395: New Asset Protection Options and Strategies

NOTES FOR EPISODE 395: NEW ASSET PROTECTION OPTIONS AND STRATEGIES

One of the great joys of being a real estate investor is to see your portfolio and net worth grow exponentially over time.  But as your assets grow, so does your risk of dealing with a law suit.  It’s not so much a matter of if, but when that will happen.  Without the proper asset protection in place, you could lose everything you worked so hard to develop over night.  In this episode, asset protection attorney Brian Bradley shares some unique and tested strategies for highly effective asset protection.

What You Will Learn

• The three stops on the road to effective Asset Protection
• What are the limits of an “LLC only” asset protection plan
• Why, when you surpass a net worth of $1 million dollars, do you need to look beyond LLCs
• What are Domestic and Foreign Asset Protection Trusts?
• Pros and cons of  Domestic and Foreign Asset Protection Trusts
• Why the Cook Islands are a good place for asset protection
• How are Land Trusts helpful
• What are the 4 major areas you must consider when setting up asset protection
• Why insurance can’t be regarded as a vehicle for asset protection
• What is an ALMP and why you need one for the best asset protection

About  Our Guest

Brain Bradley

Brian T. Bradley is an asset protection attorney for Self-Made Entrepreneurs, Business Owners, Doctors, Real Estate Investors and HNW Families. He focuses on giving client peace of mind. Brian was selected to the Lawyers of Distinction List 2019, Super Lawyers Rising Star List 2015, nominated to Americas’s Top 100 High Stakes Litigators List, nominated to the 2017 Law Firm 500 Award. Brian also work as a Chief Knowledge Officer (CKO) helping other businesses maximize their value, manage intellectual capital and knowledge, identify and integrate new products, and integrate technology, and writes on higher level asset protection for the Oregon State Bar Law Journal.

More About Brian

• Was a good baseball player
• Wanted to go professional
• In college he developed a bad arm
• Had to figure out what he was going to do with his life
• When he finished college, decided to pursue law
• Went to a small law school so as not to incur high college loan debt
• Interned at the District Attorney’s office in Santa Barbara, California while going to law school at night
• Graduated from law school during the recession
• He had an offer to be a prosecutor but it got rescinded because the whole state of California was on a hiring freeze for 4 years
• So, he moved into civil litigation and built himself up as a trial lawyer
• Jumped into as many cases as he could
• However, the recession was so bad that it also impacted the private practice area
• So he started pursuing state organizations saying, “I will represent your clients for free” because he just needed to get into court
• He worked 3 years for free representing clients of these organizations
• He got more trial experience at that time than most 25 year trial attorney vets
• At that time, he also realized a lot of clients were coming into court “after the fact”
• They thought their Revocable Living Will would protect them, even though that is not what it is designed to do.  It offers no protection
• Or they thought they could rely on their insurance
• They had a false sense of security
• They were getting sued and there wasn’t much Brian could do for them
• He saw enough of these cases to eventually incorporate Asset Protection into his law firm to help his clients to be proactive and prevent issues in the future

Specializing in Asset Protection

• He began to offer higher levels of asset protection for his client who had outgrown the basic LLC set-up
• These are clients who have hit our surpassed the $1 million dollar to $2.5 million net worth mark
• The reason being is that one lawsuit could wipe out your net worth
• For this higher level of protection, it has a higher level of start-up – a one-time charge of $25-30,000

Road Map of Asset Protection

• There are lots of ways to do this – some better than others
• When you’re driving down the road, you really have 3 stops
• The goal is the same for all three stops – get the asset out of your name
  • Each stop has it’s own level of strength
    • First Stop: LLC
    • Second Stop: Asset Management Holding Company that incorporates the LLCs into it with streamline tax option
    • Third Stop: Asset Protection Trust
      • Domestic or Offshore (i.e. Cook Islands)

LLCs

• Good entry point to establish some level of protection
• But as your portfolio grows, so does your need for greater protection
• You can’t throw all your properties into one LLC
• If you have problems with one property, the damage could bleed into all the other properties in that LLC
• If you decide to add more LLCs, it will just get more and more expensive and the maintenance is going to be a nightmare
• LLCs are used for more of a deterrent or smoke screen to prevent and drive down potential litigation costs
• Pros and Cons
  • Pros:
    • If you are only protecting a few assets, LLCs are a good starting point
    • Some limited liability
  • Cons:
    • It’s protection or “veil” can be pierced
    • If it is pierced, you’ll be held personally liable in a lawsuit and the damages
    • And depending on the state and jurisdiction you’re in, you can have either strong charging orders or horrible ones (like in California, Oregon, New York)
      • A “charging order” is how much a creditor can collect from you
      • In a good state, they limit charging order so it cannot bleed into other assets
    • As your assets and net worth surpass $1 million, you’ll need a stronger level of protection
    • You’ll need the “offshore or asset protection component” and the power of what’s called “statutory non-recognition” in order to say, “We don’t care what judgement you have, go pound sand.  We don’t recognize it.”

Asset Management Limited Partner Trust

• Two different jurisdictions
  • Domestic
  • Offshore
  • Jurisdiction means the laws and the rules that govern you, trusts and business entities.  They differ from one jurisdiction to another – state, country
  • Foreign- Brian prefers going offshore (especially the Cook Islands”
    • It’s the best home court advantage especially as you get into high net worth individuals
    • It makes lawsuits go away very fast
      • Quickly resolve for pennies on the dollar, even against super creditors (i.e. IRS, SEC, etc.)
    • The power of offshore is great
      • Statutory Non-Recognition – Makes judgments worthless because it’s not recognized by the country’s laws
        • The person who is suing you would have to re-start the whole case and utilize the “murder standard” – “beyond a reasonable doubt” -in the Cook Islands, front all court costs, fly in a judge from New Zealand.
        • If they lose, they would have to pay
        • With the burden of proof, beyond a reasonable doubt, they will more than likely lose
        • The Statute of Limitations is only one year
    • The three other factors you look for:
      • Control – For offshore to work, you need to be out of control and subject to the “foreign trustee.”  A lot of people are uncomfortable with that
      • Cost – Annual maintenance costs are a lot higher – $5,000-10,000 per year
      • Compliance – If you’re purely foreign, you have a lot more IRS reporting
      • These are the areas where offshore falls short
      • Only 5% of Brian’s clients are exclusively foreign
  • Domestic
    • Asset protection in the U.S.
    • Less expensive with costs and maintenance fees
    • Fail in maintenance and control
      • Why? Because they fail in the principles of asset protection
        • The foundation should be to not recognize another jurisdiction’s court orders
          • You want to be able to tell a credit, “We don’t care.  Go pound sand.”
          • You are under the U.S. constitution and “Full Faith in Credit” clause
            • You can’t run from judgement
            • You have to give full faith and credit to all court orders and proceedings, no matter what state it comes from
        • We’re also seeing, in litigation and trial work, a pattern of  purely U.S. based asset protection trusts being pierced
          • U.S. courts completely disregarded, for example, a California resident using a Nevada-based asset protection trust
• Brian recommends if you don’t need need foreign, then you should do neither or a Bridge Trust

Asset Protection Trust

• It’s a Bridge Trust
  • A hybrid between the Domestic and Foreign Asset Protection Trusts
  • You draw the best of both worlds
  • Was created 30 years ago
  • “You only cross the bridge (into the Foreign Trust) if or when it is ever needed”
  • Its an “Irrevocable Tax-Neutral Grantor Trust”
    • The reason it’s irrevocable is that if you are ever challenged in front of a judge and the judge says, “Hey, I see you own some assets and I think you’re in control of those assets.  I want you to bring them back so we can collect on them.”  You need to have the power to say you can’t.  You can say, “It’s irrevocable.  I can’t do that.”
    • What a “Grantor Trust” means is that you are the creator of the trust, you retain some of the power over your assets
    • All asset trusts are self-settled spendthrift trusts – they are created by you, for you, as your own beneficiary
  • Bridge Trusts are both foreign and domestic together
    • They are considered domestic because they are written to comply with USC section 7701 on the court test of control test
      • Why we care about this is that you don’t look at it like it is foreign trust in the eyes on the IRS
        • You don’t have any of the IRS filings and asset disclosures of any kind
    • They are streamlined, easier, cheaper to set-up in terms of annual maintenance and annual costs are generally $2,100
    • You have the ease and functionality of the Domestic Trust with the power and strength of the Cook Islands “go pound sand, we don’t care” in your back pocket if you ever need it in a Foreign Trust

How the Three Work Together

• First – You have your LLC
  • That holds your real estate and all your other assets
  • Brian never puts assets totally more than $1 million in one LLC
• Second – You have your “Asset Management Limited Partnership” ALMP
  • Acts as the “holding company”
  • It holds the LLCs
  • It holds the cash, stocks and bonds, receivables
  • They use the ALMPs because they have delineation or separation between a managing partner, which is a General Partner and a Minority Partner (which isn’t)
  • You, as the client, will be the General Partner of the ALMP and this gives you control of the assets and the holding company
• Third – The Asset Protection Trust or the Bridge Trust
  • The Minority Limited Partnership
  • Owns the ALMP
  • If you die or something happens to you, it goes to your Revocable Living Trust
  • If you get sued and your assets cross the bridge, you utilized the strength and power of the foreign part of the trust and after it’s settled, your assets go back to the domestic side

Delaware Statutory Trusts and Land Trusts

• Delaware Statutory Trust
  • The Delaware Statutory Trust is good for California residents
  • You must create a Series LLC, where you categorize out assets in a children sub-series
  • The only reason he uses DSTs is to prevent CA residents from spending $800 per LLC annually
  • DSTs are still domestic
  • Offers the same amount of strength as an LLC or anything else domestic
  • You don’t want to put a trust inside a trust
  • You can move your assets into a DST to just hold them
    • You can’t operate out of the DST, otherwise they lose their business designation
    • You would have to create a side LLC to operate out of
• Land Trusts
  • You would mainly use Land Trusts if you have a mortgage on a property
  • You you use Land Trusts to change the vesting of a mortgage where some banks may not want you to put the mortgage in the name of an LLC
  • But Land Trusts offer no protection
  • A Land Trust would have to go into an LLC to give you limited liability protection

Owning an LLC in States That Provide Anonymity

• Certain states will provide LLCs where your name is not associated with the LLC
• States like Delaware, Wyoming, Nevada, Texas and Arizona
• They are good to slow down attorneys who are trying to find the owner of a property
• It just means they have to pay more money to dig deeper to find your name
• The weakness of this strategy is that the judge will use the laws of the state the property is in and bypass the laws of the state where the LLC is from

A Few Words on Insurance and Asset Protection

• It’s good to have but doesn’t really protect you from lawsuits
• You need to read the fine print and see what’s not covered and what the claim limits actually are.  Most people don’t do this
• Real estate is the most heavily litigated are of law there is
• It’s not really a matter of when but more a matter of what condition you are going to be in to defend yourself when you are sued.  It’s just a matter of time
• Insurance companies don’t cover you for Fraud, Punitive Damages, Intentional Wrong Doings, claims that are a direct result of unlawful acts.  Whenever you are sued those are things they will sue you for
• Insurance companies get paid by collecting premiums and not paying out
• Sometimes you have to not only deal with someone suing you but you may also have to sue your insurance company for not paying you what you feel they owe

Biggest Investor Mistakes

• Trying to do asset protection on your own, without an attorney
• Thinking that insurance will cover you
• Many investors are self-made and used to doing things themselves
• Use templates and other things online that might not hold up in court
• Set up a team of experts

Biggest Investor Success

• A doctor client, surgeon, accidentally clipped an artery in surgery
• Was sued
• His malpractice insurance only covered $1 million of a $3 million suit
• Because he had a Bridge Trust set-up, they were able to settle for pennies on the dollar

Advice for Old Dawgs Real Estate Investors to Help Them Develop a Sound Asset Protection Plan

• For asset protection work, you don’t need to do that with a local attorney.  Brian has clients all over the U.S.
• You do need a local real estate attorney if you are doing local deals in your state
• To set yourself up right for Asset Protection, think ECCM
  • E – Effectiveness
  • C- Cost
  • C – Control
  • M – Maintenance

Current Business

• Brian’s practice is based in Oregon
• Has satellite offices also in California, Washington, Michigan
• He has systematized his practice over the last year and a half
• He transferred from a solo practice to a business and a system

Rap-It-Up

• Favorite real estate book: The Richest Man in Babylon by George S. Clauson
• Favorite business book: Rich Dad Poor Dad and the Cashflow Quadrant by Robert Kiyosaki
• Most valuable web site for success (other than your own): BiggerPockets and the Oxford Club
• Favorite app: Activity App
• Favorite quote: “Improvise, Modify, Adapt and Overcome.”
• Best cost-saving advice: You need to have a personal and financial makeover and stop living a delusion. You need a strong base camp before you try to scale a mountain. If you want to be rich, do what the rich people do.  If you want to be physically in shape, do what the strong, healthy people do.

How to Reach Brian

• Personal Email: Br1an@btblegal.com
• Website: http://btblegal.com/

DISCLAIMER:  Many of the above strategies take knowledge and have a higher degree of risk.  You need to do your research and/or work with someone who is experienced to reduce your risk.

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