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189: Ask Buck Part 3

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Buck: Welcome back to the show everyone so this is the third and final round of Ask Buck at least for the probably the next couple of months right so glad you have enjoyed it at least that’s what the feedback I’m getting is initially I was like hesitant about doing a third show but you know the reality is I’m getting a bunch of these emails tell people tell me that they like this format and that they’re learning a lot and so I think the moral story here is that you know we do a lot of podcasts right we do a lot of podcasts we talked to a lot of people and once in a while it’s nice to do sort of one of these 360s or would it be a 180 any way of looking back at you know a plethora of information that we’ve already kind of gone through and you know just start to put things together and you know there’s some real practical questions that come out of these things that we don’t always assess there’s another reason by the way that if you enjoy this format you really should consider joining the well formula Network because this is sort of the QA thing that this is what we kind of do basically in our online private community wealth formula Network you know it starts with a course of course and then but really the most of the time is spent the the real value I think that most people are really excited about is the bi-weekly zoom video phone calls that we have check that out well formula roadmap com anyway just a just a quick plug there and hey maybe it’s a nice Christmas gift to somebody that’s that’s not a bad idea right maybe you’re just thinking well maybe what am I gonna get such-and-such and you know maybe they need to maybe they need to get a little smarter financially or something like that okay so let’s get on with the questions today one question the first question just like last I’m gonna start with a generic question that I’ve been getting a fair amount of within the you know within the investor club which I think deserves some significant and legitimate attention to and that question is generic in that effectively it surrounds the concept of conservation easements you know what are they exactly are they you know dangerous from the standpoint of you know violating laws and things like that’s right let me let me kind of back up and tell you what this is okay so conservation easements are it’s an old law I don’t I can’t I don’t know the entire history of it offhand it basically allows people to take you know large parcels of land they owns it’s like farmland or you know whatever it is and you know with each piece of land that you own you have certain rights you know you have land rights mineral rights blah blah blah all this other stuff that you know if you’ve gone through any sort of real estate course in the past you probably have heard of but effectively what conservation easements are is it’s basically a you know it’s a way for a landowner to effectively commit to preserving that land from you know building or mining or drilling or whatever in in perpetuity and by designating a space as a conservation easement they get certain tax benefits now those tax benefits can be pretty profound so and they’re based on you know evaluation of what the after mining or after building value of that piece of land would be so for example say there’s a piece of land um and you know we’re usually talking about thousands of acres at a time you know we’re not talking about like you know I got an acre here and I want to do something with it so let’s say Ted Turner for example owns you know 1/2 million acres some whom I heard you know and he’s got Buffalo roaming on there and he’s like you know what I use this for Buffalo but I’m not really gonna but I’m but I’m I’m not gonna build anything I’m not gonna put like a big Tower here I’m not going to drill for minerals and stuff I’m gonna dedicate this to a conservation easement so now if he does that and he gets a valuation of that land and the valuation says man if you had built a gigantic Resort here and have you drilled in mind over here this land would be worth X X X amount in theory that amount that theoretical amount is what is used as a deduction if the conservation easement election is made okay not what he paid for the land but what the land could be theoretically worth upon this dedication to conservation easement so in other words you could have a situation where you know a land land is purchased for you know let’s say $1 and the valuation that it gets is you know five or six dollars so in that situation if it is if it is elected as a conservation easement then what will end up happening is the deduction is not for the one dollar paid for the land but for the five or six dollars that the valuation comes into so as you can imagine that’s an enormous deduction so if you’re talking about five six seven whatever it is you know it’s leverage giving so it is a tremendous tremendously powerful tax benefit now here’s the catch right so people been doing this for a long time it is made for farmers and farmers do it and you know that’s a great deal for farmers or people who own land that they have no intention of building on because you’re basically saying hey I mean I’m not really intending to build or you know drill on this land anyway I’m just gonna keep farming or I’m just gonna keep my horses there and and so so yeah I’m gonna do this and take my take my huge deduction and just by saying for sure I’m gonna preserve this land for good this land is preserved for good so the controversy is people have heard about comes to the fact that you know most people don’t have you know hundred thousand acres to do this kind of conservation easement right so what do we do historically what have we done when we can’t afford something on our own we still want to get involved well we participate in syndications okay so the controversy in this area revolves around the idea of conservation easements that are syndicated they’re not just like one farmer saying I’ve got a you know whole bunch oh you know I’ve got 100 acres here and I want to do this it’s like a bunch of investors getting together like they went on any development project and then making an election for conservation easement so the question it so the controversy is really around those syndicated things and and really here’s the controversy right I mean because clearly that was not the intention of the law of the of having like all these individuals getting into syndications to do conservation easements but on the other hand I will argue and again I’m not an attorney and I’m not giving you advice that you’re not breaking the law because there’s nothing inherently wrong with participation in a syndication there’s no laws that say you can’t do it and what’s the difference between one individual you know having land and and and dedicating it versus syndicated land and dedicating it so that’s where the controversy is now the reality is that the IRS hates indicated conservation easements okay they hate them but here’s the thing as yaris doesn’t make laws Congress makes laws and right now conservation easements and you know syndicated conservation easements everything we do are legal so what ends up happening is every year at the end of the year you know the IRS ends up sending out these like oh we’re gonna investigate such and such and we’re gonna be harsh on this and and they might I don’t know I’m not saying they’re not but I’m just telling you that every year they do the same thing and I think a lot of people think well they’re basically blowing smoke here because they can’t really do a whole lot if things are being done legally so they’re just throwing out these warnings to people don’t participate because they don’t want you to participate fundamentally the issue to me is that until Congress makes it illegal or put some certain additional limitations – this is really up to you I will tell you that you know I have participated in these things and furthermore I have been audited not because of the easements that I participated in but because but because of anybody who makes you know decent amount of money eventually they’re gonna have some audits and a lot especially if you have a bunch of business activities like I do anyway I’ll tell you in those situations what’s happened is I participated with groups that you know doubted their eyes and cross their duties and they give me all the paperwork that I needed and I presented those as part of the audit and guess what nothing happened nothing happened right not to mention if something were you know going to happen with anything related to your conservation easement it it wouldn’t be at your level it wouldn’t be at the limited partner level you just have a k1 for the thing to be challenged at all it needs to be charged at the general partner level so bottom line is this is a complex issue it’s an issue that I have decided personally that I feel like I’m gonna follow the law I’m not gonna follow the fear and because the worst case scenario in my opinion and the opinion of some smart people I know is there could be a decrease potential in valuation over a period of time in which case the potential downside turns into you know okay potentially you may have to pay up a little bit of money later but by that point you’ve already doubled the money that you saved that kind of thing anyway I’m not gonna tell you to do this and not going to tell you not to do this but the I think the things that you read about I think you just got to be smart and understand there’s law and then there’s you know there’s different branches of government there’s different parts of government there’s the IRS there’s a Congress try to try to be rational about that and know that you know if you’re not doing anything illegal you should be just fine that’s my opinion that’s not advice okay so let me get to the first question from a discreet person and that is Eric Harmelin he says Buck what assets are investments other than owning real estate would you feel comfortable with to produce consistent cash flow well well here’s the thing owning real estate equity is my favorite cashflow play because of the tax advantages upside which I’ve probably talked about numerous occasions throughout these last few episodes but if you don’t care about the tax advantages and are looking for stable cash flow there are other options that might be relatively stable now specifically you know we talked to earlier about first liens on real estate and I think that’s certainly a way to do it first liens on real estate especially if it is you know if you if you want to you know if say you say you’ve got if you’re you’re loaning out money just make sure that there’s loan-to-value is significant and that you don’t get you know screwed because all the markets went south and all this and you’re holding property that significantly devalued and I will say also that even non-performing debt in in the right hands like a HP servicing might be a good option because in those situations those kinds of funds benefit from a down economy and as I’ve said before I am you know comfortable with George Newberry’s you know roll out eh be servicing his ability to perform so that’s something however there are other ways to you know do this kind of lending that don’t involve real estate and that’s another thing to think about and it actually might make sense if you know if all you have is real estate it might make sense to have collateral outside of the real estate markets if your primary investments are really all real estate related so in the past you know within an investor club we have presented opportunities for lending you know you know even with oil and gas drilling equipment as collateral so if you have a really big company that might honestly be a pretty pretty safe bet because you’ve got a you know you got a company with all this heavy-duty equipment I mean effectively it becomes almost like a no reasonably high rated bond in that situation the big thing honestly with all of these things that we’re talking about is not a specific thing right I mean notes and one person’s hands are very stable and another is they’re not you know so the big thing with all this is to understand the underlying asset or fun and feel comfortable with it right because not all real estate of created the same nor the people who operate it you know not all debt is the same and the people who operate those funds are of varied skill sets as well and so we’ve got to get out of this mindset of you know our notes a far is real-estate safe and understand that you know in this space and this alternative space that we live in it is all about the operator it’s all about the operations it is not so much about the asset and that makes it very good if you’re in the right hands right um it’s it anybody can take something that is a really good asset turn it into turn it into a lousy one by not operating it well you know if you’re in a credit investor you’re probably seeing some of these things that I’m talking about coming by but if you you don’t you know certainly join and you are accredited then join the accredited investor group bed well formula calm go to investor club all right next question is from Jason like this is Jason back from the rock arkansas again wanted to get some feedback from you on oil and gas investments I know you’ve had some recent webinars on that and covered that topic son as we approach yours in I think a lot of us are going to be looking at active taxable income that we would like to find some at Bain and John and wanted to see what your overall take on the oil and gas investments was get some feedback on that from in green Thanks good question Jason and you know I mean at the end of the year here right I mean this is really going back to you know if you’re a high paid w2 investor you have active income you don’t have a lot of ways to write off money against your wages and you know get a return you know that as we’ve talked about before I mean one of the things that you can potentially do is conservation easements but again they are not without controversy and then of course there’s you know no planned return on that it’s basically one and done oil and gas investments on the other hand are not controversial at all in the sense that the government actually logs for you to do them and there is no you know there’s there’s no nobody’s saying otherwise you know the reality is that the the IRS has made this the guy who the you know the Congress has made this an initiative to to keep dependence on foreign oil to a minimum and the fact that the tax benefits are so compelling is what’s ultimately led the u.s. to become the number one oil exporter in the world and that’s why you know my CPA and yours I know Tom wheelwright calls the tax code a series of incentives right if you do what the government wants you to do it will likely save on taxes that’s the bottom line so with oil and gas because as much depreciation right now in many cases you’ll be able to write off the full amount of your investment against any income including w2 income which is what most high paid professionals get so in other words say you make five hundred thousand dollars per year of active income and you invest a hundred thousand dollars in oil and gas you’ll get taxed and four hundred thousand dollars instead of five hundred thousand dollars because you basically knock that off you deduct ducted that up for your top line and then the cash flow you get from the oiling gas drilling we’ll also have some tax sheltered to it I believe it’s something like 15 percent of the cash flows so just from your investment in this scenario right of a hundred thousand dollars if you’re in the highest tax bracket you you would have saved probably about you know at least $40,000 in other words 40% return on investment immediately right so when you hear that in a of course in you know you’re you’re hearing us for the first time or you’re new to this the idea you see gosh what’s not to love in theory I would tell you that I I couldn’t agree more but the devil is in the details just like anything else we go back to the idea of operators we talk about you know who’s going to actually drive these assets to profitability right so first of all drilling for oil is inherently riskier as you can imagine than something like real estate right just think about it I mean what are you doing you’re basically you know you’re you’re taking the you know obviously there’s ways to significantly improve that technology now but I mean if there’s no if there’s no oil there’s no money the next issue is that this space this oil and gas space I have to tell you and this is very true and Tom wheeler I’ll tell you the same thing is there you know this is an area that’s full of charlatans and people who are happy to take your money slap on a bunch of fees and hey give it a shot with the drill right if they get lucky then everyone wins everybody makes money if they don’t they still win with the fees that they slapped on and they didn’t have a bunch of money that they lost themselves so it’s not a bad deal for them either and the reality is that that describes the majority of the operators I’ve worked with or at least that I’ve you know vetted tried to vet in the space it’s not a pretty group now that’s not to say that you know there’s not some good one so we just had a presentation as you know with an investor club for accredited investors with a group that I that I do think is legitimate and one of the things that I really like about that group in particular was they were investing the operators on 50% of you know the capital that was going into these 50% of the equity that was going into the fund was from the operator themselves right and that tells me that the group is trying to make money by by actually finding oil not by just you know racking up the fees so if I was going to invest in oil and gas myself as I have done in the past when I actually had more of an active income you know with more of an issue that’s the kind of group I would look for and in the reality I mean I do have active income that said I I happen to be a real estate professional so I get all the same benefits from investing in real estate basically because bonus depreciation can be used to write off all all my sources of income including active sources so listed real estate at the end of the day definitely less risky and I understand it very well so for me it’s a no brainer but if I had a bunch of active income that and I didn’t have the real estate professional designation I would certainly consider oil and gas with the right group and but the right group is the key is absolutely the key I can’t even tell you you know and that’s sort of the theme so far in this this podcast is it’s not just the asset it’s not just a building it’s not just notes right this isn’t like you know going to merit rate and investing in Apple stock per se because there’s only one kind of Apple stock if you invest in oil and gas you have all sorts of different you know operators out there and you got a pic you know you got to pick one that gives you the highest chance of success okay next question is from Josh hey buck wanted to take a minute to thank you and your guests on your podcast for sharing the information you do because I really learned a lot I appreciate that I also wanted to ask a question regarding Roth IRAs I have a Roth IRA that is basically sitting in a brokerage fund or a brokerage account I can’t really contribute more because of my income and so I’m considering cashing it out and putting it towards a syndication deal my question is should I have considered putting it towards towards the deal or putting it into a wealth formula banking account and I guess I’m wrestling with what I should do there and whether it makes sense to just go straight into a deal or put it into a wealth formula banking account so curious on your thoughts on that thank you very much thanks Josh so for those who are unclear about Josh’s question I don’t think he’s talking here about simply choosing between two different potential investments which is you know either a syndication or wealth formula banking what he’s asking is if he should put the money in a vault formula banking policy first and then borrow from it so why would he do that well let’s review the idea is that well formula banking with that he would start getting a 5% or better compounding rate on his cash value and he’d start getting that in as little as a couple of months he could turn around and borrow the cash value within that account and and redeploy it into a real estate investment right so you might ask why well Josh knows I guess from the from the question you can tell that borrowing from his cash value is actually not borrowing from his own cash value what he’s doing when he borrows money from wealth formula banking is that he’s borrowing money from the insurance company as general general account and he’s there using his money in his cash value as collateral why is that important because when because his money is growing at a compounding rate in his cash value account but when he borrows from the insurance company he is he is borrowing at a simple interest rate and when he does that it effectively he’s growing capital in two places at the same time if he then goes and deploys that simple rate capital into something else that’s growing at a higher rate he’s using the loan as arbitrage essentially to juice up other investments so it’s a strategy we talk a lot about a lot of people are using it in our group and as for the answer to your specific question Josh it’s really up to you listen if there’s a deal you want to get in right now then you might not have you know the time to set this up etc but if you are thinking about this as a long-term strategy which I you know this really is only a long-term strategy right this is not you know this is one of those things that gets better and better over time it’s like it’s startup business right I you know if if that’s the goal I would just say you know listen just allocate a certain amount of money there and stick with the plan start using it because you’re not never it’s never going to be a perfect time right to start allocating to this as opposed to a deal and as you know I’m certainly an advocate for this kind of you know strategy so anyway bottom line is who doesn’t want to improve your returns right so I think if you’re if you’re you know long-term goal is to do that then by all means at some point you gotta pull the trigger on the banking policy now I will say about the Roth thing that comes to mind too is you know I’m not you know the question of whether you cash out your IRA and stuff obviously you’re gonna have some penalties and so on and so forth one thing that comes to mind that I think is interesting that some people have used these conservation at easement techniques to the tax penalty for four convert for basically cashing out Roth IRAs and actually from and actually from converting you know regular higher raise to Roth IRAs as well so that’s just as another aside another kind of ninja technique that a lot of folks in our group are using okay um next question this is a final question so it comes from Kenny French he says I am currently working with rod Zabriskie to set up a wealth formula banking policy so everything is been going pretty smoothly with one exception one of the features that I really like about the life insurance policy is that it offers a way to have money grow that is protected from creditors I agree with that it really gives me peace of mind to know that I’ll have a good chunk of money set aside for my family that can tour at least it’s very difficult for creditors or anyone else to touch looking how to hold policy in a trust LLC personally etc I found out that California where I live as terrible protections for life insurance policies yes it’s true they only exempt very small amount less than $20,000 from a little bit of research I did it looks like a Nevada trust may be the way to go either way I think this would make for a good podcast topic to do a bit deeper dive into ok so Kenny Kenny actually wrote this question I asked him if I could just read it and as it turns out because it’s a really good question okay and it’s something to think about and I am a California resident as well and and so I wanted to make sure that we did address this and so rather than try to give you my own you know specific humble opinion on this I actually consulted asset protection attorney and friend of mine Doug laud mal by the way if you have not picked up a copy of Doug’s webinar on asset protection it’s for free go to you know go to well formula calm and there’s an asset protection webinar and there they does a really good job sort of talking from you know basics to to advance and I’m you know Doug is a really smart guy he’s my asset protection attorney so he writes back so I wrote Doug and and forwarded your question basically and here’s what he wrote back he said this is an interesting topic life insurance in many states is already a protected asset so that so that is the default by which the insurance people sell it as Kenny states in some cases it is not protected at all like California in that case life insurance turns into just an asset like any other and must be put into an asset protected vehicle what does he mean by that basically like an LLC right but because it is life insurance there is an additional consideration of what happens when the policy pays out and how that affects the state for that reason there is also an additional choice which is an islet I li T otherwise that stands for irrevocable life insurance trust so he created this flowchart for me but basically here’s the deal the issue is that since life insurance has a death benefit which could impact your estate size this must be or be a primary driver for where you hold it we talked a little bit about estate planning in the last a spec Peppa sowed so go back and listen to that but you know the numbers for for estate estate taxes is pretty high so but but it will affect a number of you so bottom line is he continues if the death benefit will create or increase in a state tax then the policy should be held by either an eyelid or another completed gift type trust like a dynasty trust a dynasty trust for example in Nevada dynasty trust is he kind of alluded to now if the death benefit will not affect the estate tax because the total estate is below the exemption then I would suggest using the asset protection structured to hold the insurance if you are not in a state with good protections got it so basically he’s saying he’s saying that if you’re you know so if your first check on your state state gives you enough protection then don’t worry about it if your state does you know if if your state is not giving you enough protection and you know you you’re not looking at in a state that’s gonna be basically over ten million or whatever then automatically you can go directly and say okay you can just put this in an LLC okay now he goes on to say it also matters if the insured is using the life insurance as savings vehicle and we’ll need for it for retirement if so then it is better in the asset protection plan and again this is important right so many people in this space of course that we’re talking about do do like the idea of eventually using these funds as a retirement plan so the the LLC ownership or personal ownership if you don’t need the LLC is really sort of the ideal measure there now he does go on to say the issue with the dynasty Trust is that you are giving the assets away so if you plan on needing them this could create a conflict also remember an asset protection trust can convert into a dynasty trust at death so this is really the most flexible tool for most clients anyway so that that to me sounds like the best you know the best the best possible sort of scenario and honestly I kind of wish I’d known about that because I probably would have done that I actually haven’t had a dynasty trust myself I use it for asset protect – so in this situation it sounds like you could set up an LLC that basically triggers into a dynasty trust upon death in which case you know you don’t need it for retirement anymore right so gosh that’s a really good idea so what I would suggest is if that sounds of interest to you reach out to Doug because he is he’s the guy to set that kind of thing up anyway hopefully that makes sense Kenny it sounds like in your situation bottom line is you know you know maybe touch base with Doug or you know with another asset good asset estate planning attorney and mention this idea that Doug’s talking about which is okay I live in California and you know I may have an estate estate tax issue at some point five or ten million at some point hopefully you do because that means you’re doing well and say I want to put set this up as an asset protection type LLC that holds the insurance at first and then I want it to trigger into a dynasty trust upon my death good stuff I learned something there too so thanks for asking that question Kenny anyway that is all the questions I have now for the three episodes of ask Buck one two and three hopefully you enjoyed it hopefully you got something out of it and I want to thank you for giving me all those questions because I think you know these sort of you know you know going back and looking at all the information we have and asking questions really helps really helps for people to process the information so you know start asking those questions put them on ask Buck as soon as you have them um now we may not play them for a couple months but as soon as you got new BOTS or UPS on any of what we’ve talked about in the last three episodes or in any of the podcasts that will come up or as time goes by go to ask Buck ask the questions preferably yeah because it’s more fun that way and let’s let’s do some you know collective learning together through this anyway again this has been my pleasure the last three episodes in and starting next week we will go back to a format of me interviewing somebody else for a while and and until then this is Buck Joffrey with Wealth Formula Podcast signing off.