383 Back To School: Asset Protection

Buck:

Welcome back to the show, everyone, today. My guest in Wealth Formula podcast is Doug Lodmell. Doug has been on the show many times. He is my good friend and he’s also my asset protection attorney. He is his firm is called Living On Right Now. Doug, welcome back to the show.

Doug:

Thanks, Buck. How are you doing?

Buck:

I’m doing good. I’m doing good. It’s funny that we’re we’re talking, you and me offline here about stem cells and moving to Panama and stuff.

Doug:

But then as young as we can for as long as we can.

Buck:

No, no, no, Exactly. That’s to me right now. Like, that’s you know, that’s the way the conversation gets really interesting for me. But that’s not that’s the topic of my other podcast, if you’re listening these days. Yeah. Doug Xapo, are you listening? You’re not listening. Are you doing. Oh.

Doug:

You mean your other podcast? Yeah. No, I need to. I want to. I want to. I didn’t know. I didn’t know was there so yeah.

Buck:

It’s Sapio with Buck Joffrey and these are the kind of topics where I can mine. In fact, I want to do one on stem cells as well, but it’s a longevity podcast. It’s pretty cool. Anyway, let’s talk about something that I think, you know, I think is is important while you’re getting older. That’s asset protection. That’s what you’re, that’s what you do. And like let’s I wanted to do sort of back to the basics on this because I think sometimes we get, you know, more and more complicated and you know, we have a lot of new people and it’s always good for a review. Now, the two things that I think that people think of the least or take care of the least when they’re young and starting to accumulate wealth are asset protection and estate planning and so and abroad and a broadly speaking, how would you define asset protection?

Doug:

So asset protection, it’s really a simple concept. How do you make your assets unavailable to a creditor or anyone else that you would not want to get your assets? It’s just how do you make them available? So I mean, the very the very simplest form of asset protection is don’t have any assets, be poor, just be broke. Right. Yeah.

Buck:

I’ve done that one for.

Doug:

Yeah, yeah. I think we all did that one right. You know, come out of come out of college with a whole bunch of debt and no assets and you are protected. You’re rock solid. There’s, you know, even if you, if you did something horrible with tons of liability, nobody is going to care. They’re not going to bother you because you’ve got nothing.

But of course, none of us want to stay there. Right. That’s not the goal, Right? We want to do the opposite. We want to build assets. We want to build wealth. And at some point, what I found is there’s just kind of a tipping point there. And all of a sudden you look up and you’re like, Wow, I’ve been working really hard for a lot of years and jeez, I have something I could lose.

Like there’s something there, and all of a sudden it comes with a, a I think a hit of joy. Like, wow, I kind of made it like I got something and followed quickly thereafter by a hit of fear. Like, what happens? Jeez. Oh, shit. What happens if I lose this? Like, am I safe? And and so asset protection in the way that we think of it from a legal standpoint is is is let’s address that. Let’s address that fear. So it’s setting up legal tools and structures that make your assets either difficult or nearly impossible for a creditor to reach. So it mimics you having no assets and yet you still have the beneficial use and control and enjoyment of those assets. So you do have the assets there just in a place where a creditor couldn’t reach them.

Buck:

I should point out that I think you’re actually giving the best case scenario, which is I’m accumulating assets and all of a sudden I’m waking up out of nowhere thinking.

Doug:

Yeah, you’re right.

Buck:

I yeah, I need protection. Most of the time. It’s like, oh, man, somebody is suing me for some reason. What do I do now?

Doug:

Yeah. Oh, no, you’re so right. Yeah, that’s the best case, was you wake up on your own, the more likely cases you wake up because you get a lawsuit, you know, you get an attack, and then they’re calling with their hair on fire going, Oh, my God, I didn’t even think about it. I’ve just been making assets. I never even thought to stop and address the protecting of them.

Buck:

Yeah. So the question is, okay, so you start accumulating assets and I think the first layer of protection, what do you think? I mean, you talk about this. I think it’s a very good point. Was the first layer protection maybe is just insurance.

Doug:

Right? Yeah. So so I mean, kid out of school, you buy the minimum insurance on your car and you just go off right. At some point you realize, wow, I probably shouldn’t have the minimum insurance. And so you buy more. And then somebody says to you, Hey, you should probably buy an umbrella policy. And the answer to that is you should. I mean, if you have assets, you should. Absolutely. Because one of the greatest risks we all face, it’s I have to tell you, it is the most common call I get is a car accident. That is that is by far the reason that people call me the most. And I have been shocked at the amount of liability that a car accident can create.

I mean, tens of millions of dollars if you I mean, if you if somebody dies, it’s bad, but it’s it’s kind of limited. But if somebody gets gets permanently injured, loses their legs, becomes, you know, paralyzed in some form, it’s kind of unlimited liability. And so at that point, you know, not having the minimum insurance will be a really good thing and having an umbrella policy. So so, yeah, if you’re kind of at that stage where you haven’t looked at your insurance, I highly recommend that you you look at it and I highly recommend an umbrella policy because they’re not expensive. There really are. They’re three or 4000 for four, five or $10 million. And it’s an excess coverage policy. So umbrella doesn’t include any other insurance. Like you’re not expanding your coverage, you’re just expanding your limits on your car and your your your home and other already existing insurance. But having those higher limits if you have a real accident is is critical.

Buck:

Yeah. Okay. And then so once you’re you’ve got plenty of insurance, then you start looking at potentially LLC, these entities, limited partnerships. So what’s the first layer of that like and at what point should we think start thinking about that from an asset protection.

Doug:

Right. So, so once we have insurance, now we look at the assets themselves. So if someone comes to me and says, hey, I just don’t I’m, I’m really into the stock market, that’s my whole gig. So I have my home and then I have a brokerage account. Then we focus on, okay, how do we protect the brokerage account? We are going to use some kind of holding company, like a limited liability company or a limited partnership. On the other hand, if somebody says, Hey, I’m really into real estate, which is pretty smart because there’s all the tax benefits of being in the real estate, now we’re talking about LLC is at that level of holding the real estate. So from a conceptual standpoint, if you own real estate investment, real estate, it should be in an LLC. And there’s really no bottom line for that. I mean, the first piece of investment real estate, you buy should be in an LLC. You should you should start right from the beginning.

Buck:

One of the questions people ask all the time is do I need an LLC for every asset? My answer is usually, well, you know. Do you how, how much do you like those assets? Right.

Doug:

Well, so the way that I look at it is you need an LLC for every basket of assets that you’re willing to kind of put in the same risk basket. So if you’re buying little houses in Chicago at $60,000 apiece or in Detroit, you know, you’re you probably don’t need an LLC for each house with $60,000 of equity, you could probably be probably bunched five or six houses together. On the other hand, if you’re buying million dollar homes in California for rentals now, they probably need their own LLC, each one. And you know.

Buck:

What does an LLC do for you?

Doug:

So an LLC is, is is going to handle two different types of liability inside liability and outside liability. Inside liability is liability associated with the inside of the LLC. In other words, what is held inside the LLC? So let’s say you have a multifamily, you have a four plex inside of an LLC and you have a problem fire or a slip and fall or somebody gets shot on the property or whatever. The LLC is designed to insulate and hold that liability inside the LLC. So it kind of keeps it in there and that’s good and that’s why we break up LLC. So if you have $3 million properties in a single LLC and one of them has a problem, all three are at risk because they’re all inside the LLC. So that’s where we break up into multiple LLC is when we have enough risk in one that we are okay, that’s we filled it up enough, Let’s move to the next one.

The other thing an LLC does is protect from outside liability. Outside liability is liability That has nothing to do with what is being held in the LLC. It has to do with what the owner of the LLC did outside. So that would be a car accident or a lawsuit from a partnership dispute or malpractice claim from your profession or whatever. And now they get a judgment against you, the owner, and then they’re looking at your assets and they see that you’re holding this this real estate in an LLC. And so that liability is coming in from the outside trying to get to the asset. And an LLC, again, properly set up and done right should protect from them giving in directly.

Buck:

And then in that external and internal attack thing is really important because like if you have physical real estate you’re protecting, you know, you’ve got, you’ve got liability from the actual properties themselves that stays within the LLC, but then you have the protection of outside creditors getting to your physical assets because those are inside of the LLC, but also in our group. As you know, a number of people have significant investments in real estate syndications and other passive investments. And in that case, if they’re in the LLC, they don’t they don’t necessarily you don’t have to worry about the liability of those because you’re in a limited liability investment. However, for what you’re doing in that situation then is just protecting them from outside, right.

Doug:

Right. Yeah. So, so syndications are I think unless you’re really committed to real estate like that is your thing and you’re going to be into it. I find that my clients who do syndications are much better off. It’s zero maintenance. They get all the benefits of the depreciation. They don’t have to go do all the work themselves, especially those clients that have a day job or a day career. That seems to be a much better way for them to go. The the the other benefit is that they’re already wrapped up inside. They are just a member or a limited partner of a bigger syndication. So they’ve already insulated. So they don’t have any they don’t have any worry now. They just want to protect that interest from an outside liability. Yeah. And so those interest can go directly in the holding company. So that’s where so if you think of the holding company kind of in the middle of the page, the holding company can hold financial assets like stocks and bonds and cryptocurrency and any kind of any kind of already securitized item. It can also hold interest in your syndications.

So syndication interests, LLC interests, limited partnership interest, and then it can also hold interest in your wholly owned LLC. So let’s say you own some multifamily and you have an LLC. That LLC would be in the holding company. And so the Holder company is really designed to consolidate those assets, but we want to only really put safe assets directly in the holding company, meaning they’ve already been either wrapped in an LLC of our own or we’re buying into someone else’s LLC or limited partnership through a syndication.

Buck:

You talk about the LLC that protects your $1 million house in California. You know where you’re getting a house for $1,000,000 in California. But in. I could ignore it. I do car garage or so but the but but you bring up a point though. But not all these are created equally right. Because if you’re in California of California LLC, talk a little bit about the limitations of some of the states. An LLC is because they’re not all created equally.

Doug:

Yeah, they’re not all created equally. So. So the protection offered in it through an LLC is what’s called charging order protection. So what a charging order protection statute says is that if you, as the member of an LLC have a judgment out here, your judgment creditor is limited to getting a charge against your interest in the LLC. And so if if the State says that the exclusive remedy for a creditor of a member of an LLC is the charging order, that’s good. We don’t want any other remedy. Other states say, well, the primary remedy is a charging order or any other such remedy as the judge may in their discretion determine, i.e. California says that. And so when you have a California LLC, charging order is still the primary, that’s the one they’re supposed to point to. But the reality is the judge has discretion.

But I’m going to make another point. The reality is the judge always has the discretion. So even if you go to a state like Wyoming or Nevada, where a charging order is the exclusive remedy, it does not mean a judge cannot say, well, it’s exclusive remedy for an LLC, but in this case, we’re deeming the LLC as an alter ego of the client, and therefore we’re just going to disregard that the LLC even exists. So therefore charging order doesn’t apply. So I just want to make sure that everybody understands the discretion of a court is kind of unlimited in the United States. So there’s always, always a risk, even if you’re using one of the good jurisdictions, there’s always a risk that a judge can just decide, You’re the bad guy. I want to reach a result. I want to get to your money because I don’t like what you did. And I’m sympathizing with the plaintiff and and undercut and slice through any any structure that’s basically domestically based.

Buck:

So at what point do you take it sort of to the next level, like would the next level being holding companies potentially offshore? You know, offshore trusts that kind of things like wit, you know, we’ve talked a lot about like the different ways you can protect. But like at some point, you know, crazy people like me start looking at various trusts to see what else that they can do to protect themselves. And when is what do they do for you and who’s a good candidate.

Doug:

So the next level to this is what’s called an asset protection trust. Asset protection trusts are are kind of amazing animals. First of all, trusts are amazing animals. So if you don’t really understand what a trust is, a trust is effectively a private agreement. So I’ve had clients say, who owns the trusts? There’s actually no owner to a trust because a trust is an agreement. So if you and I say are hanging out in in Santa Barbara and you’re going to take the kids to the beach and Aslan’s going to tag along and I say, Hey, Buck, you know, here’s 100 bucks, please. You know, buy as an ice cream at lunch and whatever. But but don’t let them have any any soda. We don’t do soda. That’s it. That’s a trust. We have agreed. So I’m the settlor of the trust. Meaning I created it. You’re the trustee because I gave you the 100 bucks as Lynn is the beneficiary, because the money is for him and I’ve also put a spendthrift provision around it. I’ve said, Hey, no soda, because I don’t I don’t want soda.

So that’s really a trust. And trust can be oral. They don’t even have to be written. So so it’s trusts are created every day, all the time by anybody who ever says, hey, do this for me, you know, here’s some money, do this for me. Yeah. So trusts are amazing because they’re incredibly flexible. You can do pretty much anything that’s not illegal in a trust. So you could make up some crazy kind of situation. Say, hey, you know, whatever this, that or the other thing. As long as it’s not illegal, it’s allowable. Now, when we come to asset protection trust, we would rather not be doing an oral trust because we can’t prove it exists. So we want to write it down. And then we’d like to be under a statutory regime that actually says, hey, we allow for these certain things to be done well, that first statutory regime that ever allowed for a particular type of trust that was really designed to protect the assets, was designed in the Cook Islands way back in the eighties, 1984, with what was called the Cook Island Trust Act. And what they did is they said, Hey, it’s okay for you to create a trust for yourself, make yourself the beneficiary, put spendthrift provisions in it, which eliminate your creditors access to the money. And and then, by the way, if anyone wants to get into this trust, they have to come down here to the Cook Islands.

They have to prove their case beyond a reasonable doubt. They can’t amend their claim once they start. They can’t get a free attorney because we don’t allow contingency fees. In other words, they put this mountain of hurdles in front of anyone that would try to go down there and get these assets. That was revolutionary. It was a revolutionary concept, in fact, so revolutionary, a whole bunch of attorneys in the United States were like, that’s never going to work. U.S. is never going to go for that. They’re going to say, as a matter of public policy, you know, these are these are just disallowed. But they were used for many years and they started to work. Some high profile cases came along and it works. They really worked well. 1998 comes along and Alaska actually says, jeez. Why are we sending the business down to the Cook Islands?

Why don’t we try to get some of this business? They passed the statute modeled after the Cook Island statute, at least to the degree that they could, and they invented the domestic asset protection trust industry. Since 1998, we have 20 states in the United States that have passed some type of statute which allows for this type of trust. So what’s the difference between a foreign asset protection trust and a domestic asset protection trust?

Buck:

Domestic ones don’t work.

Doug:

Yeah. To the end. That’s it. Domestic ones are still domestic. And because of that, they’re still subject to the same judge who’s sitting there going, Yeah, I know it says that in the Alaska statute, but guess what? We’re going to apply Montana law here and Alaska doesn’t. And Alaska can’t really resist that because Alaska is part of the union. They have to respect they have to domesticate the judgments. So if we look at the case law of the domestic trusts, it’s kind of failure after failure after failure. So me personally, I’m not a big fan of a domestic trust. However, the foreign trusts got some compliance hurdles. It’s got some costs and control issues. A lot of people find out that there are a lot harder to maintain than than than advertised sometimes. And so, you know, they’re great when you’re actually defending and protecting, but when you’re just doing it kind of prospectively and, you know, hope you never need it, they’re pretty expensive and they’re pretty they’re pretty high Compliance with the IRS.

Buck:

A little clunky, too.

Doug:

Pretty clunky. Yeah.

Buck:

Not let me ask you this, though, like real quick, going back to the example of the California real estate. If you if you had the ultimate ultimately the real estate was owned by an offshore trust. Yeah. Like in that situation, the judge couldn’t still just point at you because ultimately it’s the trust that owns the real estate. Right. But first of all, that’s. Is that a correct assumption?

Doug:

No, that’s not so. So. So let’s just say we have an LLC that owns a real estate holding company that owns the LLC, Offshore Trust, that owns the holding company. Yes, we have three layers so bad judgment comes down and now we’re in a collection type of proceeding. And so they’re going to find all this out because they’re going to depose you, they’re going to find out you’re going to have to tell the truth.

You’re going to say, okay, well, what assets do you have? Are you the beneficiary or the creator of any trust? And a good attorney is going to going to be able to sniff out your basically your entire structure at that point, they run into the judge and they say, okay, judge, we’ve figured it out. There’s this offshore trust created by the debtor that holds this holding company off in Wyoming or Arizona or wherever, which holds this LLC in California, which holds this million dollar property.

We want you to dismantle this whole thing and get to the million dollar property. And at that point, we’re basically now at the discretion of that judge. So my personal experience is that sometimes that is completely respected and the judge says, Hey, sorry, I’m going to respect that structure. You can’t get to it. Other times, a judge might not respect that structure. So any time you’re dealing with physical real estate, I tell clients right from the beginning, hey, look, we’re going to set it up this way. And if we’re talking about the average liability, we’re probably never going to need to do anything. But if we’re talking about a catastrophic nuclear event, you know, somebody dies, somebody very sympathetic dies on one of your properties, and there’s a $10 million judgment and you’re not the sympathetic party they are. I’m going to tell you that leaving your real estate just sitting there, even if it’s in an offshore trust, eventually, is not a 100% safe. So you always have to be ready and willing to convert that equity into actual physical cash, which means either strip the equity or sell the property.

Buck:

Yeah. So in an obviously that runs into the transfer thing or is that called.

Doug:

Project transfer.

Buck:

Well that point the money’s already in Cook Islands jurisdiction anyway so we can do about it.

Doug:

Right. Right. And so, and the project transfer issues are important to understand. A fraudulent transfer requires a legal transfer. So when you transfer the property into the LLC, that’s a legal transfer. When you transfer the LLC interest into the holding company, that’s a legal transfer. When you transfer the holding company interest into the trust, that’s a legal transfer.

Five years later, let’s say we’ve done all these legal transfers and set up the structure. Five years later, the trust is now holding this interest in this property through the holding company and the LLC, and something some risk comes along and we decide we no longer want to be invested in California real estate. The the trust says, Hey, I’d like to go ahead and take a distribution.

The real estate is sold, the money is moved to the holding company. And then after the trust, no legal transfers there. Those are just movements of money. The trust already owned it. So from a fraudulent transfer standpoint, the more important time frame is when we set up the plan, not when we actually start moving with it.

Buck:

Okay, That’s that’s important. Okay. So that brings us to your solution to the issue of the clunky trust. You know, which allows you to, you know, kind of keep costs down, be a little bit more flexible and at the same time, you know, be able to flip the switch. Right. Tell us a little bit about that.

Doug:

So so, you know, I was in law school. I got the opportunity to go and do a tax master’s degree at NYU, which is which is, you know, just more tax. I mean, all taxed all day, every day. The fortunate thing about that is that the challenges with some of the clunkiness of the offshore trusts are because of its tax classification as a foreign trust.

So so I was actually asking the question, how do we get the protection of the offshore without triggering the tax issues? And I realized you can actually bifurcate the problem. You can have the trust registered offshore. And from an offshore perspective, the offshore entity sees it as a foreign trust. But the U.S. has their own regime as to determine what is the foreign trust, and they define it in the IRS code 70 701a 30 E and they created a two part test and they say, hey, as long as the primary supervision of the trust is in the United States and as long as the primary jurisdiction for administering the trust is in the United States, we consider this a domestic trust. So what I did is I created a trust that that actually is registered offshore and seen as by as foreign by the offshore jurisdiction. But then we meet that two part test. We actually bridge it back and meet the two part test so that it’s considered domestic from an IRS perspective. And so because of that bridging mechanism, I actually named it the Bridge Trust because I’m bridging.

And so what it really is, is it’s a hybrid between the foreign and the domestic. So from a compliance standpoint, it’s under the domestic regime, we don’t have to file the 3520. We don’t have to get a separate tax I.D. number. We just choose a jurisdiction, the United States, to have primary supervision, and then we choose a trustee that have primary control. Well, for me, the best trustee is the client themselves. They want control anyway. They always want control. We always want control of our own assets. So by making the client, the trustee, we meet that domestic U.S. person in control and by choosing a U.S. jurisdiction, we meet the jurisdiction test. And so now we have a very simple trust to maintain, doesn’t have all those expenses.

It’s much less expensive to maintain no IRS compliance. But if we have a problem, we can actually just cross back over the bridge, remove the the client as the trustee, and drop the U.S. jurisdiction. And now we’re just just back to being nothing but a foreign trust.

Buck:

So that is in a and that’s less expensive. It’s easier to use. I use that. Yeah. It’s really helpful. And what what do you call that?

Doug:

It I call it the Bridge Trust because we’re bridging those jurisdictions. Yeah. So it’s a bridge between the foreign and domestic big.

Buck:

The last point to make on this I think is an important one too, is that, you know, part of, part of the asset protection. What I’ve realized and unfortunately, you know, it’s I’ve realized a lot about the legal system as I’ve I’ve kind of had to deal with it, how to deal with it. And a lot of it is is not as is, you know, when you first start making money, you think about somebody suing you and going to court and whinging and all that. A lot of times, most of the time it never gets there. And most of the time it’s about settling and really, I think one of the things that you can do with these things is just make yourself look like a big pain in the ass to somebody who’s trying to sue you. Right. Because a lot of, you know, those attorneys are paid on basically whatever they can get money, they’re going to get a portion of that money.

They look at you and say, it’s going to take me so much time and money to do this case to try to get anything in. This guy’s got structure after structure, and maybe I’ll be able to dismantle them, but maybe not and probably not. And by the time I do, I mean, I probably would even better take another job, right? It’s not a big part of this strategy. At the end of the day.

Doug:

It is the biggest part. It is the most important part. Yes. Because we don’t we don’t really want to go to trial and get a judgment and resist the judgment and trigger the trust and liquidate assets and open Swiss accounts. I mean, that’s not our goal. Our goal is for them to never go to trial. And and that’s also why we started this conversation with insurance.

It’s why insurance is such a great piece of this. So the best combination is to have a good insurance policy with a with a good umbrella policy and then have asset protection so that when the other side is has the $10 million claim and you have $5 million of umbrella, they’re trying to decide, hey, are we going to we’re going to go for more than that. And then they’re going to want financial disclosure from you. And if you can show them a financial disclosure with all these layers built in so that it’s very clear that, oh my God, even if we are able to get a judgment in excess of the of the insurance, collecting against this guy is going to be impossible. So let’s just take the insurance.

So they work really well together, which is why I’m a proponent of getting the insurance now. Not everything is covered by insurance and in that case we just are relying on the asset protection and all the more reason why you want your asset protection to be very, very strong and not only to be strong but to look strong. And part of that is making sure that it has all the elements that the other side looks and says, okay, yeah, too difficult. Let’s let’s take a pass or let’s settle. And that’s what it’s really all about.

Buck:

This is a Yeah, I think this is a really important and I think a nice succinct sort of review of this topic. Doug where okay, so, so if people want to get in touch with you, how do they do that? And by the way, I should point out on wealth formula dot com, I believe there is still, you know, a recorded webinar that you did for asset protection, which if people want to go back and get some more information and some more layers on this, might be useful to do and you can contact Doug through that. But how else could they reach out?

Doug:

Yeah, So I mean, if you just want kind of more information, you want to see what’s going on, you can go to the website, which is just w WW dot ld mail my last name dot com. If you just want to reach me directly, you can just email me just my name Doug at Lord Malcolm and say, Hey, I heard John Bach. You know, I’d love to talk I if, if it, if it’s coming from you about I, we don’t charge anything for that initial conversation and I can help them understand what’s going on. Then of course they can call, you know, just any anytime. They can just call and make an appointment. Our phone number 6022302014. We’re in Scottsdale, Arizona. You know, we’re we’re we’re here all the time tastic.

Buck:

All right, Doug. Well, hopefully we’ll see each other soon. Maybe in Panama. Who knows?

Doug:

Yeah. Yeah, that’s the plan, right? Yeah. You got a birthday, so maybe we’ll make it a birthday, too. But.

Buck:

Hey. Well, listen, that is great having you, as always. And we will touch base soon. And thanks. Thanks again for being well from your podcast.

Doug:

My pleasure.

Buck:

We’ll be right back.