Catch the full episode: https://www.wealthformula.com/podcast/167-are-you-ready-for-an-asset-protection-knife-fight/
Buck: Welcome back to the show everyone today my guest on Wealth Formula Podcast is Doug Lodmell. He is the managing partner of Lodmell and Lodmell PC which is one of the foremost asset protection firms in the country Doug welcome to Wealth Formula Podcast.
Doug: Thanks Buck. Happy to be here.
Buck: So you’ve done a webinar for us in the past so some people particularly an investor who probably know you. But you know looking at your resume huge list of accomplishments top law schools also an LLM which is a master’s in tax law how’d you end up focusing on asset protection just so we can kind of get to know you?
Doug: Yeah that’s very interesting question because not a lot of people ask. My father is an attorney and he did real estate syndications which I think you’re familiar with back in the 80s. So in Arizona so if you remember what happened in the eighties in Arizona we had the S&L the savings and loan crisis it actually didn’t affect any of his syndication deals his deals were long-term raw land deals Chandler they all worked out amazing because Arizona was growing and still is but it affected a bunch of his investors so they had their own in some cases bankruptcy issues and because all these deals were set up as limited partnerships when the creditors of his investors came around and wanted the value of the investment in limited partnership my father said sorry they’re limited partners they have no right to demand this I’m the general partner or I control it you know the best you could do is charge in order but I make no promises about when this distributions gonna happen. Of course the general partners friendly to the investors not to the creditors. But what he saw happen over and over again was these creditors settled for pennies on the dollar and inadvertently these real estate syndications work as great asset protection he looked at that and said geez that worked great can we do this on purpose and so he at that time this is way back in Haiti started investigating and that was the very beginning of offshore asset protection for balance trust Act had just been passed in 1984. So we did all the research and ultimately started doing limited partnerships in conjunction with an asset protection trust. So I went to law school and honestly wasn’t really intending to go into business with him but it became very clear after my first year that this was this was just a great practice area so I ended up partnering with him and he became my law partner and I followed my footsteps rest is history.
Buck: Interesting it’s always good to kind of know where people are you know kind of approaching their career from is a given it’s an understanding they’re your own background and actually helps me for example just knowing that you’re obviously very knowledgeable and syndications I mean that’s a lot of what I do now. So let’s back up a little bit you know my my listeners as you know are a little bit more successful a little bit more savvy than your typical podcast we have a lot of very you know highly educated high paid professionals but you know what I find in these conversations because I have calls with investors all the time and even you know people who I don’t have calls with I’m sure they fall into the same boat is that you know we don’t no one’s really nudging us significantly to look at the idea of asset protection and get some in place you know I talk to people all the time you know there’s still there making mid six figures and everything like you know they’re there equities and everything are on their own name and I’m thinking of myself no one has told you anything yet. So at the simplest level let’s start out saying okay if you’re an attorney or if you or maybe not an attorney who’s maybe you’re smarter than others but if you’re a doctor or a dentist or you know software engineer like a lot of the folks listening to this are what is a support action why do we need it and who needs it?
Doug: Okay yeah that’s a great place to start. The simple answer is what is asset protection. Asset protection is placing a legal barrier between your assets and your creditors or your potential creditors that’s it. It’s just a barrier. It’s like a safe for your gold that you keep at home or even for your guns anything of value we want to put behind a barrier so it’s not easily attached reached you know attacked. For those old-school people who grew up in a society where lawsuits were really much less of an issue having everything in your own name or it may be just in a family trust that was acceptable it was okay. Forty years ago that was fine. But in the past 40 years the litigation landscape the legal landscape the way in which lawsuits are treated has radically changed. It’s just fundamentally become a different ball game. And that ball game is really simple the lawyers who do the suing have redrafted the playing field they’ve redrafted the rules things that didn’t happen before like even contingent fees weren’t allowed in 1960s Maine was the last state to actually change the law to allow continued theater but CPAs are still not allowed to be paid on contingent fee and if we pay the CPA for how much money they save just some taxes what’s that CPA gonna do? it’s gonna lie steal and cheat for us. They want a bigger fee. Well if you pay an attorney based on how much money they can get from a claim what’s that attorney gonna do right lie steal and cheat. And there’s plenty of attorneys in jail today for doing exactly those things all driven by they want 33 to 50 percent of the award the settlement. So the fact that we even allow attorneys to sue in a contingent fee model it’s not the way this country started it’s not the way it was all the way to the 60s. You know we used to not allow ambulance chasing. We used to disbar and throw attorneys in jail if they were caught ambulance-chasing now it’s institutionalized. The Rules of Civil Procedure have changed to allow for lawsuits was basically no basis or merit and and even the ethical rules for attorneys have been morphed and changed to trim them all down so the penalty for doing something wrong is a slap on the wrist. So why do we need it is we’ve got a litigation crisis in this country we have all the world’s lawsuits I mean the vast majority 95 or 98 percent of the world’s lawsuits are happening here and it’s all driven by money. It’s a huge industry and the lawyers drive it and the courts have acquiesced in it’s the entire system anybody who’s been in this system who’s gotten sued understands how ridiculous it can be. So asset protection is an attempt in my book to level that playing field a little bit just like just to try to even get it back to where it used to be and you do that through legal tools that make it hard for creditors to collect. So you can’t do a lot about getting people not to sue you is that’s just the system we’re in but you can do something about how collectible you are and that’s a huge difference.
Buck: Well in some ways they it goes hand-in-hand right if you know if you’re talking about contingency attorneys and that sort of thing these guys are smart though they want to know that there’s some assets to get you know they may start attacking you so it may function as a bit of a deterrent in addition to actual protection.
Doug: So that’s the whole that’s the main idea is that is a deterrent that we actually can get them off track on this attack by disclosing hey good luck on trying to collect here’s we’ve got in place.
Buck: So what kind of assets you know again just talking to people on the phone and they say well yeah you know I don’t own any real estate so I don’t have any LLC’s or you know like you just hear this kind of stuff and you know and I say well how much do you have in your brokerage account well I’ve got a million dollars and it’s in my name or it’s in my bank but maybe the wife is better than you or your husband is better than you if you’re a physician. But still there’s some things that probably could be done right. So give us a thousand-foot overview let’s say the levels of asset protection available and who they might be appropriate for.
Doug: Yeah that’s the great question. So the very first thing is to take a snapshot of every individual client or every individual person who wants to understand say okay what are the assets? Asset protection is driven by the asset profile step one is let’s see what is already exempt this is called exemption planning so certain assets are exempt from collection against creditors. You want to maximize whatever those are if you happen to live in Florida or Texas that would include your home up to an unlimited amount of money. So if you live in Florida and you have a ten million dollar condo on South Beach in the penthouse of the best building and you have an attack and lawsuit in its judgment for forty million dollars you’re not moving out of your ten million condo you can stay right there they can’t take it from you it’s homestead it’s exempt. Exemption asset protection is the first thing everyone should consider because it’s one it’s usually free there’s usually nothing to do except make sure that you qualify for the exemption and two it’s recognized by that all of the legal system in the United States. So it’s almost unbreakable so exempt assets include homestead exemption to some level qualified type plans all the ERISA plans. So if you came to me and said hey I’ve got a client and he’s got a million bucks my first question is, is it in his retirement plan or is it in his own name Vince’s retirement plan it’s a defined benefit plan under ERISA nothing to do it’s already protected under ERISA we don’t need to do a thing. So knowing what’s already protected as step number one that’s the first thing I would do with any client is go through all the exemptions. Sometimes life insurance or cash value of life insurance or annuities are exempt depending on your state that’s state by state by state do you have to look at each state and say okay in your you’re exempt or you’re exempt up to this amount but step number one goes your exemption planning step number two then look at the assets that are not exempt and say okay what could we do to make these more difficult or impossible or as close to impossible as possible to reach by a creditor and you know if it’s cash and investments your own name definitely we want them out of your name mana means some type of charge motor protection entity I call these cop entities some type of charge of order protection entity that’s either an LLC or a limited partnership and then depending on the level of assets it’s going to be some type of asset protection trust on top of that there it’s a fully foreign asset protection trust or a bridge trust but it again depends on the asset level.
Buck: So just yeah just review real quick because I know this question comes up quite a bit but you know a lot of people think that if they have assets in an LLC as you know pretty much all they need to do and you mentioned charging orders and obviously those charging orders are different on every state talk a little bit about the strength of an LLC you know relative strengths and weaknesses of simply just saying okay well I have an you know I’ve been asset you know I have an LLC that’s owned by my wife and me and you know and I’m putting assets in there and why is that not enough?
Doug: Yeah that’s a great question so the answer is it’s a great start I mean it’s better than nothing. Having an LLC with you and your wife is a reasonable start. Here’s the limitations so first of all understanding what a charge in order is what a charge in order is it says hey a creditor of a member remember being husband and wife here in our example a creditor of a member doesn’t have a right to foreclose on the LLC and sell the underlying assets and force of distribution. But they have a right to is to stand in the place of the member when it comes time to make a distribution the theory behind this is that if you are a member of an LLC and let’s say your million dollars your and your wife your million dollars in an LLC and do the two members you get a judgment against you for a million dollars the creditor says hey I want the million dollars there your answer is well if we ever make a distribution to yourself ourselves you would certainly be in line for that you’ll just have to wait if that’s the theory. Now that day works really good if you’re in a limited partnership in a real estate syndication and there’s fifteen other unrelated members and a separate general part that works great it’s it’s really going to work I haven’t seen any of those fall or break down because you have third party management that’s unrelated to you you have a bunch of third party investors and deals. A real estate syndication this is a side note but a real estate syndication by its very nature is a really good asset protection vehicle just by its very setup it already provides a great level of asset protection.
Buck: For the investor or the general partner?
Doug: Both for the investor but not for the general partner. General partner has unlimited liability for the partnership made you know bars on the hook the investors are off though. So for the investor a real estate syndication is fundamentally so if you said hey Doug I’m either going to put my money in a brokerage account or when I invest in a real estate syndication which one is better for asset protection I’m gonna tell them the real estate’s implications you know make your own financial decisions but from an asset protection standpoint it’s certainly better. Take that same philosophy and you apply it to a two member LLC with husband and wife here’s the problem the court could say yeah that’s the general rule. However in this case we don’t have these third all these unrelated members to worry about both husband and wife are the culpable parties they’re the ones that threw the party that served the alcohol that ultimately the guests left and had this horrific accident and we’re gonna hold them both responsible. So in this case we’re going to make an exception to the charge of order being the exclusive remedy.
Buck: Let me just stop you for a second there. In that scenario that you’re specifically talking about is that the assumption assuming that both the members of the LLC were involved with you know whatever they’re getting sued over right I mean in other words just cuz they’re husband and wife alone would that be problematic or is it because in other words is there no sovereignty between a husband and wife and an LLC or is it sort of a gray area?
Doug: Well yeah it’s a sort of a gray area and here’s the issue is that judges in the United States have discretion. So there’s two courts of law in the United States from this Law School theoretical thing if the court of law you have the court of equity. So the court of law says what does the law say the law says charging or is the exclusive remedy you cannot foreclose on an interest in an LLC that’s what the law says so the judge can look at that and say yep I understand the law of the law says I can’t do this, however I have in my back pocket a special super power as a judge in the United States called the court of equity and in the court of equity I am allowed to disregard what the law says in order to find an equitable solution to this problem and the court of equity which means basically my personal judgment as the judge here is that that wouldn’t yield a fair result and since it wouldn’t yield a fair result I’m going to disregard what the law says in favor of getting a fair result and I’m gonna go ahead and foreclose on this limited partnership interest oil and this LLC interest in order to make this very sympathetic plaintiff whole and judges do that on a regular basis. Here’s the problem Buck, I can tell you what the court of law says and I could go through every state and we can analyze it up and down problem is I could never tell you what any individual judges and I and no one can and if they tell you they can you know they’re just you’re guessing.
Buck: So then we that people have additionally addressed this just through just through LLC’s and we’ve talked about this quite a bit is the concept of equity stripping, right? Now do you want to talk about that and then talk about whether you actually think I mean I from my experience it is if people get a little bit – including myself at one point probably got a little bit sucked into the idea that this was like the golden you know the holy grail of protecting yourself right finding a legitimate means of equity stripping but why don’t you talk about what it is and what your thoughts are on this.
Doug: Okay so let me back up a little bit and explain how we could even get to the concept of equity stripping. The way we get to the concept is that we take an asset like a piece of real estate which is physical and can’t be moved and we put it into a charging order protection entity like an LLC and normally that LLC you be connected to a holding company which would typically be another charging order protection entity like a limited partnership which in turn would be connected to that magical asset protection trust. This either a foreign asset protection trust or domestic asset protection trusts but something that is supposed to have these magical powers of you know you can’t be forced to distribute any assets because there’s this third-party trustee potentially. So that’s the that’s that’s how we start with that we lay all that out now somebody comes along and says okay well what about the real estate I have five million dollars with a paid for real estate and that’s most of my assets so how does the asset protection trust protect that and the answer is oh it’s really easy that LLC is owned by the holding company which is owned by the trust and therefore it’s already at the right chain of ownership. Because it’s in the right chain of ownership it is if we can just strip the equity if we ever have a problem out of that LLC and send it to the trust offshore. So in theory that’s fantastic and would work the problem is a practical reality stripping $5,000,000 equity out of real estate at a time when you’re under stress and in trouble it’s a lot harder than it seems. So it’s not that the plan is wrong or that that’s not a very good way to set things up it’s that the execution needs to be much more methodical you need to be thinking well in advance and what I tell clients is if it’s here in the US all bets are off because judges do what they want to do so if you’re gonna get that off the table you need to get it off the table sooner rather than later and using phony liens from a Wyoming LLC’s.
Buck: Yeah and that’s kind of one of the things I was trying to get at is I think there’s at least in this podcast community you keep hearing about the same types of stuff and you hear about Wyoming entities alone acting to strip equity and it’s just the reality is I think that if you’re relying on that as a means of keeping your property it may not be a good bet. But let’s focus in on the I would say your typical Wealth Formula listener because you know at this point people are here and all sorts of different things and thinking well okay so then what do I do? So let’s just take one example right high paid professional let’s say let’s say this is a physician or a dentist and they’re making three hundred and fifty thousand dollars a year and they have a net worth of say three million dollars or so a million dollars in equities the rest and say you know non you know real estate and things like that now what are the specific issues that this person who reflects I would say a lot of people in this listenership what should they consider and I know you know we can we can start talking about specific things I know you’ve invented something called a bridge trust is that then become appropriate for this well why don’t I kind of give you sort of just how would you talk to this how do you approach this person and then think about sort of the levels of what might be appropriate.
Doug: Right so first I would just look at the asset so you pretty much lay them out they have a good income three hundred fifty thousand dollars a year they’ve used that to end up with a million dollars of equities and then another two million dollars of I’m guessing real estate or personal or other investments maybe their limited partnerships syndications whatever it is. We look at the asset mix so we start with the juiciest first so the million dollars of equities is the juiciest stuff that’s the most attractive if I’m suing and I see a million dollar brokerage account in the name of a guy that’s a green light I’m gonna put full throttles or just giving that a judgment against that guy because collectability is a non-issue I can just go to the bank present the writ of execution. So we need to get that moved the way that we would look at is get that in a cop entity get that in a charged order protection entity I’m probably gonna recommend a limited partnership I call it an asset management limited partnership there’s a couple of reasons I don’t know if we want to go into them here that LP is a little different than an LLC there’s a distinction between the general partner and the limited it’s why you see virtually all real estate certifications ill using LPs and not LLCs because there’s a really nice distinction legally and statutorily as compared to an LLC which is much more of a single class of membership statutorily and then in the operating agreement you have to make these two classes and the LP is an older legal entity been around a lot longer. So we like an LP as the Holding Co the spouses can be members of that and then a bridge trust or an asset protection trust a foreign asset protection trust one of the two and the on asset level be the limited part.
Buck: So just real quick in terms of the LP or the LLC there is a distinction amongst different states so if you can do it you know if you have some flexibility what state would you choose or States would you from?
Doug: Okay so that’s great question the big states Wyoming Nevada Delaware and I include Arizona in that because Arizona is lesser known but statutorily exactly the same as Nevada so it’s a very very good state and it’s much less used and therefore there’s some problems with states that are so widely used you kind of get a bad reputation and sometimes that’s held against you. So my personal preference for holding company is an Arizona limited partnership okay that’s my personal preference.
Buck: I don’t want to interrupt you but part of it I just wanna because one of the issues is I think some of these some of the states and you might as well not have anything right.
Doug: Well some states if you’re if you’re doing it in California for example yep wouldn’t say it’s nothing but it’s not the same it’s I’m saying and you’ve got another if you say that California that doesn’t recognize a series LLC and then you get a planner that goes to Nevada and creates a whole bunch of series LLC’s and so this is your solution and then implements it with California real estate I don’t think you’ve done the client what he deserves there.
Buck: Got it. So then you mentioned on top of that you mentioned a holding company that owns that or wait was the trust that opened it?
Doug: So the holding company would be the limited partnership so that would own the brokerage account so you transfer the million dollars into Arizona asset management limited partnership or the XYZ LP. And then XYZ LP is managed and controlled by clients either individually directly or through an LLC depending on if they want some privacy to the structure. A lot of your clients probably would like the privacy you know that’s where I why I mean LLC comes that’s a really good use for a while LLC as a general partner because now we have there’s no assets to speak of maybe one percent of the LP interest but you’ve got the privacy so you don’t really have any recorded you know easy to look up who owns this structure so I use that off which is why my LLC is a General Partner and an Arizona limited partnership. The limited partner is not registered in Arizona no one knows who the limited partnerships are how many partners are yeah good thing. In our case the limited partner would then be the bridge trust which is we can talk about separately but that’s your asset protection vehicle.
Buck: Right because now at this point so now you’ve effectively got you’ve got this holding company right this holding company is ultimately the question is is it going to be owned by something else in many cases this is where you start getting into the foreign asset protection trust you know the offshore trusts there’s been some people talking about some of the domestic asset protection trusts like in Alaska etc. And those things have some pluses and minuses you want to talk about that because you know one of the things that I thought was interesting about when I started talking to you is of course what I had already had some offshore things set up but that’s not necessarily what your first inclination is where I think a lot of asset protection attorneys would say yeah you need to have a trust now on top of this holding company talk about pluses and minuses and your alternative.
Doug: Yeah that’s a really good point. So the holding company is important and depending on the level of assets it alone might be enough just stop there so you know what we’ve got a multi-member Arizona limited partnership it holds the cash it holds some LLC’s which holds some real estate maybe that’s enough. If we’re talking about a half a million dollars from less than a million dollars that might be where we just stop just a domestic structure to put a little bit of a barrier in there between you know a creditor and your assets. Once you get over a million dollars I don’t consider that enough. At that point we need something on top of that holding company. So your choices are to gasps air protection trust foreign asset protection trust or some type of hybrid let’s talk about them all. The domestic asset protect the foreign asset protection trust is really the base it’s the baseline it came first 1984 was the first statute in the Cook Islands it is is still considered the gold standard. It’s why you see so many planners just go straight to it they just like that’s the gold standard that’s it a Cook Islands trust let’s just go right there and that might be appropriate it might and we do that from time to time but it’s not my first stop and there’s a couple of reasons for that. One if you have a foreign trust you have now subjected yourself to foreign trust compliance which is form thirty five twenty and thirty five twenty eight each year that’s a full balance sheet disclosure of all the assets of the trust responsible parties in the US all listed. You also have facto disclosures if you have a foreign account. Well my opinion having a foreign trust and not having a foreign account is having a plane without the pilot I mean what are you going to do with it you you need a foreign account if you’re gonna have a foreign trust that’s the point is you got to get the assets out there. So if you have a foreign account now you have factored disclosures which is count balances and all those things.
Buck: So let me stop you right there because that when you say it like that seems so obvious but I have to admit when I came to you and another asset protection attorney and I had already had this set up it was not recommended to me to have a foreign bank account but again now it makes total sense right because at the end of the day the thing that the foreign asset protection trust really really helps with is liquid assets because at this point like what you’re talking about doing is even if you’re in the middle of some kind of you know you’re in the middle of something where you know you’re in the middle of a trial or something like that theoretically you can move things you know you can move things offshore and there’s really no way to get them back I mean you can’t order those back you know because they’re because of a court order they can’t get it they don’t have jurisdiction right isn’t that the idea?
Doug: Yeah that’s exactly the idea and you stated it correctly. Foreign asset protection trust works best I mean it’s real sweet spot is liquid assets the Canadians also be moved offshore that’s its number one highest and best use so talk about like so you have got the you know you have to trust you to deal with you’ve got all of the other fees associated and reporting requirements what’s the Bridge Trust doing?
Buck: Okay well so with a fully foreign asset protection trust you’ve got all the compliance at the IRS that’s what we just talked about you have the trustee you’ve got the cost of the trustee you’ve also got the cost of that compliance which is your CPA are you doing it. I tell clients at the very minimum you need to budget five thousand dollars a year to maintain a fully foreign trust and it’s more like ten and that’s if there’s no attack, we’re talking about just a dormant standby trust we’re not talking about one that’s under actual attack. So for all those reasons that’s not my first go-to entity because of all that and most of the client you just described did they really need a foreign asset protection trust with?
Buck: Hopefully not is the answer
Doug: Yeah really they don’t right now they possibly need one they could possibly need one but they definitely at this moment don’t need one. So before I talk to them about the bridge let’s address the domestic side of it because you the idea in 1998 when the Alaska statute was passed the idea was is you know why sided offshore we can do this domestically we’ve done it for years with Wyoming and Nevada and Delaware we could just have a state create these exact same types of protections and authority to create this type of trust. So Alaska passed the statute why I mean not to be left out Nevada not to be left out Delaware all pass statutes and now we have we have we had seventeen it’s fiction out of sixteen states one of them repealed their statute in Hampshire they actually said you know what didn’t work out for us we’re gonna take it off. But we have 16 US states that all have some type of Authority. Here’s the problem is that it does simple well here’s the benefit it simplifies the foreign trust reporting because it’s not a foreign trust so we have no 3520 you don’t need a foreign account because we’re relying on these domestic protections so we can just keep it all domestic that’s the promise of it that was the good side. The problem with it is now we’ve seen these in action and they just keep failing and they fail for the expected reasons that a court in one state just doesn’t recognize the trust in another state or it’s a federal court which supersedes state law. So Alaska can’t tell the federal bankruptcy court to go take a hike they Trump with a federal district court and so what we have is we have an attempt by the states to try to recreate the foreign protection and I’m not gonna say it’s been a complete failure it hasn’t but it is not the success I think everybody in the beginning thought it would be. I certainly never thought it would be a success. I was happy it was happening because it validated the concept of an asset protection trust the third of the US states have said yeah we like this idea and we’re statutorily in embodying it that’s good for the concept the problem is the execution has really fallen short.
Buck: We have a lot of you know we haven’t a fair number of people I don’t know how many but I’ve talked to some people who ended up doing a domestic asset trust because there are some people in this community who other attorneys who were still advocates of it are they completely lost I mean is there anything that they can do to maximize what they at least they paid for?
Doug: Yeah so here’s the thing I mean a domestic asset protection trust could have some value. Number one if you live in the state in which the statute was passed and you’re using that state you already have a much better trust that if you’re out of state trying to use a Nevada trust. Already you know at least fit into the bounds of the statute because the first thing you got to look at is that Nevada law is made for Nevada citizens so if you have if you’re a Texas citizen you try to use a Nevada DAPT you already have a challenge of whether the law should really apply. Second is if you follow the statute verbatim and you really do have the type of liability that is not in the exemptions of the statute maybe a DAPT is enough for you. So the very first thing I do if one of your clients called me and said hey Doug I paid for and I did a DAPT I would say well let’s see if we can use it let’s see if it’s valuable do you live in a state that the DAPT was done in you know you’re a Nevada resident great that’s that’s already a plus um let’s look at your risk what kind of risk are you facing I mean have you met all the requirements for the D apt to be valid? If the answer to everything is yeah it’s checks all the boxes probably gonna say just keep it it’s probably enough because they’re not worthless they just they just don’t stand up under intense pressure.
Buck: So now we’ve talked about the pluses and minus of those let’s talk about the hybrid.
Doug: Yeah okay so my question to myself 20 years ago now was gosh the offshore is clearly the best I mean I definitely wanted my clients to have access to that but I also know my clients pretty well and I don’t think they’re gonna go for that it’s a little too much for most of them. And so I asked myself well how could I solve this problem how could I give them access to the foreign but keep it simple if we don’t really need to use it and and the answer was I created a hybrid. So it starts life as a foreign asset protection trust so it’s registered offshore it’s got a you know it’s designed as a foreign asset protection trust got a foreign trustee in the in a standby role but for the purpose of out the IRS code which is 7701830E there’s a two-part test it’s the core test and the control test the court has to be in the United States in other words the court of primary supervision has to be United States and the person in control has to be in the United States that means the trustee so what I do is I meet that so I bridge that foreign trust back into the US for 7701. I make sure that the trust is governed by a US jurisdiction and that it has a US trustee. Well who I picked for the US trustee is the client comes out because they’re domestic and it also solves another huge problem that my clients have always had which is giving up control of their assets before they really need to. So what we have is we have a situation where we have a fairly straightforward domestic grantor trust in which the client is in control of and I can tell you now it’s been 20 years and over 98% of those trusts have not needed to cross the bridge other words they’ve not needed to turn fully for and drop the u.s. jurisdiction and and trustee be changed well that tells you that I was pretty much right most of my clients do not need a foreign asset protection trust for the 2% that we’ve had to do that what happens is that at the point we cross the bridge and pull the trigger it’s a full foreign asset protection trust and the foreign jurisdiction recognizes that trust not at the time that the bridge was crossed but the time the trust was originally registered. So way back in the beginning. So what you have is you have a foreign asset protection trust that is fully affordance or protection trust all the protections but you’re only really going there if you need to it’s like putting a parachute in your plane you don’t jump out at the first sign of trouble you wait till the plane is really going down.
Buck: So Doug if you have a map if you do already have a Cook Islands trust or this is just a scenario in which you may say I’ll really have any great benefit to this maybe I should back this out into a bridge and not pay all the extra fees I mean how do you usually deal with that because we do have some people for sure who are already in that area including myself.
Doug: Yeah so I’m pretty hesitant to just wholesale say yeah back it up because once you’ve established the Foreign Asset Protection trust you’ve really gone all the way done as much as you can do. I’m pretty hesitant to unravel something that has been in place that long that is providing a benefit albeit probably not going to use it but what I would do is I would give the analysis back to the client say okay here’s what you got you know if your accountant has figured out how to do the thirty five twenty you kind of dial that in if everybody’s on the page before and trust these fees yeah they’re higher than a bridge would be but you know you’re okay and if the client is a net worth level where a foreign asset protection trust kinda is already making sense I’m probably gonna say let’s stick with that’s not just unraveling on the other hand if it was misdiagnosed say that if it’s the client you told me about three million dollars in net worth fairly straightforward guy not a ton of risk a concern fifty thousand dollars a year you know just nothing out of the box does it makes sense for him to pay five or seven or ten thousand dollars a year for the next 40 years overnight and in that case I would I would say you know let’s consider dialing this back.
Buck: One thing that we didn’t really dive into which I think is actually pretty important for this audience in particular is that a lot of us are real estate heavy maybe not even just you know we own real estate ourselves but for example I have a significant amount of my investments are as a limited partner in syndications and then of course I’m also a general partner on syndications but let’s focus on the limited partners syndications or somebody who owns real estate would those companies or would those assets with the limited with the limited partnership investments be coming out of the holding company the Wyoming holding company then is that where you would invest passively through?
Doug: Well I mean depends on how they’re already invested so where does your average client hold his LP investments in a holding company.
Buck: Well let’s say they’re just starting on there saying I want to start investing in a way that is you know that protects my assets so what’s the ideal place for them to start you know moving money into and investing from there would it be that holding company if they were partners?
Doug: It’d be the holding company. So in my model I would say let’s start with the Arizona asset management limited partnership is the holding company if they want the privacy that’s going to do the Wyoming LLC as the general partner and you make your investments into your other limited partnership deals so your holding company limited partnership deals.
Buck: Got it. Those are your needs how much didn’t know that the issue there of course is well this isn’t the liquid asset all right so how am I really getting you know what’s my protection here I can’t just zoom this off into the Cook Islands if there’s a problem.
Doug: Right so we’ll yeah so one you’re in a limited partnerships you already have a real charge of our protection right very real charge more protection. So I mean it’s almost unheard of to see a credit or your investors for example would not be able to force you to liquidate your 11 partial deal okay too many other parts to this is why charging our protection was designed that’s the whole purpose of it bracelets right there got a huge deterrent. If in turn that limited partnership interest is held in another limited partnership you have a question of whether they can even get a judgment attached through to that even the charging order they would legally have to get the charging order from the holding company limited partnership not from your limited partnership so you’ve actually removed one extra step which is very good because now you know the creditor is looking at it saying okay what are the chances of Buck making a distribution to you know a limited partner who’s got a judgment and a charging order probably pretty low and this deal could last for years and years and years maybe I should go for a settlement. And here’s the other thing I mean let’s just say this the purpose of asset protection is to reach settlement. It’s not to tell people to go pound sand get that out of your head if you’re thinking oh yeah I’ve asked that protection I can just tell him to take a hike no asset protection is just a tool it’s leverage it’s it’s rebalancing what is an unbalanced playing field but it doesn’t mean you can disregard real judgments or real claims in favor of just telling people to take a hike you want to see this as leverage to make a reasonable settlement especially if you actually have some responsibility you know you need to take it and say okay what you’re not going to get this assets very easily but I am willing to make a settlement and that’s a conversation I have with every client I just say especially the ones that are coming in and they already have something to worry about and it’s a misunderstanding I see in the market place out there asset protection is this magical thing that will just wipe out and make everybody run away from. It’s pretty powerful but it’s not magical.
Buck: And that brings me to I guess another thing though you and I talked about that I think is really important to understand is that there is a significant difference what I have found in my own experience so far and for better or for worse is that there’s a difference between theory and what works in reality you know there’s a difference between you know you know a lot of great ideas and professorial approach to things and a knife fight in the street right you know what did Mike Tyson say everybody has a plan until they hit in the jaw. And so what I like about your approach is you are far more I would say practical do you think that that’s a fair assessment?
Doug: Yeah I do. I consider myself practical. The entire Bridge Trust concept you know for the first five or ten years that I did it I had a whole bunch of my colleagues saying oh no here’s all the reasons why you’re not textbook perfect I said I don’t care this is practical my clients actually keep their plans I watched client after client do foreign asset protection trust just to dissolve them three or four years later in fact the average life span of a foreign asset protection trust you’re gonna be shocked there’s only four years yeah that’s the average links because people put them in place when they’re feeling stressed and then they get tired once the stress is over which is almost always resolved they get tired of maintaining them they get tired or not being in control they get tired of dealing with the trustees and filing CPAs are hammering them to please get rid of this thing I don’t like it CPAs hate it by the way and so they just get rid of them. So how good is their perfect plan if it’s not in place fifteen years later when they actually need to use it. Bridge Trust stays in place because we’ve made it so simple to maintain. There’s no patch returned fourth there’s no foreign trust in a foreign account yet we’ve left the door open so I am definitely a pragmatic planner I probably got that from my father he’s a very pragmatic guy and it was always just very practical it wasn’t about theory and textbooks and perfect answers it was about how does this knife I go down the street.
Buck: Yeah and and I think that’s a really valuable advice because I think that’s one of the big things like I said that are missing and you know there’s a lot of practical issues about the fact that I think gosh you just got a stress test ahead of time to let me just one of the you know because of your advice the advice for another asset protection trim I’m trying to open up a foreign banging it yeah and this trustee that I have been paying is absolutely worthless worthless. I mean it has literally been three months like just can’t get him to get this for an account open. It’s just remarkable and it’s like imagine if that was your situation and you were under duress and you were trying to do something and you couldn’t get your trustee to respond. There’s just so many moving parts to this and on it is where I’m at but I mean it’s it’s good to at least know you know things like that like you know your trustee is gonna respond if you need them to respond. So that’s something by the way if people have got a FAP make sure that your trustee is responsive.
Doug: I’ve seen that more than once Buck. I mean a bunch of times I’ve seen just trustees which is a name on a piece of paper they were not prepared to handle the job.
Buck: Yep absolutely. So Doug you were kind enough to do a webinar for us and what we did is we put the recording on wealthformula.com under Asset Protection for Professionals so if people want to check that out I urge them to to download that that webinar but let us know also if people just want to call you or get in touch with you what’s the website what’s the best way to reach you?
Doug: Yeah you can just go to the website lodmell.com that’s my last name there’s a ton of stuff on there videos lots of content I feel like educating my clients is the best they had conduced they understand. They’re also welcome to call 602-230-2014 that’s the main number if you call in and you say I heard this what you know podcast with Buck just Doug said he would he would talk and give me an analysis my assistant will schedule you there’s no cost for that for any of your clients or your listeners that are listening to this and I’m happy to talk and again the first thing I’m going to do is go over see if there’s exempt assets you’d be surprised how many times I get to give the good news hey you’re pretty much covered you’re all good live in the right State and you have an asset mix that’s that’s already protected.
Buck: Yeah and the other great thing is that Doug will be joining us in Dallas for an excel formula meet up September 27 the 28th Doug actually a friend of Tom wheelwright who’s also going to be there and so we’re looking forward to having you and your another reason people should definitely come out and check it out and meet you in person and you know get some get some advice on the road. So Doug again thanks so much for joining us and Wealth Formula Podcast.
Doug: All right thanks Buck my pleasure.
Buck: We’ll be right back.