How to Not (Accidentally) Lose Your Portfolio to Lawsuits

David:
This is the BiggerPockets Podcast show, 838.

Brian:
It’s an interesting thing whenever you look at recessions and depressions and everything, the amount of lawsuits almost doubles. So when times go bad, people start running out of money and start panicking. And what do they do? They start suing. Who do they sue? The haves. My landlord, I hate you. My doctor, you got that nice BMW. I want that BMW. So as things get harder, you have an increase in divorces and you have an increase in lawsuits. And then you couple that, which I broke down also because I tried to set the scene in my book. How did we get here? And it realistically is over the last 40 years, we created a society of victims.

David:
What’s going on everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast on the planet. Every week, bringing you the stories, how tos and the answers that you need to make smart decisions in this current market. Today is all about protection and I’ll be joined by the honorable Rob Abasolo.

Rob:
I hold myself in contempt.

David:
Today’s show is all about protecting yourself from potential lawsuits as well as dispelling so many of the myths that you may have built your foundation of knowledge on that are not true. And we get into that today with returning guest Brian Bradley. Brian was previously featured on the BiggerPockets Rookie episode 106 and 107, as well as our show, the BiggerPockets Real Estate Podcast, episode 595. He is an asset protection attorney and he brings the heat today. Rob, what were some of the things that you think people need to look out for to protect their wealth?

Rob:
Listen, we’re going to get into some pretty technical stuff, but we really make it digestible for everybody at home. And so whether you’ve been investing for 20 years, 15 years, or you’re just getting started, we are going to lay out the blueprint for how to protect your assets. And we get into that towards the end of the episode. So you’re definitely going to want to stick around.

David:
That’s right. No matter where you are in your journey, $0 or $100 million portfolio, you want to protect what you’ve built and we are here to help you. You’ve heard it said, measure twice, cut once. It is always better to prepare for things ahead of time than to wait until your middle of the storm and try to figure it out. Today’s quick dip is simple. In today’s episode, we talked about a recent change to landlord and tenant protections within the legal system. If you’re not sure about landlord and tenant laws, the BiggerPockets blog has a great post on this. Check out the link in the show notes and go read the blog. It’s got charts for specific issues like security deposits, lease violations and more. Rob, anything you want to say before we bring in Brian?

Rob:
Yes, a goose. 1% of people will understand that joke, but y’all are the real ones.

David:
And if you’re part of the 99% that don’t, make sure you’re following us on YouTube so you can see what Rob just did. All right, let’s get to Brian. Brian Bradley, welcome to the BiggerPockets podcast. How are you today?

Brian:
I’m doing great. Thanks for having me back on and this is going to be a lot of fun and we have a lot of important changes in the law to go over as well as myth busting a lot of misconceptions and questions that I get. All of this, I go into a lot of detail over my new book that’s coming out Over Exposed where I break all this crazy world down and this mess in that we’re living in and then investing in. But I think we’re going to have a lot of fun in today’s topic.

David:
Well, awesome man. Well, we want to bring you up to the stand if you will, and I hope you both will to tell us about these things.

Brian:
No, absolutely. Looking forward to kicking it off.

David:
And for those of you who have been enjoying the lack of jujitsu references, because I haven’t been going for a long time, I’m sorry to say that streak is likely going to end today because Brian was a IBJJ, is that what you’re competing in?

Brian:
Yeah, I compete through IBJJF and I’ll probably do ADCC afterwards in December.

David:
Well, it’s great to have you here again, to give our listeners a heads-up on where we’re headed with your insight today, we’re going to be talking about why your risk as a real estate investor has changed and what you need to know because of that, how to not accidentally commit fraud. It is way more common than you think and exactly what to do to protect your assets the right way at every level of wealth. So one of the reasons that we’re talking here today is that there’s recently been a court case with pretty big implications for people who own rental properties. Can you tell us about the Mallory v. Norfolk case?

Brian:
Yeah, yeah, absolutely. So it goes to when we’re talking about asset protections and layers. First layer of asset protection, think of cold weather, you’re going to wear a nice thin T-shirt or a nice thin shirt underneath all of your other layers. This is your base layer, your LLCs, it sits on your skin. Asset protection 101. And so there’s a lot of confusion when it comes to asset protection like where do we even set these things up? And you’re like, do we go to Delaware, Wyoming, Texas, Nevada? And this is where we really need to break down these modern myths and through the case law, because we’re talking about charging order protection and corporate veil piercing, just big legal fancy words.
And so what we have is, for example, a lot of California residents running off to other states like Wyoming to create Wyoming LLCs to hold the real estate in, the risky assets and their investments in, but then when you have to register those LLCs in the state that you’re a resident of and then pay the franchise tax. You can’t just go and take another state’s more beneficial laws and bring them to you to another state. And this is demonstrated now in a recent 2023 Supreme Court case named Mallory v. Norfolk, where the Supreme Court upheld a Pennsylvania statute that forces companies to face litigation within the borders that it’s registered to do business in.
And I’m going to repeat that because it’s very important and when lawyers and professors repeat things or cops repeat things, it’s generally going to be on the test. So I would say focus and pay attention. It forces companies to face litigation within the borders that it’s registered to do business in. This case now opens the door for other states to adopt similar registration requirements. So state courts are permitted to exercise jurisdiction over registered foreign corporations that are, let’s say, being used to hold your real estate in just as if they’re domestic corporations of that state.
So your Wyoming LLC that is now registered in California or registered in Pennsylvania or whatever the heck the state is that you’re a resident of is subject to the laws under California or Pennsylvania or that state that is registered in. And remember, you’re legally required to record your out-of-state LLCs known as foreign entities and pay the franchise tax. Again, you don’t just get to take Wyoming or Delaware tort and damage and personal injury laws with you to other states. You can’t just go and purchase other states’ more beneficial laws. And this case now has kind of put the nail in the coffin on that.

David:
So what you’re saying here is if I live in a state that has unfavorable laws, I can’t just open an LLC in a state with favorable laws, hold my properties in that LLC and then benefit from those favorable laws.

Brian:
Correct. Your general rule of law thought is we’re going to use the state that the asset is in. So if you own a rental property and it’s in California, it’s going to be a California LLC. If it’s in Tennessee, it’s going to be a Tennessee LLC. And there’s another really big distinction that’s really important when it comes to just LLCs that people are just literally not understanding. And what it is is a distinction between tort law and personal injury laws and then business law and contract law.
And when you’re setting up businesses and creating contracts, we can and should use choice of law clauses and venue provisions. You see them in every contract you ever sign. Okay, if we have a dispute we’re going to be litigating in this state, but when we’re setting up a business and we’re selling widgets or a product in a different state, we can then use Delaware or Wyoming or Nevada, those good charging order protection states.
What we’re going into there is internal disputes of affairs of the business, and I’m going to say that again, hint, hint, to govern internal disputes and affairs of the business internally. But again, when it comes to real estate and LLCs acting as holding companies for the rental properties, that’s not a business. When a person gets injured on your property and you’re getting sued or your LLC is getting sued for damages due to wrongful doings and negligence, so another legal fancy words, that’s not a business dispute, that’s a tort liability. We’re talking about wrongful acts and infringements on rights. So cases like tort liabilities do not relate to internal affairs or corporate government matters. And so they are seen as outside the entity. So you really don’t have corporate bill protection at all.

David:
So what you’re saying here relates to the belief that a lot of investors have that they figured out a loophole, they figured out a secret, there’s a way that they can get around being sued or losing things, and you’re saying it’s not as cut and dry as that sounds.

Brian:
Correct. And what it is really saying for some reason there’s become this weird thought that I have an LLC, I’m good, that’s all I need. It’s this dragon slayer and they forget first word, first letter, limited, they tell you this straight up in the name. And then we have now transitioned from ignoring the decades of case law about LLC and veil piercing and veils are very easy to be pierced and all you got to do is think about the thin, flimsy piece of fabric that goes over a bride’s face on a wedding day. It’s the same weakness. It is very weak.
There’s a seminal case on this, it’s called Associated Vendors Incorporated versus Auckland Meat Company came out in 1962. Here, the Court of appeals gave 20 reasons for justifying piercing your bill. I’m not going to go over all of them, it’s too tedious, but I’m just going to do the five heavy hitters. Co-mingling of funds of other assets, using funds for something other than corporate uses, failure to maintain adequate corporate records or the confusing of the records, use of corporation as a mere shell, under capitalization. That’s just five of them and I’m pretty sure you and your listeners have probably were like, “I probably check a couple of those boxes off already.” And that’s just five and that’s going to pierce your veil.

David:
Piercing of avail for example, is if you have a LLC for your rental properties and then you’re using the credit card for that LLC to buy personal-

Brian:
Groceries.

David:
Purchases or groceries, okay, that would be a case to pierce the veil because you are commingling personal funds with business funds.

Brian:
Correct. Like, “Hey babe, I forgot our credit card, but I got the business card. I’m going to go get some groceries.” Oh boom, now you’re co-mingling and mixing assets. Transfer the money out from your business account, put it into your personal account, declare it on your taxes at the end of the day, and then go use the money to go buy your car if it’s not a business for the business or go pay for the groceries, go on your nice vacation. But as you start mixing accounts on co-mingling assets or under capitalizing your corporation, which is very vague, there’s not even a clear distinction on what under capitalization is, especially if you’re starting up. So it’s an easy way to pierce the avail though. And so people need to realize this is why LLCs are the bottom of the rung of protection and why as you grow and you scale and you keep getting more and accumulating more, you add more layers, you add the management companies, you add the trust.

David:
And we’re going to talk about those. This is scary stuff because I think a lot of people, exactly like you said Brian, are under this impression that they got from some Instagram graphic that they read or some free webinar that they attended that said, “Hey, look at this little org chart with circles.” They’re always circles and it says, here’s you and here’s your LLC. Now if you get sued for the property, it stays within this self-contained LLC and it can’t come out and you’re protected. And what you’re basically describing is when the judge actually has that case and they look at the, you were negligent on your rental property, something terrible happened, somebody was hurt very bad, and they’re suing.
If you’re thinking, well, there’s only $50,000 of equity in the property, that’s all they can get. That’s not necessarily true. The judge is going to be looking at the intent, was this really a business or was this your house that you just registered as an LLC? Judges look at intent all the time and you’re giving examples of things judges hang their hat on and say, “No, no, no, that wasn’t its own business.”

Brian:
That’s very correct. And that’s the scary thing is especially when it comes to LLCs is you hear a lot of promoters, I’ll call them salesman promoters because a lot of them aren’t even attorneys. They’re saying, “Oh, we’ll get really creative with the operating agreement and we’ll put this on the operating agreement.” What you don’t realize is you submit that operating agreement to the judge for a judicial determination, and so you’re sitting there, “Please judge, please judge, agree with my operating agreement.” Well, that operating agreement is probably not valid and it doesn’t hold up to the statutes. And so that operating agreement gets pierced, which means in the bail gets pierced, which means now you’re held personally liable goodbye properties in the LLC and goodbye other personal assets as well like your brokerage accounts and other assets. So it’s very-

Rob:
Brian, can you just quickly define just the basic concept of piercing the corporate veil? I think we can probably get it from context clues, but just to give some very simple one line, what is it?

Brian:
Holding you personally liable. So the veil is separating out the managing member of the LLC and saying you can only get a judgment against what’s inside that LLC. The rest of the members’ assets are completely protected. Now some states are different with charging water protection. Some are stronger, some are weaker, but if the veil gets pierced no matter what, that means we’re no longer providing that one layer of separation between you and the rest of your assets. Now everything is fair game to be used to collect on for a judgment.

Rob:
Okay, got it. Yeah, yeah. And David, I feel for you on those Instagram TikTok where those reels or whatever where it’s, “Hey, do you want to not pay taxes ever again or ever get sued? Set up an LLC in Wyoming.” And I’m like, I’m pretty sure all that doesn’t work that way, but not a lawyer, and that’s why we brought you on.

Brian:
Yeah, and we’ll get into that with that’s a great one for when we start talking about fraud and scams because there’s a lot that we can dive into on that.

Rob:
Yeah, okay. We’ll get into that here in a second, but before we do, I do want to ask, with the new law change and everything, what does this actually mean for investors and what are some of the impacts that you think we’ll see as a result of this court case?

Brian:
So one, I think that now you’re going to see other case instituting similar statutes that Pennsylvania did is fair game now. And so what you’re going to see is that essentially if you went down this route and are just randomly using Wyoming to hold real estate in or as a management company and you have no connection to that state, you just bought a false sense of security, which sucks. You thought you did something beneficial, then you get sued and when you need it to work you’re like, “Oh my god, it didn’t work. What do I do.” That’s horrible. And that’s a really expensive learning lesson.
I spent money on this system, I thought it was going to work. I lose the case, spent all this money on the system paying this damage award and now I have to redo my entire asset protection plan so it’s going to cost more money. So this is really when you start going down this route of purchasing and setting up a plan to protect your assets, you really just have to look at what’s the case law, ask good questions, use these cases that we talk about and ask the promoter or the attorney, what about this case? What about that? If they don’t have an answer for you, which I had literally had a client or a potential client call yesterday who was, thank God I went through your website and was going over all these case calls so I asked this person all these questions, they said they’ll get back to me. I’ve never heard back from them and they ignore all my emails, which means their system doesn’t work.
So go through a checklist is how effective is the system, what’s the cost? Is it easy to maintain IRS compliance on? Do I maintain control of my assets or not? That’s kind of the checklist that you want to go into, especially like effectiveness and what we’re going to realize is jurisdiction shopping like this is just not going to be effective.

Rob:
Okay, all right. And I know you’ve mentioned one of the things you’ve encountered kind of a lot in your legal work with real estate investors is that people have accidentally committed fraud. Can you walk us through a story of how someone could accidentally commit fraud in the inner workings of LLCs and legalities here?

Brian:
Yeah, so there’s three realms of fraud. One is divorce, which we’ll come into because that’s not accidentally stumbling into that, that’s just you trying to hide assets. So we’ll break that one down after, but there’s two good tax scams that relate to accidentally stumbling into a scam and fraud, it’s essentially tax trust, myth busting. It’s insane how many times I get this call thinking that asset protection means not paying taxes and moving and hiding assets so that you lower your taxes and not pay it at all. The question generally is asked, I want to set up an asset protection plan, I’m tired of paying taxes. This is just legal and is tax fraud and that’s when people potentially go to jail.
But tax mitigation is legal, so just realize you can mitigate your taxes, pay less in taxes, that’s done with your CPA and wealth managers and using the tax code like a treasure map, setting up different investment types of stuff that you guys talk about and different types of investment accounts, that’s legal, that’s using the tax code how it’s supposed to be used. Now asset protection is about limiting liability of risk from lawsuits and creditors, people coming after your money and your assets through legal means, not hiding and moving assets.
So let’s start with the easy one that you can stumble into when you’re calling people in my world of the high end offshore trust, what we need to understand is that offshore asset protection planning will not reduce your taxes. If someone is telling you this, it’s a scam, and this is why we don’t use the Caymans, we don’t use Belize, we don’t use the Bahamas. They’re all red flagged and used as tax havens. The scam works by a promoter or sometimes an attorney or a CPA, generally just a salesman who’s not even a legally licensed attorney trying to sell you the idea that if you don’t have your money in the US then you don’t have to pay or owe any taxes on it until you bring the money back to the US. So just don’t bring the money back.
This is just false. The fact is that the IRS taxes you on worldwide income, plain and simple. You have annual FACTA disclosures, offshore wire transfer disclosures, 1035s, 1035 As, it doesn’t matter where you earn your money. If you’re a US citizen, you’re a US taxpayer and you owe the taxes, you have to disclose it, especially when it comes to offshore stuff. The problem with this scam is that when the IRS takes a look at your plan, it not only will not protect you, but it may leave you with this massive tax bill.
The bottom line is that asset protection planning and tax planning do not go together. It’s rule number one is oil and water. Anyone promising to help you legally evade paying taxes using any offshore entity is certainly lying to you. And if you’re involved in a scam like this, whether you were duped into it, it was not intentional, you just listened to some promoter talking to, you’re like, “God, this sounds amazing. I hate paying taxes. Great, I believe you.” Or you did it intentionally, it doesn’t matter. It all comes down to you. You’re the one that’s signing on your taxes under penalty and perjury. You’re the one going down for this.

David:
Right, so let me see if I can paint an analogy here since we’re on the protection theme. Let’s look at this stuff like body armor. There’s body armor that is really good at protecting you from ballistics heavy rounds and then there’s body armor that’s easier to move around in and it’s more comfortable. They are rarely ever or never going to both provide maximum benefits on both of those. It’s either easy to move around or it’s going to be protecting you more, but they’re not the same thing. When it comes to asset protection strategies that can protect you, that does not mean they will also be great at saving you in taxes though the entities that you create to claim your income are similar. It’s like they’re both forms of body armor.

Brian:
And then your CPA can then do their thing and what they can do within the tax code to then mitigate the taxes. And so essentially the CPA just needs to know how is this owned? Is it owned personally? Is it owned in a corporation? Is it owned in a trust? Now we know what section of the tax code we can do our magic with.

David:
Gotcha.

Brian:
But the asset protection plan is tax neutral. You can’t call an asset protection attorney and say, “Hey, I hate paying taxes.” Put it in a trust and hide it.

David:
Or vice versa. You can’t tell a CPA who wants to save in taxes and also make sure I can never get sued, those are not the same areas of expertise.

Rob:
But it’s a common thing that people, my accountants always like, “People ask me so much about LLCs and there’s a big misconception.” And starting an LLC is not going to save you thousands of dollars in taxes like that specific deck. It’s the actual tax stuff.

Brian:
But trust are magical. There’s a lot of things that you can do with them. They’re strong, they’re flexible for asset protection like we’re talking about just not for income tax avoidance, but you got a really big one, which you can stumble into. This scam is called, this is a 643 domestic abuse tax trust scam, and the IRS are heavy on this and I’ve hired 800 more auditors to check this out, and basically you get some salesman or a promoter talking about a special new trust where you can save on taxes and particularly you don’t have to pay on the sale of a business.
You can sell your business tax-free. This is just BS. At the bottom line, this is just messing with the definition and misusing Section 643, the tax code. Section 643 relates to distributable net income as it relates to how you tax a trust. The basic rule is that the taxation of a trust for income is going to be to the settler, meaning the person that created it or the beneficiary or the trust itself or some kind of combination of the three. What these promoters are doing is they reference an actual accurate authoritative source like citing the IRS code, but then they intentionally misinterpret what the code actually means.
But the taxpayers, you can’t freely self interpret the meaning of the tax code in a way that you want it to be. This is where you get in trouble and then essentially you’re up, you know what creek without a paddle. So it was very important to understand that even though trust are magical, creating a trust does not somehow magically create an ability to defer or avoid paying income taxes. Elon Musk can go and make a trillion dollars mining some sort of mineral on an asteroid in space, and so he made a trillion dollars in space, but he’s still going to have to pay his taxes on it.

David:
So that is ways people accidentally commit fraud is they are under these erroneous beliefs. All right, now what about divorce?

Brian:
So this is the other one that I get, the big D word. Asset protection plans cannot help you in a divorce. You can’t hide assets or unilaterally change the character of an asset from community to single, period. The end. A judge will determine that through the ruling or you and your ex-spouse must agree and all assets when you go up to the table in a divorce court are all presumed community, and then you have to prove what’s not community. It is hard to imagine in any scenario that in a divorce some portion of the assets are not going to be community assets. And that some of them won’t be awarded to the ex-spouse. This is just the reality.
So you start hiding assets, it’s going to be considered fraud and the system is going to be pierced. So the way you go about protecting your assets, if you’re thinking about having a potential divorce, is you plan individually, meaning only with separate assets that were agreed upon before the marriage with a prenuptial agreement or you plan with the spouse even though you’re going to get in divorce, but to protect it from lawsuits coming in while you’re figuring out who’s going to get what or you can plan individually, but exempt the divorce proceedings [inaudible 00:23:48] the protection planning.

David:
So it’s got be [inaudible 00:23:50]-

Brian:
Correct.

David:
There’s no secret. I moved here. I guess.

Brian:
And this is the Dale versus Dale case. All right. This is a 2015 Supreme Court case that made a major blow to domestic asset protection trust. The Dales were going through a very contentious divorce. Ms. Dale claimed that she was entitled to the assets that her husband placed and hid in his own domestic asset protection trust, one that he created just for himself. Then two big things happened in this case. First, the courts considered Mr. Dale’s assets that he placed in his own domestic trust as community assets and they joined those assets as a married couple.
So the Asset Protection Trust was pierced and it didn’t work for the divorce. The second thing that happened, which is why I like to use this case because it talks about both divorce and asset protection, is you can’t rely on choice of law recitals that are in the documents to establish jurisdiction. The court ignored the choice of law clause and found that it violated Utah public policy, meaning ultimately the court will decide not your documents.

David:
Now what about the popular case in the news about the soccer player that was married to an older girl and she divorced him and tried to take his stuff and he had moved his assets into his mom’s name. Are you familiar with this?

Brian:
No, I haven’t heard about that one. So yo have to give me some-

David:
So the idea was it was in another country and he was married and he felt like his wife might be looking to marry him just for his money. So he put the majority of his assets in his mother’s name. He didn’t own them. She divorced, she went after him and he said, “I didn’t own anything.” Is there a scenario where that could work?

Brian:
Yeah, no, that won’t because what a judge will generally do is consider that fraud and that you’re just hiding the assets and changing title into somebody else’s name, undo it, call it community, and you’re back into community assets.

David:
Now in another country, they might have different laws when it comes to, but not in this country.

Brian:
Correct. Yeah. And you hear something similar to that when it’s talking about doctors who are investing in real estate and then saying, “Oh, for a lawsuit just put it all in your wife’s name and then if you get sued, the assets are on your wife’s name.” That doesn’t work because a judge will just call that fraud. You’re married as community-

David:
Yeah, it’s community property.

Rob:
Yeah.

David:
So there are, again, same theme, these shortcuts when you’re actually in court standing in front of the judge, they get revealed as not being accurate as the same as the YouTube video that you watch with somebody telling you this is all you got to do.

Rob:
Or a season three of suits. I really felt like that prepared my real estate journey with the LLC stuff. So moving on, Brian, one question I did want to ask was, LLCs are always the thing that people get caught up on, especially in the real estate world. They’re like, “Oh, can I start a business without LLC?” And then I also see a lot of stuff about S-corps. I understand that there’s some misconceptions about the S-corp side of things too. Can you shed a little bit of light as to some of the misconceptions around them that you’re seeing?

Brian:
Yeah, yeah, absolutely. So S-corp fraud, you can use S-corps can use C-corps. They’re more set up for tax mitigation strategies. The problem here when it comes to lawsuits and asset protection is when a lot of people get into these situations like this, I’m creating a business, I want to go talk to my CPA, “Hey, CPA aDave, I don’t want to pay that much taxes.” So what systems should I set up or what should I do to mitigate as much taxes as I can pay? S-corp, first thing the CPA is going to do, they’re not thinking about lawsuits, they’re not thinking about anything like that. They’re just thinking about keeping more money for you.
So you create this S-corp and then you start investing in assets like real estate, or it could be you own a truck bed business and you have 100 now truck beds, or you’re a doctor and you have all your equipment in this S-corp. This is the general problem. And then 10 years later you call me and you’re like, “Hey man, Brian, I realized this was a really bad idea. I got $100 million worth of real estate all on this one S-corp, I need to take it out.”
Or, “I have my medical practice and I can’t have all my assets in there because if the medical practice gets sued, I still got to practice medicine. What can I do?” Probably nothing because I can’t take assets out of the S-corp without you owing all the deferred taxation back to the IRS. The problem with this situation is most people don’t have that kind of money just sitting around liquid in their bank account to pay the IRS back.
So the assets are stuck, I can’t do anything with it, or S-corps have shares, they can be frozen and seized by judges, which means all your assets are now frozen. So setting up an S-corp is good for tax mitigation money coming in, but what we want are assets to be held in LLCs, lease the assets back to the S-corp and that’s how you marry the two together. But your S-corp should not be just holding large amounts of assets. Because then you get sued, there’s literally nothing that we can do over.

Rob:
Got it. Okay. Cool. Cool. Thank you. Thank you. Well, I’d love to move into how to protect your assets. I think asset protection in general is a pain point no matter what level you’re at, and really there aren’t a ton of great resources. There’s not a lot of education on this. I have students ask me all the time about asset protection and LLCs and I legitimately refer, when someone asks me a question about asset protection, I refer them back to the episode we did with you about a year ago because that one was such a great masterclass in basically the basics.
But I have found personally that it’s hard to set up a system that grows with your portfolio. I have figured this stuff out as I’ve gone versus having set up the foundation at the beginning of my journey. So what I’d like to do is actually take people through the different pillars of income and maybe talk through the plan that someone might want to consider at that time. So for people that are in that $0 to $250,000 of exposed assets, what might that look like in terms of real estate?

Brian:
Yeah, so first, so what do we do shopping for an asset protection plan? This is where I think people need to before we even talk about the pillars, do it before it’s needed. Asset protection only works before it’s needed. That’s it. It’s a barrier. It’s a safe for your gold or your guns. You can’t set it up after the fact. The two big takeaways that I really want people to understand is there’s this case called SEC versus Solow. Here’s a situation where Ms. Solow’s trust was attacked by the SEC to collect her husband’s fines from engaging in fraud and a fraudulent trading scheme.
So just say bad people doing bad things, they’re the villains in the story. The court found that Mr. Solow made a fraudulent transfer after the SEC judgment was entered. So after the judgment was put up against him. So what he did was he assigned his assets over to his wife’s trust to protect them after the judgment. This is just no bueno. This is just straight up fraud. Mr. Solow was held in contempt of court. The good thing is 100% of the assets were protected because he put it in an offshore trust, but he was still held in civil contempt of court.
I liked this case because it demonstrates two things at the same time. One is just the power of an offshore trust, which we will recap as we go through the layers in a second. But it shows what really needs to be done is it goes to a timing issue. The timing of the trust has to be set up before the wrongdoing, before anything happened. So Mr. Solow was blatantly wrong. He’s the bad guy, but the strength of it 0.1, the assets were protected, but why was he held in civil contempt of court? Because of the timing issue. He did everything after the fact, after the lawsuit, after the judgment, and that’s fraudulent.
So the big takeaway, number one, when you’re shopping around for asset protection is do this stuff beforehand. You call me after the fact, there’s literally nothing I’m going to be able to do for you or anybody. Anybody that tells you that they can run away from them. They’re just trying to take your money from you. Now, when it comes to the layers. Think about winter. I always like to use a winter reference because we layer up when we go outside in wintertime. Entry level, first layer, you said you’re at 250,000 or less in net worth, maybe zero to three properties. This is when we use LLCs in insurance. It’s that thin layer that your base layer goes straight on your skin. This is where you’re starting at.
Then as you’re scaling and you’re growing, you’re adding more assets and you hit that probably four unit mark and you’re investing probably in multiple states. We got three or four LLCs set up. You have around $500,000 to $700,000 net. You want a mid-layer. You want something that’s a little bit thicker, like a Moreno wool sweater or a cardigan for you ladies that are listening, this is a management company. Some people use a Wyoming LLC, but you know why I don’t? We use a limited partnership for this layer. Then you keep growing, you kind of hit that 1 million net worth mark, or you are also a doctor, high risk professional with assets. This is where you want that last layer, that outer shell waterproof layer, that really nice winter jacket.
This keeps you nice and dry and warm when the weather’s really bad, that’s your doomsday lawsuit protection layer. That’s your asset protection hybrid trust. But by layering like this, you’re more flexible. You can adjust and make yourself more comfortable. You’re skiing, you’re getting hot. I’m going to take the mid-layer off. Oh, I’m sitting at the lodge getting some drinks with some friends. I’m just in my base layer. Oh my God, this storm came in and we weren’t expecting that. Now I’m going to throw all three layers on it. We’re going to go hit the powder. That’s the purpose, and we want the same thing that apply for asset protection trust.

Rob:
So to recap that, you’re saying when you’re starting out, it’s best to start out as soon as possible because if you don’t have these systems in place and someone sues you, there’s nothing you can do after the fact. And if you try to transfer it after the fact to an offshore shelf that you talked about, that’s fraud. So the first layer is going to be, I think you said is it $0 to $500,000? And that’s where you have a couple of LLCs.

Brian:
$0 to $250 generally is where that is. Yeah, so you’re going to start with just the base layer LLC and insurance and go get into some good insurance. Then the next layer, you’ll start growing. You’re going to expand. You’re going to need more than just the LLC because we know we just spent what, 20 minutes bashing LLCs. So now we know why we need the next layer. So we need to do something more. So that’s where those management companies come in. Some people use Wyoming LLCs as a management company. We use limited partnerships as a management company, but you need that another layer. That’s the second layer.
And then you’re going to keep growing. Hopefully you become a millionaire and you have like 10 properties or you’re high risk professional, that’s where you need that third layer, that asset protection trust, and it’s a combination of all three together that really provides you really strong ironclad protection. It’s just wherever you fall on that at the initial stage, I’m not going to advocate for somebody just starting out to say, “Hey, let’s go spend $30,000 today and create the Taj Mahal of all asset protection.” That’s stupid spending of money. I mean, honest to God. Start small. You’re just starting, LLC insurance. We scale as we go. If you’re coming in big time with me already, I’m a doctor. I got six properties, all in my personal name.” We’re going Taj Mahal, we’re going LLCs, limited partnership and bridge trusts.

Rob:
That’s interesting. That is something I did want to follow up on was when I’ve talked to a real estate attorney before, obviously LLCs are a layer of protection, but he’s always kind of maintained. And I’m curious on your POV here that really that first layer of protection is insurance. Insurance is usually what kicks in before we get to the lawsuit side, is that one of the first things you need definitely for sure?

Brian:
For sure. Insurance. Obviously, if your listeners go back to our prior episode where we talked about what’s wrong with insurance to recap that they’re good for the little things and then you have claim limits. What happens if you have an above claim limit? What happens if there’s an allegation of fraud or intentional wrongdoings in the lawsuit? Insurance doesn’t cover you for intentional wrongdoings or fraud, and virtually every case that’s filed nowadays will always have an allegation of intentional wrongdoings and fraud.
So if you have now a million dollar case with some form of intent, which could just be sending an email, yes, the plumbing was done, send, and then you have a mold issue, a multimillion dollar lawsuit now, what is the insurance company going to say? We’re not going to pay you a million dollar claim for something that has an allegation of intentional wrongdoings. If you think we’re wrong, sue us. Goodbye. That’s how they wiggle out of big lawsuits.
So do you need insurance? Yes. Get good insurance, is good for the little things. What you need to know is what are my claim limits? What are the wiggle outs? And from there, you start scaling as you go. But absolutely get insurance and get the LLC. Just realize the weakness of it, which we’ve been talking about, and the need to scale as you go.

Rob:
It’s like the first line of defense, but it’s not the silver bullet.

David:
And from the insurance company’s perspective, if we’re just being smart and taking a wide range and not just narcissistically looking at our own needs, they’re going to pay out on small claims because it doesn’t make sense for them to hire someone at a six figure salary to go look at small claims. They’re looking at, oh, we got to pay 10 million for this. Let’s find a way to get out of it. So by having them cover your small stuff, they’re not going to fight you on it as much. It’s fine for that lower $0 to $250,000, but when you get into having a higher net worth, the risk of lawsuit goes up, now that thin layer of ballistic armor that may have worked for small firearms or something isn’t going to be a good when you’re getting into light machine guns or something, right?

Brian:
Correct. And to piggyback off of that, the same analogy and principle goes to the next layer of insurance, umbrella policies because people are like, “Oh, why not just go get an umbrella?” It’s the same exact argument. Just realize all umbrella policies do is provide you more capital to fight, but generally all that money is going to be eaten up in litigation and trial expenses. So you need to realize it has the same loss, the same limitations, the same exit strategies, and then think about the cost of trial and the cost of litigation. That is generally going to be like if you’re going to go really fight, that’s going to probably be $250 to $500,000 legal battle.

David:
And then the ultimate protection for when someone gets to a net worth of a million dollars or more are these offshore accounts. But they have to be set up before you’re in trouble. Again, there is no get out of jail free Trump card that you can throw down and say, “No, no, no. The judge said that I have to pay this, but I’m just going to move all my money to the Cayman Islands and then he’ll never be able to touch it. I outsmarted the law.”

Brian:
Correct, because people are like, “Oh, well, you’re Mr. Offshore anyways. You’re doing all these Cook Island trusts. Why can’t I just put it in there and have jurisdictional non-recognition?” Because even the Cook Islands, even though they don’t recognize you as judgments and court orders, you’re doing this after the fact. So they’re going to look at it and say, if you set this up beforehand, yeah, it is completely legit. We won’t recognize it, but you did this after the fact. So they still are going to say, “No, sorry.” They can force them to bring the judgment down to the Cook Island. So we have a little bit of negotiating rule leverage there and say, “Cool, you got it.” They won’t recognize it, but you got to go take the judgment down there anyways, so that could get us back in the negotiating table. But it’s nothing like, nana, nana, nana, we threw your judgment in the trash. Take my penny on the dollar. That argument is when you set this up beforehand.

David:
I think it’s funny that as human beings, we all have that, what if I think I know the loophole because I’ve watched season three of suits or Yeah, I saw a YouTube video. If it ever comes down to it, I’ve got this super secret five-finger death punch that can get me out at any fight. And we don’t think about the fact that you have judges that are incredibly smart people with extensive law degrees at a practice for 20 years, and that is the person you’re going up against with your, I’m going to outsmart them with this strategy and that they’re going to do what you said. They’re going to look at your intent. Was your intent to get around my judgment? Because I’m not going to let you do that, versus was it in place before I issued the judgment?

Brian:
Correct. And we kind of identified what the term of fraud is, but you keep hitting the nail on it when what is the intent? So when we’re transferring assets, the judge literally is going to be, when we transferred it, what was the intent? If you had no creditor and you had no lawsuit, then there is no fraudulent transfer because you had no intent to hinder or delay a claim of a creditor. Now, if you’re coming to me after the fact and we transfer an asset, that is the exact definition of fraud. You just intended to transfer an asset to hinder or delay a legitimate creditor.

David:
Now Brian, when people are setting up these legal entities, at least in my experience, I’ve had to probably reshuffle things around four different times. That’s partially because I often have to switch CPAs and oh, I just get PTSD thinking about what it’s like. I did it a year ago and I’m still talking to them every week trying to figure out how we’re going to set it up.
But a lot of it’s because of, like you said, changing needs, equity grows, your net worth changes, the ways that you make money change. This is like a living, breathing organism. It’s not like pouring concrete and you could do it one time and you could just let it sit for 50 years. What advice do you have for people who maybe think that they’re doing something wrong because they’re frequently having to have conversations about how to structure their entities and how to take advantage of taxes?

Brian:
I think that what you need to realize is those are the conversations you should be having consistently. As you’re becoming successful and you’re making more and you have more risk and you have more assets, you honestly should be talking to your CPA and your advisors more regularly. And I love it because one of my good affiliates who’s a great CPA for investors, he’s like, “God, I wish my clients would call me more than one time a year and just dump a bunch of files on my desk and say, here, work some magic.” He’s like, “You know what magic I could have done if you were talking to me and telling me about what you’re doing beforehand throughout the year.” It’s like, “I could have really done something for you.”
And so what I think people need to realize is these are conversations that you should be, get some sort of plan with your CPA where it’s not just, “Hey, you’re going to going to file all my taxes at the end of the year.” Talk to them quarterly. Tell them what your goals are. Tell them, “I’m going on vacation next month. How do I save some taxes on this?” “I’m building this business.” Involve your CPA. Maybe you don’t need to involve your attorney on it right now because some people don’t want to pay those costs for the legal fees for that, but at least start getting involved with your advisors more often and just realize that’s the business of being successful. And the more you utilize your advisors, the more money you’re going to probably save and make.

Rob:
Well, I am signing my trust tomorrow because every time I get on an airplane with my wife, she instantly goes to, “We’re going to die.” And so every time we’ve travel, she’s like, “We need to get our will in place. We need to get our trust.” I’m actually signing our paperwork tomorrow. And after listening to you, I’m like, did we do it all wrong? Who knows? Find out on the next episode of BiggerPockets, no, I’m just kidding.
So yeah, there’s a lot of, I’ve spent the past year really trying to learn the tax side of things. I certainly have not put that much effort into the legal side of things. And so I’d really like to, now I’m more inspired than ever to be, “Okay, let’s look at the system cracks here. Let’s make sure that all the credit cards are being used correctly.” I think the number one thing that people can probably do and find education on is how to protect themselves from, I guess the veil being pierced. Some small education there can really help you break a lot of bad habits that all investors probably have.

Brian:
Correct. I devoted a lot of section of that in my book. And then there’s other good books that are just written about corporate veil piercing. The problem is now there’s not a lot of, it’s hard to get access to information and sifting through what’s a bunch of BS and what’s salesmanship and what’s legit. And so that’s where I always look at who wrote it? Do they support it with case law? Do they have statutes on this or is it just a bunch of hyperbole and theories? And we need to start flushing a lot of that stuff out. And I think people need to realize some of this stuff, estate planning, protecting your assets, talking to your CPAs, yeah, it’s not sexy, but this is the important stuff when we’re making money and trying to grow and have financial freedom. That’s the stuff where the nitty and gritty needs to really happen.

Rob:
Well, we’re trying to keep the financial freedom, I guess.

Brian:
Correct.

Rob:
That’s the point of asset protection is yeah, taxes help you get there. And then the legal asset protection side-

David:
There are people out there, and this is me going into a hypothetical, okay, I don’t know this, but here’s what my gut says, with YouTube, with social media, with how fast information transfers and with the growing animosity towards wealthy people that we’re starting to see as we go into a recession, I think you’re going to see an uptick in how much people don’t like people that are financially successful. You’re going to start to see information being made that teaches people how to sue in the same way that we are teaching you now how to protect yourself.
You will start to see people saying, “Hey, I learned how to take advantage of someone by suing them in this way. This is what I did. This was the process. This is the point they settled at, and I was able to make $180,000.” As that information gets around, more and more people are going to start doing it. The protection that you need is going to need to level up as the weaponry of the other side increases. I’m not looking forward to that, obviously. I don’t think it’s good, but I think it’s a legit threat that we would be irresponsible not to be sharing that that’s very likely to happen. Have you seen Brian maybe an uptick in how often this is happening?

Brian:
Yeah, I actually was going to say, it’s an interesting thing. Whenever you look at recessions and depressions and everything, the amount of lawsuits almost doubles. So when times go bad, people start running out of money and start panicking, and what do they do? They start suing. Who do they sue? The haves, my landlord, I hate you. My doctor, you got that nice BMW. I want that BMW. So as things get harder, you have an increase in divorces and you have an increase in lawsuits. And then you couple that, which I broke down also because I have tried to set the scene in my book, how did we get here? And it realistically is over the last 40 years, we created a society of victims. And now as this victim class increases, now they want to play the lawsuit lottery, and they’re trying to get rich quick by what you’re talking about.
“Hey, I sued people like this. Now here’s the script. You can go and try to do the same thing.” And even though lawyers now can advertise and have a medium of stirring the pot, there’s no pot to stir. If people didn’t check out accountability and responsibility and weren’t so sue happy and weren’t identifying as a victim, then there wouldn’t be a pot to stir. And so it goes straight to your point of how we got into this massive mess anyways and realize things are getting worse. The world economy is getting worse. There’s no easy fix, monetary manipulation, inflated diet mentality, we got to protect our stuff and we got to be prepared for the tsunami that could potentially be coming ahead. But keeping a positive attitude about things in saying, “Where do we keep investing and growing from here?”

David:
Yeah, I look at us like we subscribe to a philosophy that more or less was captured in the book that I wrote about Pillars of Wealth, save your money, make more money, invest it wisely. And it’s all about adding value to the marketplace, improving your skills, pursuing excellence, giving your best, educating yourself. That’s how you become wealthy. There is an opposing philosophy that preaches financial freedom with the Robin Hood method. We’ll just take it from those people that are rich and give it to yourself. And there is a bit of a struggle that isn’t as noticeable right now, but I think as we head into a recession, it’s going to become much more noticeable and this information becomes more popular.

Rob:
Totally, yeah, yeah. Well, Brian, you kind of mentioned you have a book. Can you tell us where we can grab it? Is it available now? Is it available with pre-order? Where can people find you, all that good stuff?

Brian:
Yeah, so as soon this last stage of its editing, so it should be done this week, and then I hope to have it put out and published by this week or next week at the latest. It’s called Over Exposed and like I said, I break down the world of asset protection and how we got to the point of this crazy messed up legal system that we’re living in, and how do we just protect ourselves from it? And then a great way to go and find the book. You can just jump on my website. I have a whole page just for the book that people can click and go to, or I’m going to publish it through Amazon so they can just jump on Amazon and get a copy of Over Exposed.

Rob:
And what is your website? Where can people find you?

Brian:
Yeah, www.btblegal.com. And like before, I use my website just as an educational link for people, tons of case law, tons of client facts, situations, frequently asked questions, questions you should ask attorneys when you’re vetting them to create this system. And what I’ve noticed is when people actually go in and jump on my resources and start asking people questions, they can vet through a bunch of BS.

Rob:
Cool. Well, I rest my case, your honor. David Greene, where can people find more out about you if they want to learn about you on the Innerwebs?

David:
You can’t handle more about me, davidgreene24.com, or you can check me out on your favorite social media @DavidGreen24. What about you, Rob?

Rob:
You can find me on YouTube over at Robuilt and on Instagram as well. I got very diverse content. They’re both very different, so go say hi. Go leave a comment. Go leave a mean comment about my hair or a compliment about my hair because I seem to get them both every single day.

David:
Any attention is good attention when you’re an attention starved person like Rob. Well, thank you, Brian. We appreciate you coming back on again. This is David Greene. For Rob, I rest my case, your honor, Abasolo, signing off.