Asset Protection for Rookies: 7 Wealth-Saving Answers from an Expert

Ashley:
This is Real Estate Rookie, episode 106. My name is Ashley Kehr and I’m here with my co-host, Tony Robinson. We are getting super excited for the Bigger Pockets COnference. Make sure you guys get your ticket at BiggerPockets.com/conference and we will see you guys there because if you listened to Wednesday’s episode, you guys found out that we are the actual MCs of the conference and we’re so excited.

Tony:
Yeah. Super excited. We’ve got some really good keynote speakers lined up. You got Hal Elrod, Brandon Turner of course, Ken Corsini, David Green, Mindy Scott, myself, Ashley. Lots of really good people coming up on the stage. If you guys want to spend a couple of days in New Orleans with all your favorite real estate investors, then make sure you guys head over to BiggerPockets.com/conference to pick up your tickets.

Ashley:
There is also going to be a panel on short-term rentals and Sarah Robinson, the one and only, our hype girl is going to be on that panel. I’m so excited for that.

Tony:
If you guys want to meet my lovely, crazy energetic wife, to make sure you guys come to that short-term rental panel as well.

Ashley:
Today is going to be a part two of Wednesday’s show. If you didn’t listen to that show, go back and listen to it. We brought on an attorney who specializes in asset protection and today, he is going to be answering questions from rookie investors.

Tony:
The first episode was like a crash course on asset protection, but today, we got some guests interactions, some live audience interaction, people who were submitting their questions, and I think really just clarified a lot of the concepts that we went over and Wednesday’s episode. You guys are going to get a lot of value from it. I know you will, so let’s dive in.

Ashley:
Okay, Brian. Welcome back for our Saturday episode. If you guys didn’t listen, Brian was here on Wednesday where we did a full interview and now we’re going to do some Q&A with some rookie listeners today.

Brian:
Thanks for having me back on and it’s going to be fun. Hopefully, I didn’t blow up anybody’s mind too much.

Ashley:
Even after that recording, I was thinking, I need to go back and I need to listen to this again and I need to take even more notes. It was definitely really beneficial.

Brian:
We didn’t even get into the fun stuff, like the power of the offshore trust. That’s where people’s mind really is like, oh my God.

Ashley:
Maybe that will come up as one of our questions today. The first question we can jump into is Adrian. Adrian’s question is can I create an LLC and sell my rental property to the LLC?

Brian:
You would just transfer it out of your name into the LLC. You can quit claim deed it into your LLC.

Tony:
Got it. Okay. I’ll take the next one here. This one is from Jason and the question is, will converting my rental property from personally-owned to LLC trigger a taxable event?

Brian:
That’s a good question. It could trigger an assessment if you’re not using a trust, like a grantor’s trust. If you’re using an asset protection grantor’s trust, then generally, no. Then if you’re in California… What was it? I think title nine got changed, like title 13 or something like that with taxable events addressing that. That’s not going to affect the transfer either because that just affects the asset transfers upon death and beneficiaries, but every state’s going to be different on that so I would talk to your CPA and attorney on that one, depending on the state that you’re in. Generally not the systems we use because we’re using grantor’s trust.

Tony:
Got it. One followup question to that, Brian. We didn’t touch on this in the original episode, but explain the difference to us between an LLC and a trust, and why you feel that a trust is like that top layer of protection.

Brian:
Asset protection trust, it’s not a business entity. Trusts have been around since the Roman times, and so I really like asset protection trusts because they’re the longest lasting entities of all entities. They go, like I said, back to the Roman times for holding assets. You would go and fight a war, you would put your assets into a type of trust for somebody to watch for you while you went and fought a war.

Brian:
When done right, they’re just very strong and they can be sculpted to fit how you need them and they can morph as you need them without dealing with funding issues that you see with LLCs and other business entities. To where if I’m trying to pierce an LLC, I just look at how it was funded and then how you manage your money. Then I’m going to pierce it 9.9 out of 10 times. I just love trusts. There’s so much case law supporting them and their strength. They should be the very top of your planning every time because they’re so powerful. This is where creating that asset protection trust and more importantly, picking the proper jurisdiction to set them up in comes into play.

Brian:
Then trusts, like we were talking about, come in lots of different flavors and types. You have the standard 101 trust that everybody’s familiar with from back in the 60s, the family revocable living trust because trusts don’t die. When you do, and you actually funded your trust by transferring ownership and title to it, which most people forget. They create their family estate plan, but then they forget to transfer the assets into it. Make sure if you have a family trust and estate plan, make sure you’ve transferred your assets into there, but you don’t have to go through the courts and probate. It just changed the landscaping of estate planning.

Brian:
Then you also have, like we talked about, land trusts for real estate that holds your land and you connect them to LLCs, but then land trusts don’t have any protection in and of themselves. They’re only as strong as the LLC that you connected to and those are easily pierced. From there, you have higher levels of trusts and they’re called asset protection trusts. These came about in the early 1980s and what these really are, they’re called self-settled spendthrift trusts. Meaning they’re created by you for yourself as your own beneficiary with creditor protection from spendthrift provisions. You can create them three ways, onshore, meaning here in the US domestically. Offshore in another country, like the Cook Islands where I prefer, or you can create a hybrid best of both standards called a bridge trust.

Tony:
Just added protection really, and the top layer of protection. Just to clarify, you recommend doing that as the final step once your net worth reaches a certain level, correct?

Brian:
Correct. Generally, we would be using a bridge trust around 1 million unprotected net assets. On the metric side, when you’re just starting out, 0 to under 150,000, you’re looking at LLCs and insurance. When you get to about 250 to 500,000, that’s where we start talking about that limited partnership. It just has so many benefits to it. That’s why we use the limited partnership. Then when you get between 850,000 to 1.2 million, that’s when we start talking about asset protection trusts because it takes most people a very long time to build that, and then one lawsuit can completely wipe it away. When you’re talking about off shore protection with LLCs limited partnerships and an asset protection trust like a bridge trust, altogether combined, that full package is generally on average, around $29,000. To spend one time 29,000, less than your cheap car in your garage to protect 1 million plus from a doomsday scenario that’s going to completely wipe you out, the value at that point is there. Before that, it’s not.

Ashley:
Once again, we had mentioned this briefly in the last episode that we recorded with you on Wednesday, that figure this into your numbers, paying for these kinds of things to happen. If you want to grow a net worth… You’re a rookie investor now, and you know that you want to grow that out, factor in some kind of cost into your properties that your cashflow is going to cover that $29,000 down the road, and that’s put into your numbers because if you’re analyzing deals now and you’re not incorporating your attorney fees or your CPA fees, that can really cut into your costs down the road. Plan for it now when you are analyzing deals so that going forward you don’t have to worry about these costs because it’s already cut into your deal. You already know that you’re going to be pulling out that money to pay for these things going forward.

Brian:
I would say that’s a great piece of advice. I’ll use an example for this. I have, again, a California client. Not a client because he just keeps calling, think information seeking, but in a massive class action lawsuit. His portfolio is around 25 million. Each property is in California, so each one’s worth 1 million plus. He’s in a massive class action lawsuit. Calls me after the fact, what can I do? I don’t want to pay this lawsuit and it’s a class action for wage claims and stuff like that. Insurance ain’t going to cover you. It’s not going to cover you for that type of lawsuit, sorry. There’s nothing I can do. You’re too far down the rabbit hole. I have to exempt the lawsuit, create the protection planning to go forward. You have to think and budget for this stuff beforehand, otherwise once in a lawsuit and you’re sued, when you’re like, oh man, now I need to create my asset protection plan. Sorry, it doesn’t work at that point. It’s like trying to go and get insurance after you get a car accident.

Tony:
All right. We’ve got one more follow-up question here from Jason as well, Brian. Jason’s question is can I put two properties that are in different states into one LLC?

Brian:
It’s a great question. Can you? Yes. Would I recommend it? No. I’m going to just use Ohio and Tennessee. The laws and states are different, and so they’re going to have different damages laws, tort laws. They’re going to have different liability laws. You don’t want one asset in law suit from one state, we’ll just say you’re getting sued for your Tennessee property, to affect your Ohio property. I would not recommend bleeding them together like that. I would separate them out into a Tennessee, LLC and an Ohio LLC, and then put those two LLCs into a limited partnership.

Ashley:
The next question is from Richard [Bumate 00:10:11]. I’m currently living in Texas and I was wondering if I house hack a multi-family property for my first investment and get an FHA loan and live on one side for a year and rent out the other side, will renting out the other side through an LLC protect me from a worst case scenario of getting sued and having those related costs or potential losses come out of pocket? For example, will my personal assets be shielded by my LLC in this scenario because the cost or potential losses will only affect my LLC?

Brian:
Well, the interesting thing about Texas is you have homestead protection rights there. If you’re living in there, then it’s going to shield you through the homestead exemption because it’s your personal residence. Generally, an LLC can be pierced. That’s the limitation of LLCs. I would say you’d get some homestead protection from there and look in with each state, how much that’s going to be because every state’s going to be different. Texas has very, very strong homestead rights. House hacking is great. Just realize you’re house hacking, so it’s not just your personal residence at that point. A partial percentage of your house is going to be a business at that point. I would talk to a Texas-specific attorney on that liability issue right there to where you need to understand if I am getting sued and I’m house hacking my property, how much is my homestead exemption in that state going to apply it because it’s not just my personal residence, it’s also a business entity?

Brian:
I would also say with Texas and a lot of the south, you have these series LLCs. I only recommend you using those series LLCs if you are both a resident of a state that acknowledges them and has series LLC legislation and the asset that you own recognizes them as well, versus if you’re a Texas resident and you own a California property and you put it into a Texas series LLC and you got sued in California, California doesn’t recognize them. They would just say, “Well, too bad. Sorry, we don’t recognize that.”

Tony:
All right. The next question here is from Dennis Callahan. Dennis’s question is how should I best structure an LLC partnership to avoid having separate bank accounts for every single LLC to avoid co-mingling of funds? Currently, I have homes in my name, my partner’s name, who’s my brother, and in two partnership LLCs. It has become crazy at tax time, where we’re working to have all of the homes and LLCs, and we’re 50/50 owners on all of these in upstate New York.

Brian:
That a great question. As you grow, you’re going to be accumulating a lot more LLCs and a lot more assets. That’s where you want to consolidate into a limited partnership. When you use limited partnerships for investing as a management company, they’re called asset management limited partnerships. That’s where you would create your main business account through, and that management company would be doing your contracting, your vending. You would have your business account set up into there. You would have all your LLCs owned into that limited partnership. It would just be owning those limited partnerships. Your business entity would be that management company, that limited partnership.

Brian:
Then you would just have your business bank account set up there, and then you would just pay yourself through disbursements into your personal bank account from that point on. It cleans up your system. There’s a lot of benefits to that second layer being a limited partnership or family limited partnership. They’re like LLCs. You’re going to have some charging order protection. I like them better at that second layer because they have very distinct delineations between the management partner called the general partner, and a minority partner who does not.

Brian:
Think of an LP is having a split personality, which an LLC can’t have. We like having both a general partner interest and a limited partner interest. We use the limited partner at that starting point for clients for the holding companies or the management companies. Then we add a bridge trust or the asset protection trust for the actual asset protection component because a limited partnership isn’t going to have any more protection than just an LLC, but they have really good built-in specific reasons that I use them.

Brian:
I specifically like Arizona and for the limited partnership over a Wyoming LLC or others to consolidate all this is because you have exclusive charging order protection Arizona as the only remedy for creditors of a partnership, but it has to be of a partnership. LLCs, you don’t have that. You have an actual statutory, so a statutory between general partners and limited partners. This is by statute. This is better than an LLC because LLCs can only do this by an operating agreement that a court will then have to interpret. Then you’re up to the judge’s interpretation, and that can just be whatever his mood is at that time and whether he doesn’t like the color of your clothing at that time. That’s how crazy these things can get.

Brian:
We have ARS section 29-333, which specifically allows for a limited partnership to make what we call a unilateral withdraw from a limited partnership on a predefined event of duress, like a lawsuit. We just predefine it when we create the system. This is unique only to Arizona, and it’s exactly what you need to allow an asset protection trust to actually disconnect from the holding company during that lawsuit or that duress. This cannot be done with an LLC without exposing you to a claim of prohibited or fraudulent transfers. Just those things alone is a good list of the benefit of a limited partnership, but just a few others. The Arizona limited partnership is perpetual, whereas every other state that you have annual reporting and filings and renewables of LLCs. Arizona doesn’t require listing the limited partners. You only need to list them if you’re the general partner. By nature, limited partners also have built-in complete privacy.

Brian:
Then for tax filings, which we’ve been talking about and kind of hits this question again that was asked, your limited partnership can’t be a disregarded entity, but LLCs with just one member, are automatically considered a disregarded entity and that’s not good for liability issues and lawsuits. At that second layer, have it as a limited partnership. Have all your LLCs owned by that limited partnership. You and your spouse are managing that limited partnership. Your asset protection trust will later on own that limited partnership.

Tony:
For the limited partnership, Brian, when we say partnership, what if I’m just a single person? I’m not married and have a partner. There’s no spouse and it’s just Tony Robinson. Can I still have this limited partnership?

Brian:
It’s a partnership. You need another person involved in it. Ask a sibling or somebody, like 1% share, minimal, minimal amount, but you do need another person for a limited partnership, like a business [inaudible 00:17:15] something.

Ashley:
For our next question. This is from James Folan. For short term rentals, do you recommend purchasing under an LLC? What are the advantages, disadvantages? Should the LLC be created prior to finding a deal, or can it be created after getting the property under contract and closing with the LLC?

Brian:
That’s a great question. I think that goes into like what Tony was breaking down his situation in the first episode. I would link back to when we were going through his situation, but if you mean short term as in Tony was… As like VRBOs and short-term rentals, vacation rentals and things like that. Yeah, put them into an LLC. You can create them before or after. I always recommend preventative planning before hand. It’s easier if you already have LLCs. It’s a quick transfer, we put it in. You can do it afterwards. That’s how most of my clients come. It’s either they come with a bunch of real estate on their personal name and we transform into LLCs afterwards, or they have the LLCs and then we just clean them up and do a limited partnership. The answer is yes, put them into an LLC. You want some sort of limited partnership. Get some insurance, depending on the number of them and where you’re at, then put them under a management company and then a trust depending on your net worth and all of your risks. Then it cleans up your accounting.

Tony:
Perfect. All right. The next question here is from Monte. Monte’s question is as an owner and landlord, what’s the best way to protect myself legally as my portfolio grows? I burr all of my deals and I start with hard money, but I was told by my lender that signing my leases under an LLC makes it more difficult to borrow from Fannie and Freddie because my losses count against my debt to income ratio, and they can’t always consider my profits based on some recent lending changes.

Brian:
That’s a great question and it could affect your ability to go and get… Just like personally, I think you can only get up to 10 personal loans and then people have to started getting really creative lending strategies. Same thing when you have asset protection planning as well. You see more private lenders because they’re not banks. If I go to Ashley and say, “Hey, Ashley, I need to borrow and get a loan for $500,000.” You’re not a mortgage expert, but you’re going to go and have your attorney review the documents. That attorney probably is very unfamiliar with any asset protection planning you have in place. He’s going to be scared or she’s going to be scared, whoever that attorney is, and they’re going to tell you Ashley, “Yeah, I probably want to do it. I don’t understand the structure. Deals done.”

Brian:
You see it more with private lending. Larger banks, they’ll just want you to divulge what you have. Okay, it’s for asset protection. How’s the system set up because they’re just doing their due diligence on understanding you, who’s owning it and what are you doing? Okay, great. That’s generally going to be the underwriter. You could see a harder issue with getting loans and bank loans as you’re growing your portfolio. We, again, like to use our asset protection trust, our grantor’s trust. They’re easier to use.

Brian:
If you’re not using a grantor’s trust as an asset protection planning, you will find a harder time getting a loan because most lenders don’t really like non-grantor irrevocable trusts. They’re just very hard for banks and financial institutions to use. That’s why we use off shore, Cook Island, fully-formed asset protection trusts that our grantor trusts. We just domesticate them by complying with IRS compliance. You get the the best of both worlds and the banks it’s easy to maintain and manage your lending with. Long story short, yes, it could affect it. Just talk to an expert and then it all comes down to what type of trust are you using?

Ashley:
Brian, one last follow-up. Usually, at the end of the show, we ask where can people find out more information and reach out to you? To lead into that, do you represent people just in certain states or are you Nationwide?

Brian:
Yeah, that’s a great question. Asset protection is great to where I can represent clients in every state. We even represent clients globally. I have a client in Spain who is massive crypto guy who just bought an island off of Fiji for a crypto investment hub. Then I have clients in every state. We have over 3,000 clients nationwide. It’s just the nature of asset protection. If I were to represent someone in court, I would have to be licensed in that state that I would go and represent you being sued in Virginia. Then I’d have to be licensed in Virginia to cross the BAR to talk to a judge on your behalf. For what we do asset protection wise, we represent everybody in every state.

Ashley:
Awesome. That’s great to hear. Then just where can people reach you if they want to get in touch with you?

Brian:
You can reach me at my website, www.VTBLegal.com. Great information or resource there. Email me directly, [email protected]. Even if you’re not going to do business with me because you may not be able to afford me, I would just rather you have good information to make a better educated decision.

Ashley:
The goal of all the rookie investors is to be able to afford Brian Bradley by having successful investments for asset protection.

Brian:
That’s why you’re investing. If the goal is to have 1 million plus, you don’t pay for the Taj Mahal when you start. You start off small and then you scale as you go. You just need to understand where you start is not where you’re going to be ending and the same thing with your planning.

Ashley:
Well, thank you so much for joining us today. We really appreciated having you on today to give us this insight. I think it’s very rare to have an attorney that will actually come on and give as much advice as you did. We really appreciate that. I’m Ashley at Wealth From Rentals and he’s Tony at Tony J. Robinson. We will be back on Wednesday with another episode and make sure you guys check out our YouTube channel. Just search Real Estate Rookie and you’ll find us on there. We put out weekly videos that are tailored just for rookie investors. Thank you guys and we’ll see you guys on Wednesday.