, one country from another.
If you just think about, you know, like cop movies or TV shows and there’s a dead body that falls, right in the middle of a county line or a state line and you have two arguing detectives, our jurisdiction, now, it’s our jurisdiction. They’re arguing about whose laws are going to apply in this. And that’s the importance of jurisdiction. You have two options when you go this route, when you set up an asset protection trust, like I said, domestically here in the US, or you can set them up offshore.
I personally prefer offshore and the power of going to the Cook Islands if and when the client needs it. And the reason is because they have what’s called statutory non recognitions, they don’t recognize other states or countries, court orders or judgements. They’re just going to say, “Thank you, we don’t care, we’re the Cook Islands a lawsuit has to come through here.” There’s so many statutory hurdles that have to go in place to get a lawsuit there that it makes it virtually impossible to be sued there.
They’d have to prove their case by the murder standard — beyond a reasonable doubt, the plaintiffs have to front all the clerk cost and they have to fly in a judge from New Zealand. You can’t use contingency based lawyers, your US attorneys can’t follow you there and go with you there. If you lose, you pay and so I’m suing you and I have to prove a civil case beyond a reasonable doubt, most likely, you’re going to lose and then pay my attorney fees and my legal fees.
There’s only a one-year statute of limitations. It’s’ really five-star effective, you know, statutory nonrecognition. But, everything has pros and cons. The cons of purely offshore is, it’s expensive, it’s not for everybody, the costs are going to be higher and the maintenance fees are going to be higher, generally around 5,000 to $10,000 a year. And then you have the domestic side, the purely domestic asset protection trust.
They’re great on cost, they’re going to be a little bit cheaper and the maintenance fees are going to be less but their problem is, they’re going to fall short on effectiveness. And that’s just because of our US legal system. In the US legal system, we have the US Constitution, the Full Faith and the Credit Clause that you know, every state must give full faith and credit to the judicial proceedings and some orders of every other state.
Which means, if I’m getting sued in one state, I can’t go run to another state for their protection, kind of what we’re talking about with LLCs before. It’s just not the way the legal system works and they’re also seeing a lot of case law come down, for example, California residents using out of state Nevada asset protection trust. The courts are coming out saying, “Well, if you’re not a resident of these states and there’s only 17 states that have this Self-Settled Asset Protection Trust Legislation. If you’re not a resident of one of those states, it doesn’t benefit you. You can’t get the benefits of a state that you’re not a resident of. And so they’re piercing those trusts now and collecting on the assets in them. And this is just from basic cases like Dale versus Dale, Tony One versus Wacker and Ray Hubbard. All great facts but the courts just said, “Hey, you’re an out of state resident using a different state trust, sorry, we’re not recognizing them.”
You use this landscape of asset protection and you can go offshore, you can go domestic, you don’t know which route to pick and you know, I really like the culmination of both. Why can’t we just marry them both together? You can. Actually, it’s called a Bridge Trust. And so what the Bridge Trust is that hybrid and it’s a Foreign Asset Protection Trust but we maintain domestic compliance with the IRS. And we stay in compliance with what USC section 7701. That makes the IRS classify the Cook Island trust domestically.
If you’re ever sued, we drop the US compliance, now as purely a Foreign Asset Protection Trust and all the strength and power of the Cook Islands are automatically in your back pocket when you need it. The benefit of it is, the cost is going to be cheaper, generally around $29,000 to set up that whole system and annual maintenance fees are going to be a lot less. Like $2,100. Plus you don’t have to deal with all the foreign IRS compliance so you don’t have to have all the disclosures on that, you would for a foreign trust.
You have anonymity by the Saint Germain Act and if a rainy day and you’re staring down the barrel of a really big lawsuit, all of a sudden, you can just automatically trigger the migration clause, transfer the assets to the foreign jurisdiction of your trust and you’re going to be a lot stronger position of strength.
[0:17:50.2] KR: Got you. Those are some interesting advanced strategies, as I think you mentioned, about a million-dollar market. When does it make sense for folks really to look at these more advanced asset protection trusts?
[0:18:01.2] BB: I would say, for the Bridge Trust, I would say about, you’ll be surprised. $500,000 net worth, which means minus your liabilities, you know, I think a lot of people will call in and say, I have six properties but they’re all mortgaged and so their net worth isn’t actually where —
This is an unprotected net worth of 500,000 or more. The reason we go at 500,000, and we see a high number of clients coming in there is simply because it takes most people a really long time to make 500,000 to a million dollars worth of net worth. One lawsuit can completely wipe that out and they’re not going to be able to recover from that. If you get above like 2.55 million, that punch to the gut may not knock you out, and you’re going to take a longer time to recover but they can come back in and say “Man, I really wish that we set this up beforehand and before we lost this but you know, we’re still there recovering over the years.”
The 500,000 to one million net worth mark, you’re really at risk at that point in your life because you’re visible but you don’t have enough money to back yourself if you ended up having a big lawsuit and a judgment against you.
[0:19:08.3] KR: Got you. That’s interesting and why is it that — because I hear a lot of people talk about going back to LLCs here, a lot of people talk about LLCs, different strategies around LLCs. Why is an LLC strategy not enough to protect you?
[0:19:22.6] BB: I think it is great when you are beginning, like, right at the beginning point when you are starting out. And generally we say, “Rule of thumb, create the LLC where the asset’s at.” So if you own a property in Texas, Texas LLC. If you own a property in California, California LLC. It works as a deterrent and the issue is the Full Faith and Credit Clause of the Constitution that you just can’t run from judgments and you have no protection from a judgment coming your way.
LLCs are very easy to pierce. Any person just graduating from a law school would be able to make a pierce in the corporate veil argument just based off of your accounting and how you manage the business. And most people are running those LLCs as a business. They are just using most holding companies, which is then going to be argued as a shell anyways, and so the arguments that you use when it comes to just using LLCs as asset protections generally will pierce that veil.
The corporate veil on that you’re looking for protection from very quick, which then opens up the floodgates to all of the assets in it. And your personal assets and then the other misconception is, I think, a lot of people think that, “Well, I’m a California resident with a California property and I created a Delaware LLC with a land trust and I put my property in that land trust, connected it to my LLC but I am being sued in California.” So they think that for some reason that Delaware court laws are going to transfer over to California.
It’s like in a business world, sometimes that will happen if it is internal liability versus you . And I own a business and we are suing each other, or we have an internal lawsuit, generally those laws of the Delaware LLC are going to be what’s governing that lawsuit. Because it is a business lawsuit. This generally are going to be lawsuits with real estate, personal injury, toward damages, fraud, and things like that. Those are all going to be state-specific litigation cases.
[0:21:15.8] KR: Got you and I think that is a powerful point because, I mean I, just see a lot of people making those types of decisions right? It is, “I am going to set up a Wyoming LLC or Nevada LLC because it is going to provide me additional protection.” I think the point that you made about, really the jurisdiction lies where the property is and whatever the offense was that happened, right? That is ultimately what’s going to govern.
[0:21:38.1] BB: Correct, it is and all of that Delaware LLC or whatever LLC is going to do is just waste another motion that the plaintiff’s attorney is going to have to file to pierce through it. And most of the time, when you’re a commission based attorney, you have the money to do all of that because you are just going to be taking a percentage from the damages down the road. You have already done the cost analysis of the case. So following an extra motion to make a pierce on the corporate veil argument isn’t going to make me hesitate from suing you and that’s really what LLCs are.
It is an initial barrier as a smoke screen to try to jack up litigation cost or small claims to make them settle faster. But as you have more and you get into potentially bigger lawsuits and bigger claims, or let’s say you’re a developer and just like your whole project goes down the toilet, you are talking about multi-million dollar lawsuits. An LLC is not going to stop someone from suing you. You need a stronger form of protection that actually someone that will tell someone:
“Hey, these guys have an offshore trust. Even if we got a $10 million judgment on them we are not going to get a penny out of it.” So we have no choice but to come to the negotiating table and then generally those cases settle for pennies on the dollar.
[0:22:48.4] KR: Got you. So going back to the asset protection trust, what happens to your assets when you transfer them into the trust? I mean are you maintaining control? Talk about what happens from a day to day management standpoint as those now sit in a trust.
[0:23:03.1] BB: Yeah, so the assets get transferred into a limited partnership and when you use them for asset protection, they are called an Asset Management Limited Partnership. You are the general partnership owner of that because limited partnerships have two separate classes of ownership, a general partner and a minority partner. The general partnership just holds and owns the assets, you are managing that share of it.
The minority share of that limited partnership is the ownership of that management company. The Asset Protection Trust or the Bridge Trust is that entity. And so that Asset Protection Trust owns the management company and then you are the beneficiary of that trust. And so you would just operate as you normally would through your management company, you know, payables and receipts coming in and out of there through your bank account that you attach to there.
The assets are going to be in tier-one protection and the LLC and are being held there. And then you have the next layer of protection, which is the management company and that management company is going to be the face in doing your business. And then you have the ultimate cold weather, it’s a really deep winter storm, it’s cold, I got to go outside so I am putting on my outdoor weather layered jacket and that’s your Asset Protection Trust.
[0:24:14.8] KR: Got you. So you are essentially layering in three levels of protection into the system.
[0:24:19.7] BB: Exactly. And you should have insurance. So I would say there is a fourth layer too, you should always have insurance. Just understand the limits and your claim limits of insurance and what actually happens in litigation. You’re like, those lawsuits go through fraud, and then the way your insurance providers wiggle out of coverage, these are just going to say, “We don’t represent you for fraud or intentional wrong doings.”
And even in email as simply as saying, “Hey the plumbing got done and then a pipe burst,” will essentially, a judge will say, “Well, that is an email. Emails are intentional.” So in deeming that statement intentional, that turns the entire law suit into an intentional act and that right there — it gives the insurance providers the wiggle room to separate themselves out for doing, say, “We’re not covering you and if you think we’re wrong, sue us.”
[0:25:03.3] KR: Very interesting. So it is a certain level of protection but as you said, a very clear distinction of if they can make the case that it was, how did you say it? An intentional act or?
[0:25:14.3] BB: An intentional act or wrongdoing and that’s generally how insurance is great for small damages. But if you are talking about larger lawsuits, their whole role is to separate and distance themselves from you and to wiggle out and create that separation. And at the end of the day, what people don’t realize is insurance really is just a means to provide capital if you have to go to court and sometimes insurance providers are going to say, “Okay, here is your lawyer.”
That was a conflict of interest. They’re religious to settle the case for the insurance provider, not your best interest. And then that capital that they provide is even up in litigation and then at the end of the day, you’re still going to be left with a really big damage loss potentially.
[0:25:52.2] KR: Got you. So it definitely plays a role but it is not the end all be all as any of these are which —
[0:25:57.0] BB: Yeah, I would not recommend you solely relying on insurance to cover you, especially in really big lawsuits.
[0:26:03.7] KR: All right that’s good advice. So there are a lot of people out there talking about asset protection now I’ve heard multiple speakers. I have heard them say different things. You know, as we are going straight to the source here, what are some of those common misconceptions that you hear people — that, maybe they come to you and say?
[0:26:20.0] BB: Yeah, so we covered a couple of them already. Some people are like, “I have been an investor for 30, 40 years and I have never been sued, like, I’m good.” Well, that is not a plan. That’s just relying on your lady luck. You know that is just being at the roulette table or craps and say, “I’m just letting it ride. You know I have been lucky this whole time.” That is not a protection plan. That’s just luck. So the next one is, you get some people who think it’s illegal.
No, asset protection isn’t illegal and the courts have been very clear on this. They like preventative planning. You know they want you to plan before you need it, before a lawsuit. If you come in afterwards, it gets to be a really thin line of what we can do and we have to then cross and walk through that analysis through fraud and fraudulent transfers. And a whole lot of another analysis. That can be a whole other show on that but it’s not illegal.
And insurance is a base form of asset protection. So just realize that’s been around, trusts have been around since the Crusades. LLCs have been around forever. We’re just using different legal tools that exist and then how we use them or combine them just depends on the client’s profile. Another big misconception for offshore trusts is that they’re all scams. No, they’re not — but scams do exist so don’t think that they don’t exist. Scams exist everywhere.
And people get concerned when they hear about for example the Panama Papers or they watch movies or Netflix. So just do your due diligence like anything else. But realize offshore trusts have been the global standard since the 80s when they were created and there’s a reason and the case law of offshore asset protection trust is solid. Over 40 years of just great case law, which you can’t say for LLCs and all of the piercings of LLCs. So just do your due diligence when you talk to an attorney.
But you should be comfortable if you have a proper attorney drafting an offshore trust. They exist and they’re used worldwide. Another great one is, I am using asset protection to avoid taxes. No, if that’s your intent, don’t do it. It’s illegal, it’s fraud. If you talk to an asset protection attorney and they start talking about hiding assets, run away from them. If they talk about how it’s going to benefit better for their taxes, just hang up the phone and run away.
If you were to call me and say, “I want to set up an asset protection trust because I don’t want to pay my taxes” I am not going to retain you because it is illegal and I don’t want to lose my license. So just realize it’s all tax neutral. It has to be but that doesn’t mean you can’t get secondary tax benefits because if you take something out of your name and you put it into a business entity, the IRS views you with different optics now. Which means you are going to pay different taxes and generally it’s going to be to your benefit.
It just can’t be the primary reason for the set up. Another one, which is really a good question and confusion that I get is, “Would crossing the bridge with a Bridge Trust be a fraudulent transfer?” Because you have a domestic trust and then you’re getting sued and then it becomes a foreign asset protection trust. How is that not fraud? Like, logical question, and the reason it’s not is because a conveyance happens when you change ownership of an asset.
So at the point, if and when you ever would have to cross the bridge — and most the clients never do, there is not a change in ownership because the Bridge Trust already owns the assets from this creation. So crossing the bridge doesn’t qualify as a conveyance because all of the conveyance was done within the first 30 days of creating the trust. If we have to, we just drop the IRS domestic compliance, which then purely classifies the trusts as foreign.
And then another really big misconception is, “Can a foreign trustee takeoff with my money?” And that is a really — you know, because you watch Panama papers and you see these stuff, you hear it. And it is a very good and understandable concern and a properly drafted Asset Protection Trust creates internal and external checks and balances. So it involves the trustee, you with the trust protector looking over the trustee. You, the client, looking over the trust protector. And the bank of your choice having built in delays and that client consent requirements before any transfer can ever even take place and you actually have to sign off on it. And so the effect of that is virtually impossible to make any move in your trust and your assets without you directing knowing of it consenting to and then signing off on it.
[0:30:35.5] KR: So it is not just the layers of protection. Within each layer of protection, there is additional nuances that you have to set up correctly to avoid like you said a situation where somebody could commit from, right?
[0:30:47.3] BB: Yeah and I will piggyback off of that and that’s where it’s like, “Oh I can do this myself.” No like you did a great job probably DIY-ing your investment career and your business. Don’t DIY things that carry liability and legal implications especially to this level because you are just going to mess it up so bad and it won’t have the effect that you wanted if you are ever challenged in court. And that is what you want. You are setting this up to where if it rained and poured on me and I’m in court, how is this actually going to work?
[0:31:13.1] KR: Yeah, I think that is great advice and you mentioned some fees, some cost, kind of round numbers. I mean what is it ultimately going to take if you are looking at these different levels for folks to set up the trust and then manage the trust?
[0:31:27.8] BB: Yeah, that’s a great question. So basic LLCs asset protection-wise, you’d probably be looking anywhere from $1,000 to $1,500 depending on the firm and what they do. And that is a pretty good general cost that I find across the board. For it to be done right and for it to be done by a lawyer and to have all of the eyes dotted and Ts crossed that most people forget about. An asset management company, you are looking at generally $6,000.
And then they’ll transfer, like, we would even transfer the LLCs into that for you, most firms would. For the full package, you know an Asset Protection Trust, the Bridge Trust with an asset management company, we charge $29,000 for that. And that’s about — we price ourselves like right in the middle just because it is just our business practice. We’d rather have people have something that they can actually get the benefit off and not hurt their bank account.
And so you will see some people charge more, some people charge less but the Bridge Trust with an asset management company, generally $29,000 — that’s the two combined. And then the LLCs just get transferred in and some firms will throw an LLCs if you have nothing, they will include an LLC in that package for you.
[0:32:35.5] KR: Got you and just as a follow up to that, the asset management company, from what you said, sits in the middle there. Who is actually running the asset management company?
[0:32:44.4] BB: You’re the managing member of that.
[0:32:46.0] KR: You’re the managing member of that and then the trust is this the minority?
[0:32:49.9] BB: And the trust is the minority and that’s the ownership of that and the trust owns it, yeah.
[0:32:54.8] KR: Got you, okay. Well awesome, well Brain, so much awesome info. I think you helped clear up some misconceptions for me as well. But really powerful stuff. Before we end, there is a section at the end that I like to do called keys to success, just four simple questions I’d love to get your thoughts on. Put yourself in a passive investor’s shoes, somebody that is looking at a deal with a syndicator. Or that’s maybe, from your perspective, more of somebody that has done a few investments like this now and has accumulated some wealth. What is the one question that they should be asking?
[0:33:29.4] BB: Where is my liability coming from?
[0:33:31.3] KR: Interesting and then what’s the thing that you’re most proud of?
[0:33:37.1] BB: You know, I get to spend a lot of time with my kids. I have a two year old and a four year old and so the way that I set up my practice now is I get to spend so much time with my two girls at this critical time in their age. And taking them to dance class and gymnastics and soccer in the park. So I get to spend more time with my kids than I think most people do.
[0:33:57.6] KR: That’s awesome and then that was one of my main drivers to become an investor as well is that time freedom. I’ve got three small kids so I am right there with you. And what’s the book that everyone should be reading?
[0:34:09.4] BB: So there are so many good ones but I am going to go with something — because everyone is going to be like, “Oh, Rich Dad, Poor Dad” or “Richard’s Man of Valor.” Any of those. But I am going to say The Alchemist because it is kind of like those but in your personal life and journey and you are going to read a bunch of financing and investment books but you know that’s the whole package. And so, you know, have a good little personalized journey, which also ties into finance also if you’ve never read the book. So you got a lot of business principles out of there.
[0:34:38.9] KR: That’s good. I haven’t heard that. Well, I am going to check it out.
[0:34:41.2] BB: Yeah, it is actually I think one of the top four bestselling books ever so yeah.
[0:34:46.2] KR: Really? All right, well I am going to pick it up on Amazon. And then lastly, what’s your number one key to success?
[0:34:52.9] BB: Don’t be afraid to fail. You’re going to fail just don’t be afraid of it otherwise you are going to be stuck in analysis paralysis. Just look at failure as a growing opportunity and the sooner you start failing, the sooner you are going to start learning, make adjustments, don’t make the same mistakes twice and keep going but just realize failure is inevitable just don’t let it freeze you. Just learn from it and go on.
[0:35:15.4] KR: That’s fantastic advice. Brian, so last how can folks get a hold of you if they want to learn more about what you are doing and asset protection?
[0:35:23.5] BB: Yeah, they can jump on my website, www.btblegal.com, I have tons of educational videos and pamphlets and brochures there and frequently asked questions. There is probably not a question that you can think of that we don’t have on there just it’s all education for me. The more people get educated the better. They can email me firstname.lastname@example.org. I used to do paid consultations but I just do free consultations because I find most people are afraid to get the legal advice.
Because they’d want to talk to more than one person and they don’t want to pay an astronomical amount of consultation charges so they just become Google lawyers — which is all wrong and make the wrong decisions. And so I’d rather just give you some free advice, let you think about what you want. Or if you like what I have to say and you want to go price shop, you know it is not my problem but do that. I just would rather have you good solid evaluation than make an educated decision and not be afraid to talk to someone because of cost.
[0:36:21.7] KR: Yeah, I appreciate you doing that because it is a topic that’s really complex, right? Like you said, there are a lot of different opinions out there. I mean I have heard, like I said, numerous people say many different things on the subjects. So I appreciate you giving those free consultations to folks.
[0:36:37.5] BB: Yeah and the advice when you are looking at different people’s advice is realize it comes down to your current situation, your current investment strategy but don’t lose sight of what your long-term goal is. Because things are going to have to change and evolve is that gross and so just realize that if someone is only selling you a one stop shop piece of advice there is a reason that has probably not what around I would want to go because it’s your whole picture and then where you’re going that has to be evaluated.
[0:37:01.3] KR: Yeah that’s great. So as a takeaway for our listeners today, make sure that you guys are evaluating your position, evaluating the asset protection that you have in place, understanding where your liabilities are. And this is complicated stuff. So I think getting a good legal counsel around this, but at a bare minimum, we talked about using debt as strategy. We talked about making sure you have the proper insurance. We talked about LLCs as a starting point.
But then ultimately moving onto that asset protection that greater level of asset protection with the asset protection trust. So make sure that you are evaluating and educating yourselves on that and with that Brian, thank you so much today. A really valuable topic and thanks for being on the show.
[0:37:43.9] BB: Well thanks for having me, I enjoyed it.
[END OF INTERVIEW]
[0:37:45.2] KR: Thanks for listening to another great episode or Ritter on Real Estate. Hit the subscribe button to make sure you don’t miss out on the content that will make you a better investor. Also, visit kenritter.com for articles, videos and tools curated just for passive investors. Until next time, this is Ken Ritter on Ritter on Real Estate. Now go out and invest like a pro.