$500,000 Problem: Tax Entity? Asset Protection? Use of Profits?

Question

I'm going to be returning from you US from Korea and need an entity other than my personal bank account to place $500,000. There are several goals that I will list below and desired results of those goals.

Goals:

• Invest in real estate directly (maybe owning it in my name or not) in 18 more 3-plex or 4-plex properties in various markets throughout the USA
• Invest in real estate passively through a few funds that I'm looking at (maybe owning it in my name or not)

I'm doing both currently.

Desired Results:

• Minimize or eliminate my tax liability through write-offs, depreciation, and entity structures. I've done this so far through an LLC. I've basically spent all the income I've gotten on business expenses. I looked at real estate in Guam and met with realtors there. It's a beautiful place but didn't meet our criteria. Thailand had some decent investments too, but we didn't buy there because of the instability. Those business trips wiped out my profits. I'm assuming I'll have more profits with the additional $500,000 in capital and might not spend all the proceeds on business expenses.
• I'd like to protect my assets from lawsuits and be able to pass them onto my children at some point. I think trusts are able to hide who owns an asset, which seems to be an excellent deterrent. Use a mixture of deterrents and legal entities to protect equity. I have $1 million umbrella policy currently.
• I'd like to be able to use the assets as collateral. If they are in the name of another entity I can see how that might be hard for a bank to lend to me on such an entity.
• I'd like to be able to use the income as opposed to a retirement account.

Thank you for any help, opinions, advice, strategies that you might have.

Jerry W. · Answer

Thanks for the plug @Steven Hamilton II, the problem is you really cannot do much for someone who all you know is that they have $500K to invest. lot depends on your other assets, your tax bracket, etc. Probate in some states are pretty bad, not so bad in others. If you have your money mostly in things like bonds, etc. you can do a simple POD beneficiary. If you set up a few LLCs or corporations you can gain some shielding from lawsuits, but there is never a shield from your own actions. You can have all the LLCs you want, but if you drive drunk and hurt someone they will sue you personally for everything you have. Putting money in retirement accounts is a great protection they are immune from execution. Most LLCs limit judgements to only being able to do charging orders, the creditor cannot take the asset, just the money paid out. If they have a charging order it is the same as a retirement account then. You can use trusts, but try to buy land in a trust then sell it and see if the title company will give you insurance without a copy of certain portions of the trust. If the trust is sued the court can order it to divulge who the owner is and who the beneficiaries are. Just like your oversea trips you can spend your money setting a series of blind ownerships or you can invest to make money. If you are married put high dollar assets in tenants by the entireties and do your risky business in your own name alone. No offense but $500K of net worth is obviously nice, but not enough to draw lawsuits on it's own. Good insurance good operating policies, and an LLC or even a closely help corporation will offer massive protection. It seems you need to come up with a plan for investing then have someone set up your ownership to accomplish what your goals are. The job of counselors is not necessarily to tell you what to do, but after you decide what to do, hep you do it the best way possible. You are focusing on all the wrong things.

Jay Hinrichs · Answer

Account Closed this is the only subject that you and I agree on.. asset protection..

However trusts set up correctly are pretty cool..

but business insurance if one is in a business that has a lot of liability is a must

owning rentals to me does not fall into that category.. so basic umbrella policy is cheap insruance

Jerry W. · Answer

@Eric Gabriel, generally putting real property in a trust that you are the trustor and trustee of does not trigger the due on sale clause. I do not know if your state has the same rules regarding it, try asking your bank who has the mortgage. POD or payable on death, is a clause put on personal property like bank accounts and life insurance. Trusts do not have tenants by the entireties as trusts do not generally get married, people do.

Liability is usually based on 4 things, 1) Duty, 2.) Breach of that duty, 3.) Damages, 4.) and a causal connection between the breach of duty and the damages. This is over simplified, but should give you the idea. You can create all the corporate entities you want, but if you yourself violate the 4 rules you can have someone sue you and win. If you are acting on behalf of a corporation you make the corporation liable as well. If your activity is passive, like buying Apple stock, you are not liable for what Apple does. If you are an Apple designer and create a phone that explodes when it gets hot from sitting in your pocket, both you and the company will be sued. I hope this helps a little bit.

Eric Gabriel · Answer

Account Closed , how do you have your trust set up? You can PM me details. Is there someone in Portland that I could talk to? My parents have POA to sign for me and I coached them in November that they might have to create a trust for me and my family with the money that I send them. I just need guidance on how to set it up correctly.

Steven Hamilton II · Answer

I wasn't picking on you. I was just saying its a fine line based upon the question of asset protection.

Lance Lvovsky · Answer

Eric - I cannot be providing you advice or telling you what to do given the nature of the subject on the forums. Please understand.

All I will say is that in order for assets to avoid Probate, assets must be titled to a Trust. Also, as an FYI, owners of LLC's are considered "members". As such, owners in a LLC own membership interest. Owners in a Corporation own stock.

Of course nothing said above constitutes legal and/or tax advice.

If you have further questions, feel free to PM me.

Andrey Y. · Answer

You need to read up on real estate taxes or talk to a CPA. There are geographic/regional limits set by the IRS. If you have 1 or more rentals in Portland, Oregon and take a trip to Home Depot IN Portland, that is absolutely a business expense. Scouting out a market that you don't end up purchasing property in, those are NOT business expenses -- those can become "start up" expenses if you end up with a rental business in that geographic region in the future.

I thought the same thing as you, and I was schooled by several CPAs on this site, and confirmed it in my reading as well. You are playing with fire, its illegal, a risk, and chances are you won't get audited, but if you do, those expenses will be disallowed and you'll likely be fined.

Eric Gabriel · Answer

@Andrey Y. , Let me clarify. For example, you are saying that if I take a trip to Home Depot with my work truck and don't buy a light fixture, then go to Lowe's to see what they have and don't buy a light fixture, then go online and buy a light fixture, it is illegal to write off my mileage on my business taxes? I would say that you are wrong. I can totally justify that expense if the IRS asks me. Let me know what you think would make it a business expense.

Eric Gabriel · Answer

@Jerry W. , Regarding assets, I have 2 plexes in my name and my wife's name in Oregon. That's all and the pile of cash in Korea. If I put them in the name of a trust, is it still possible to get financing on them? I'm guessing it would trigger the "due on sale" clause. Maybe not if I show the bank the trust with me as the beneficiary.

Are PODs used only for liquid assets? It sounds like a document attached to a Will.

I know what "tenants by the entireties" means but is that the wording that the trust should have?

Thanks for all the details. Greatly appreciated.

My plan, which might not be completely clear at the top of this thread, is to buy 18 plexes, rehab, refi, hold, and repeat 18 times. I will buy 18 plexes or build 18 if I can't find ones that meet my criteria. After that goal has been met, I will place my excess funds in a retirement account that will invest in several RE funds.

$500,000 Problem: Tax Entity? Asset Protection? Use of Profits?

$500,000 Problem: Tax Entity? Asset Protection? Use of Profits?

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