205: How to Protect Your Real Estate Investments
Buck: Welcome back to the show everyone. Today my guest, he is no stranger to the show. He’s my asset protection attorney, he is my friend, he is Doug Lodmell of Lodmell & Lodmell and he is the guy I trust when it comes to asset protection and also the guy really who you know helps me get an overall sense of structure along with you know my tax team with Tom Wheelwright, he helps guide and work with my estate planning all around it’s good to have a guy like Doug. Doug welcome to the program.
Doug: Thanks Buck, happy to be here.
Buck: So Doug I wanted to have this show because you actually wrote a paper which I thought was incredibly useful because a lot of the same kinds of questions happen all the time in the real estate space, which is namely you know how do I protect my assets? And there’s a lot of you know there’s a lot of bits and pieces of information out there, but what you’ve done is you’ve created essentially like a white paper which we are sending to all of our subscribers and also will be able to be downloaded but from from WealthFormula.com but I want to walk through it. So first thing I got to ask you is you know when I read your paper one of the things you say is real estate is one of the most difficult assets to protect, so why is that?
Doug: Yeah it’s it’s difficult because it’s physical. It can’t be moved. So if you have a piece of real estate it’s in the jurisdiction of a judge and if you have a case in that jurisdiction there’s not much you can do with the physical piece of real estate. It doesn’t mean it’s not protectable, in fact it’s very protectable. It’s just more difficult when it comes to cash securities liquid assets um we can move those we can physically even gold bullion and cryptocurrency, all that can be physically taken to a place that a judge can’t actually reach it, where real estate can’t. And for that reason you have to take different steps and use different strategies to protect real estate.
Buck: Got it. So let’s go over these concepts and again they are in the paper, people can read this when they get their hands on it, but you go over some key concepts and the first concept is related to a saying: gross is vanity, net is sanity and cash is king tell us what that means in terms of asset production.
Doug: Yeah so I learned this you know in in the strategic planning that I do for my own businesses and one of our leaders said gross is vanity net is sanity cash is king and what that means in the context of both business and in real estate is your gross income if you’re at a party and you want to seem like a big guy you say yeah I gross one hundred million dollars a year.
Buck: With a 1% margin right?
Doug: Right big guy. Net is sanity, like okay well how much do you net out of that? Oh well four percent so 4 million, okay still not terrible. But cash is king and cash, what’s your cash flow well I’m negative I’m bleeding money you know okay so now we have a different issue. When it comes to real estate the same thing applies. Gross is the vanity so am I using the paper. An example of a client as a twenty five million dollar portfolio that’s a really nice healthy number that’s good so when he’s at parties he says yeah I’ve got twenty five million dollars for real estate great. Net is his sanity that’s the amount after the mortgages so in his case he’s got twenty million dollars of mortgages so he’s got a five million dollar net still not bad right, still got five million dollars of net real estate. But his cash flow is negative and cash is king so if that was a five million dollar portfolio with a positive cash flow and he was making $500,000 a year positive cash flow after he serviced his debt well then he’d be sitting pretty. But in his case he’s actually negative he’s negative over a million dollars a year because it’s a particular play that he’s making that is not fully covered it’s called a covered land play. So there is some rental income but not enough to cover the twenty million dollars of debt. So he’s bleeding cash having to come up with it from other sources in order to hold on to this portfolio his goal is that it’s going to be worth 75 million dollars. So he’s willing to feed it that extra million dollars a year because he thinks it’s gonna explode and that’s calculated risk on his part. From an asset protection standpoint that guy is already not a super attractive target because his net is only 5 million and his cash flow is negative so anybody coming in, one they’d have to take care of the banks before they ever got in a position where they could take his real estate because the best they could do as a judgment creditor is get a second lien behind the the the banks, in his case the bank’s gall cross-collateralized there’s no you know it would be very difficult for a judgment creditor to come in and feel like they’re ever gonna get a penny out of that thing. Add to that negative cash flow and I’m pretty sure that the judgment creditor wouldn’t even bother getting a lien on it because it’s not gonna be worth anything. So in the context of asset protection what I care about is the net, so when clients call me and say yeah I’ve got you know six million dollars with the real estate, okay I say how much in mortgages? Four million. Great two million net that’s what I care about, we’re protecting 2 million, we’re not protecting 6 million. The more you have in mortgages the less you have in equity the more asset protected you already are so it makes your cash flow more difficult but it makes your asset protection easier. So that’s just a concept and we’re gonna build on it but it’s important to know that that net is what we’re really counting on, what we’re looking at when we were protecting real estate.
Buck: So we’ve talked about it fundamentally is you know get a debt in the form of mortgages and liens is probably the most solid asset protection you can have and that’s kind of what you’re talking about. Just as an aside, what is your take with your personal residence you know there’s a lot of reasons in my view not necessarily to try to pay down your personal home yeah but from an asset protection standpoint I would think that’s the last thing you’d want to do.
Doug: Yeah so it is a little bit of a you know double-edged sword here yeah everybody wants their home paid for yeah everybody’s wife wants to paid for home, it feels good, you’re like hey I’d you know at least that’s always taken care of unless you live in Texas or Florida or one of the states with an unlimited homestead exemption in which case paying up your home is a great idea, but if you live in California with very minimal homestead exemption and in California you know it doesn’t take much to have a two million dollar home, I mean a three bedroom home is two million dollars, so it’d be better if you said hey purely from asset protection, don’t pay it all right leave it fully mortgaged not only that I mean just as an aside you do get the the tax you know write-off for the mortgage to the extent that you can yeah so that’s that’s positive for you. So we just have to decide which is more important, paying off the home or having it mortgage. We can protect the home without paying it off by using the bridge trust which we know we’re gonna talk about a little bit, but yeah I mean debt is good from an asset protection standpoint. Buck: So let’s go back to these concepts on the paper you talked about inside versus outside liability in real estate. What’s the difference? What are you referring to there?
Doug: Yeah this is an important concept and one that most people don’t really understand because no one’s ever explained it there’s two types of liability that I’m worried about. Inside liability which is liability that the property itself creates is so it’s inside. So if we create an LLC or something to hold a piece of property and that property has a mold issue, that is inside. So it doesn’t matter how many layers of protection we have around a piece of property if the liability occurs inside, then whatever’s inside that bubble is at risk. Outside liability is liability that occurs from anything else, but the common element is the ownership. So you own a piece of real estate but let’s say you own a multi-family apartment complex and then you have a liability unrelated from another direction from a car accident that exceeds your auto insurance. Now that judgment creditor is looking from the outside in at your real estate and saying can I get to it. So it’s important because inside liability determines how many entities we need to use. So I’ll give you an example I had a guy from California call me. He had three $1,000,000 properties. He had them all in a single member LLC one LLC and he had a mold issue on one of the properties. The mold issue was a five million dollar claim his insurance was a million so he had a four million dollar excess judgment issue outstanding. Because all three properties were in one LLC all three properties were at risk, so that judgment holder could go into that LLC and catch all three of his properties even though only one of them had the mold issue. That was because it’s inside liability and he mixed all those properties together. If he had had three separate LLC’s, then that judgment creditor could have gotten into the one with the mold but the other two would be excluded because they’re not in the same bubble. So you can think of it as like a safe hit your house whatever is in that one safe, if the burglar cracks the ones safe they get everything. If you have a lot maybe you want to have more than one safe in your house and they get into one you still have the other two so that’s the difference between inside and outside. Inside liability means we need more than one LLC for various properties. Outside liability is different. Outside liability it doesn’t really matter how many LLC’s we have because the liability is coming from the outside. So back to our mold guy. If he has all three million dollar properties in one LLC and his issue wasn’t inside it was outside the judgment coming from a partnership issue and he got a judgment creditor that LLC would protect equally whether it’s 1 or 3. So outside liability really you just need minimal number of LLC’s, inside liability we break it up and we usually look at the value you know, a million dollars is definitely enough to start a second LLC, usually even about half that.
Buck: At least a million dollars of property value or a million dollars in equity you think?
Doug: See that’s a perfect question back to concept number one a million dollars net protectable. He might have a twenty five million dollar property but if it’s got twenty four million dollars of debt on it it’s just a million dollar property to me from an asset protection standpoint so it’s net that we care about not gross.
Buck: Right right and one of the things from the standpoint of outside liability even again just taking a slight digression there there is a difference in terms of the types of protection you can get from the different states that these LLC’s you know like in California for example, California LLC is pretty much worthless isn’t it I mean compared to say like Arizona or Wyoming, is can you talk about the levels of protection in terms of different states?
Doug: Yeah so this is another confusing area because you hear about Wyoming and Nevada and Delaware and in Arizona and Alaska and you hear about these states that are really good about protecting their LLC’s and some of those states have privacy and so people say oh it’s better to do that. Well it comes down to an issue of what are you holding? So if it’s California real estate that you’re holding and you do a Wyoming LLC because somebody on the internet told you it was better and then you go and you bring it in to California and you hold a key piece of California real estate, you have converted your Wyoming LLC in effect to a California LLC because you’re doing business in the state of California, not only you’re gonna pay the franchise tax, but if you ever have a liability issue the judge in California is gonna apply which law? California law right not Wyoming law. Judge in California doesn’t care that your LLC is a Wyoming registered LLC, what they care is that it’s doing business in California. So for assets that are real estate, I recommend using the state that the real estate is located because you’re not buying anything by using another state you’re just doubling your maintenance costs. Now you have to maintain the LLC in two states. Alternatively what you do do is you use one of those good jurisdiction as you’re holding.
Buck: Right okay and that that brings us to the next concept which is layering. And so yeah let’s talk about that because that sort of feeds right into that. So layering is the next next level of protect.
Doug: Yeah so what layering is is taking protection and so I spend a lot of time in Colorado. I have a mountain home up here and when I first got here um they said okay dress in layers and they literally have a system. There’s a base layer it’s made out of merino wool you put it on against your skin it’s the perfect thing and then you want the mid layer which is usually a little thicker it can be a synthetic or it can also be the wool and then you want an outer shell which is waterproof the reason you want that is you’re much warmer with all three of those layers, but you’re also much more flexible. If it gets hot you’re skiing you can take the outer layer off or you can take the inner layer off or the middle layer you can adjust and you’re definitely warmer and more flexible. The same thing applies with asset protection. So the base layers your LLC holding your real estate that’s your base layer. Your mid layer is your holding company and in the mid layer we do want to use one of those states that has really good protection around the LLC’s and the LPs so Arizona, Nevada Wyoming it could be even Utah some cases, Delaware, Alaska. We want to use one of the states that has stood up and said hey we’re serious about protecting these. We’re gonna make it a multi member entity, whereas the base layer it’s okay to make it a single member entity the reason you’d want to do that is that single member entities get disregarded for tax purposes but they also can get disregarded for asset protection purposes. So we want it disregarded for tax purposes because you know when a client comes to me with fifteen pieces of real estate and we need fifteen LLC’s, what he doesn’t want is fifteen tax returns that’s what he doesn’t want. And so if we make them a single member which is usually how they come to me they’re all they’re all single member and if the individual is the member now we have a problem from an asset protection standpoint because the court is has a tendency to disregard those single member LLC’s as you said in California, a single member LLC how by an individual is about worthless, however if we have that single member LLC held by a multi member partnership in Arizona as an example, now we have layered the protection. We’ve solved the single member piercing of the corporate veil issue and now we’ve also got that jurisdictional benefit of being in one of the good states and so that’s the first two layers.
Buck: There’s a lot of really important things that you kind of spread in there that I think are of value too just to emphasize beyond the fact that there is just this additional layer the concept of the single member LLC versus the multiple member LLC, that’s a really important one because I see people creating LLC’s all the time and they’re just single member LLC’s and what I understand that you’re saying at this point right now is that in many cases, and I’m sure it depends on the state, the court often looks at these as disregarded and so if you’re gonna do an LLC it’s probably a good idea to have you know some kind of partnership between I don’t know maybe you and your wife, you and your kids you know.
Doug: And at the holding company level it’s much better because if you do it at the LLC level, now you’ve improved your asset protection situation but remember you like that disregarded entity status from a tax standpoint.So unless you want to end up with those 15 tax returns the grass structure is to use the multi-member at the at the mid layer, the single-member at the base layer and then this works best if you then use the outer shell, which is the bridge trust.
Buck: So now let’s talk about the outer shell and we have talked about bridge trust before but I want you to kind of talk about this in the context of you know what it is and how is it different from some of the other you know options that are higher level asset protection like you know a foreign asset protection trust and domestic asset protection trust.
Doug: Yeah so everything that’s out there that’s legitimate, I’m not talk about the illegitimate trust, I know we’re gonna do a webinar talking about some of the problem trusts out there, that’s a whole nother webinar, but I’m talking about of the legitimate options which would be the domestic asset protection trust, the foreign asset protection trust, and the bridge trust. Of those, and there are some other ones that are also legitimate that you know are non grantor and do some other things, of all of them, they all have their place. There’s not one that’s just automatically always better and that’s kind of the problem is that a lot of people are out there saying this is always better you know foreign asset protection trust is always better here’s why. Well here’s the issues they all have their pros and their cons. They all have a cost associated with them and if we start with the foreign asset protection trust, I’m a huge fan. I mean I have lots of experience actually using foreign asset protection trust to protect client assets and it’s worked so well, I mean I it is proven to me over the past 22 years of doing this that it is a rock-solid tool. The challenge with it is that it’s expensive, it comes with a loss of control, it has a lot of compliance issues, it comes with foreign bank accounts that a lot of domestic clients are unfamiliar with those are more expensive than regular etrade accounts. So you have this whole extra layer and what I see is a lot of promoters out there just saying hey this is best everybody should have this, no it’s not true some people should have that but it’s not best for everybody so in my own client base better than 98% of the clients will never and have not ever needed to trigger their bridge trust, which means it’s less than 2% of the clients that would really need the foreign asset protection trust and so yes in the right moment it’s the best tool, it’s the best tactical tool, it’s not the best strategic tool because the best strategic tool leaves you with the most options and unfortunately when you go straight to the offshore trust you have limited your options. You have narrowed them down you’ve made your choice now you have this offshore trustee you need to get the assets offshore you change some of the taxation issues which Tom Wheelwright and I talked about pretty regularly with you know some of the investment because once it’s a foreign trust it comes into a little bit different tax regime even though it’s still a grantor trust. So you have some considerations. So yes it’s the best tool in the right circumstance. I’m a huge fan of it. Let’s talk about the other popular tool which is the domestic asset protection trust. These are done in it was seventeen now sixteen US states have some type of domestic asset protection trust legislation or authority that allows for them. It’s the same concept which is a self settled spendthrift trust a trust that you can be the beneficiary of which also protects assets from creditors. The difference is that it’s domestic. So with the foreign asset protection trust and the reason they’re so good is that in the foreign jurisdictions like the Cook Islands, the statute actually says that the Cook Islands is statutorily prohibited from recognizing a judgment from any other jurisdiction in the world including the United States. That’s really good if you’re protecting. Well if you do an Alaska asset protection trust or a Nevada domestic asset protection trust they cannot say that, they cannot statutorily say that. In fact Alaska tried to do that tried to say all issues related to the trust must be adjudicated in Alaska and it was struck down that was recent. And so we have article 4 section 1 of the US Constitution which says the states must grant Full Faith and Credit to the other states’ laws and judicial proceedings so that means a judgment from California is valid in Nevada, it’s valid in Alaska and so when they come and domesticate it now we have a-whole-nother set of challenges whereas in the Cook Islands they would just tell you to get out of out of court in Alaska they can well. Not to mention the federal courts the bankruptcy federal bankruptcy courts the federal district courts those all supersede state law. So if you look at all those and you look at the history of the domestic asset protection trusts that have been litigated, it’s not nearly as rosy as with the foreign trusts.
Buck: Those domestic trusts that were litigated did that happen pretty recently because we’ve even in the last couple of years have had you know fairly well known people you know talk about that as an option that may not be good but I’m kind of curious you know because from what you’re telling me it sounds like doesn’t sound like a very good idea at all.
Doug: Well okay so yeah there have been litigated and and recently I’m like I said the most recent one was the case out of Montana where it was a real estate issue and they tried to use an Alaska protection trust and it just all fell apart and the courts all sided with with Montana Court with the underlying judgment and the Alaska Trust failed. So when push comes to shove, I’m not a huge fan of domestic asset protection trust. It doesn’t mean they don’t have their place if you’re a resident of Nevada it’s a totally different issue than if you’re a California resident trying to do a Nevada asset protection trust. So if you’re a resident of Nevada and you have the right facts and circumstances that you want to protect from is actually something that the Nevada asset protection trust is good at well then i think it’s a realistic option for you. I think what’s happened buck is that the foreign trust is kind of unpalatable to most people it’s too expensive it comes with too many hurdles of comfort to get over that you want to use it that a lot of attorneys have just kind of taken the domestic asset protection trust as hey it’s better than nothing and I will say it’s better than nothing and probably they’re not going to need to use it so it’s statistically we’re not gonna have a lot of failures, I’m probably not gonna be one of those cases and they’re saying hey this is a lot easier to do let’s just do this. And I would agree in many cases. I would agree more though if there wasn’t a better option and so when I looked at this whole landscape and this was before there really was a domestic asset protection trust statue, when I looked all this I asked the question well wait a second how can we keep my clients in the domestic world for simplicity and yet put them in the offshore world once the time comes? And the answer was the bridge trust. So what the bridge trust is, is it is a foreign asset protection trust. So the trust is actually registered offshore. It has a foreign trustee listed in the trust documents that signs when the is created and accepts the role of special successor trustee, which means that in the future if they’re called upon, then they will serve as the full trustee and that trust can be a fully foreign trust, but in the interim when we don’t have a life-threatening crisis we bring the trust, we bridge it back into the United States and under 7701A30E of the Internal Revenue Code there’s a two-part test which determines whether a trust is domestic or foreign we meet the two-part tests it’s called the court test in the control test, so we make sure that a court in the US has primary supervision over the bridge trust and that a person in the US has primary control, that person is the client as the trustee. So the client gets to serve as their own trustee. And that stays that way unless we have a crisis. If we have a crisis we pull the trigger we cross the bridge we we call upon the offshore trustee and the offshore trustee then take steps to make it move the assets offshore, remove the client as a trustee and do everything necessary to make it a fully foreign trust. The reason this works is that the trust itself is registered offshore already and is recognized in the Cook Islands not from the moment we cross the bridge but from the moment it was originally registered. And so we have at that point a 10 year old offshore trust and that’s extremely powerful, but we cut out of all the maintenance and the IRS compliance in the meantime.
Buck: So this is I mean it’s fascinating to me. So basically it’s a domestic it’s a foreign trust that’s been domesticated back into the US is that right?
Doug: For tax purposes.
Buck: For tax purposes yeah, tell me about the process to going from the bridge to fully have you had to do that?
Doug: Oh yeah yeah in 22 years I’ve had to do it a lot.
Buck: And so what does that look like?
Doug: What happens is the client calls me and he says we gotta trigger the trust we gotta cross the bridge and my first thing is they okay well tell me what’s going on and I will tell you about nine ten times my advices we don’t need to cross the bridge, just stay steady relax it’s not as bad as you think because remember I see this everyday it’s just like if you’re a real estate investor and you flip homes for living and you flipped a hundred homes you walk into a home and what you see is a lot different than someone who’s never tore down a wall and ripped out a kitchen and put in a new floor. You see it you know exactly what its gonna take to get the job done yeah they see it and go this is a disaster, I’m not gonna buy this home, same thing.
Buck: So and I totally get that because you know when I first started out in business you know getting any letter from a lawyer or anything like that, I mean literally god I’m terrified and I’d had adrenaline going through my body and it would ruin my day and it’s gotten to the point where you know as you know my business stuff is fairly robust and it’s almost impossible not to have some kind of a letter come your way and at this point, I just send it to somebody else I sometimes don’t even open it I just don’t open it, I just send it to the attorney. But that being said when it happens I’m curious on the mechanical level how quickly and how nimble that process of de-domestication and making the bridge into foreign trust happens at that point.
Doug: Okay so in the 10% of cases when they call and I say I agree with them okay yeah let’s cross this bridge, the process is twofold. One is declaring an event of duress. So the protector and I’m normally the protector for my clients would draft at literally a document which says declaration of event of duress. That goes to the client to sign and acknowledge they’re not approving it they’re not the ones writing it they’re just acknowledging that they understand the protectors making this declaration. The protector signs it, it goes to the offshore special successor trustee who’s already got the trust and says here’s what’s going on here’s the situation as protector I am discretionarily declaring an event of duress. That causes that offshore trustee to become a full trustee, the minute that happens there the trustee. In conjunction with the client, now they are gonna take steps so that happens very fast that’s gonna happen within a couple days as soon as I write the letter get it signed by the client email to the trustee the trust is now technically triggered. The next step is okay now we got to figure out what does that look like from an asset protection. Do we need to move the assets? Well I can tell you if we’re triggering the trust we need to move the assets. There’s no point in triggering the trust and not moving the assets and this is where a lot of people get fouled up. Even people who start with foreign trusts the ones who sell a foreign trust his best start here, oftentimes they just connect it to domestic entities and they have all the assets here so they’re actually in the exact same position as someone who’s just triggered their bridge trust. Now the offshore trustee has to say okay what are the assets okay there’s two million dollars in a brokerage account, okay what are we gonna do with that well the trustee needs to open a new account. Where are they gonna open that account? In a safe jurisdiction that’s gonna be Switzerland, Liechtenstein, Luxembourg could even be Australia, any jurisdiction where there’s not a comedy of recognizing and judgments from another jurisdiction. I say Australia because I recently had a client ask me to do a paper, I did all the research ask Australia it’s actually very good they do not recognize foreign judgments and it’s very hard to get one recognized there. So if you happen to have a bank in Australia that you’re comfortable with that would be okay. Switzerland, Liechtenstein and Luxembourg also are good. So that process is gonna take time. That’s not gonna happen in a week so triggering the trust it’s gonna happen quick. So now we have a foreign trust.
Buck: What about real estate? Because that because now we had this process where we had this holding company that was owned by the bridge trust but that holding company was presumably holding you know entities in different states vis a vis different LLC’s different state LLC’s. So what is the process, I mean is what happens in that case or that stuff to be owned by by the trust?
Doug: So this is really the key part of the whole thing, this is where the rubber meets the road and it doesn’t matter if it’s a foreign trust from day one or a domestic trust or bridge trust doesn’t matter, same issue the exact same issue which is what do we do with the net equity back to concept number one, with the net value of that real estate, we’ve got to get it out of there. So you can get it out of there one of two ways you can strip it out through loans, that’s way number one. So you can use conventional loans if you still have access to the conventional loan market. You can use private money, you can use hard money, you can use any kind of money you want but you have to use a real loan. So some other people out there on the internet are saying oh you create your own Wyoming company nobody knows who owns it and you record a mortgage against all your property, that’s a phony loan, it doesn’t hold up when put under scrutiny whatsoever and it usually ends up creating more damage than good because the courts now think that you’re a shady kind of guy that is creating fake loans to hide your own real estate. So I’m not a fan of the fake loans with Nevada or Wyoming companies, you have to get real loans that’s way number one. That’s a job and there’s no way around that job and it doesn’t matter if you started offshore trust from day one you still have the exact same job. How do you pull the equity out of this real estate? You need to have time you need to start as soon as it becomes apparent that this is going to be critical. Do you need to pull a hundred percent of the equity out no because whatever you leave you know ten fifteen to even twenty percent of the equity. It’s not super attractive because the costs of selling it, the costs of taking care of all the previous mortgage holders all of those things are there some costs in that will eat up some of the value the net value. But I’d like to see eighty percent or if possible ninety percent of the equity out. The stripping of the equity is possible always, I’m just going to tell you that. It’s possible. The question is how much is it going to cost you. So there is always a hard money lender that is out that are willing to give you 80 property right.
Buck: Let me ask you this though in terms of what is the additional value that the foreign component gave you then if really you’re just stripping out all the equity.
Doug: Well you gotta have some place to put the equity, that’s where it goes. So if you’re stripped the equity out and you put it in your bank well now you haven’t done anything, you’ve actually made it easier for the creditor because you strip all the equity out let’s say you have five million dollars egg-free you strip it all out you do all this work you go through all these hoops now you got five million dollars sitting at Charles Schwab the creditor comes and goes oh thanks I was gonna have to do a lot of work to just that equity you just did it for me. So the foreign component you have to have a place for that equity to sit that is just the safest place and that’s where you still need that foreign bank account, you still need a place to put all that equity. So that’s option number one option number two is sell the property. So if you’re looking at a catastrophic loss, liquidate everything. Now I will tell you, I thought honestly I understood this well even when I first started practicing, I’m like wow okay real estate is tough. I thought I was going to go through a lot more challenges with real estate then it turns out I have. It’s surprisingly the LLC with the holding company with the trust on top of it in and of itself has dissuaded 95% of the creditors from even bothering and we haven’t had to strip equity or sell real estate nearly as often as I had presumed we would when you know 20 years ago, it’s just turned out that it’s it’s actually pretty effective without stripping the equity.
Buck: In 20 years how many times have you had to do it?
Doug: I’ve had to do it god it’s a handful Buck, I mean I had to do it a couple of times with offshore lenders and and you know but at fairly high cost and you know but these were huge cases with multiple banks going after the client. I’ve asked clients to go out and get loans when they still could just to be prepared and I’ve done that multiple times I don’t think any of those circumstances that we actually needed to send that particular money offshore, but I would say it’s just a handful. It’s surprising how well it worked without actually going to that final stripping the equity selling the property. But I always tell clients you got to be prepared for that because if I tell you how it’s going to work without it and you’re the case where it doesn’t well you know you know no we have a problem.
Buck: I always it’s sometimes I’ve said in the past that I think one of the major purposes of asset protection is really making yourself look like the most unattractive person to go after in the whole world right, is just turning yourself into a complete prune and and making yourself effectively into a massive pain in the ass for any creditor.
Doug: Yes that’s accurate and that’s one of the arguments that the domestic asset protection trusts only people use right is that hey just it’s already gonna be such a pain in the ass you like you know yeah this may not be as good but it’s still gonna do the job 90% and if that’s their argument I’m okay with that argument. I still think it’s why wouldn’t you want to have the bridge offshore like why wouldn’t you but I’m okay as long as the client is aware of that what bothers me is when the clients not told that when they’re when they’re misled into thinking that somehow it’s as good as sliced bread and it’s not quite you still have to slice that.
Buck: What are the, if any, what are the critiques of the bridge versus you know just doing a straight up fact I mean are there are there you know people out there who say you know I don’t think it’s a good idea to a bridge and you know what are their arguments if they do that?
Doug: Yeah yeah there are people out they’re almost exclusively people that sell one of the other two things. I haven’t found anybody that unbiased Lee has said in fact all the unbiased people I talked to are other attorneys and their their comment is overwhelmingly oh my god this is great, this is what I want to represent
Buck: And if it’s work I know I should just add to that too you just said something I think is critically important: it’s been tested it’s not like this thing is you’ve not you know that it’s a theoretical thing you’ve used it multiple times in the last two decades.
Doug: Oh yeah, no, upwards of a hundred times I mean I have I have we have used it a lot and remember once we cross the bridge, we’re not a bridge trust anymore right we’re a FAP, we’re a foreign asset protection and it’s back dated so it’s not dated as of the original registration day.
Buck: And so there’s not a fraudulent convenience issue.
Doug: Rright so but the criticism is oh well you won’t have time to trigger the bridge. That has only proven to be true if guys with three-letter yellow initials and windbreakers come into your office, that is the only time that’s proven to be true and I tell clients hey if there’s a chance that three-letter governmental agencies in windbreakers and SWAT teams are coming into your office grabbing your computers and threatening you with jail bridge trust is not the tool we want to use for you or if it is, just no it’s not gonna work we will not have time. If they slap a temporary restraining order on that kind of client then the bridge trust is done, we’re not we’re not gonna trigger it. But let me tell you that’s actually been a benefit I have had clients in that exact situation and I’ve told them look if that happens, this is not working there’s no asset protection feature whatsoever to it if that’s what happens and that has happened and the client has called me and the net result was actually in the favor of the client because we didn’t have it they were able to stay out of jail it simplified their case, the criminal attorney that I spoke to was absolutely overjoyed that it wasn’t offshore because he said this was offshore this guy was going to prison.
Buck: Why would that have been?
Doug: Well because once you once you go offshore, one your optics change the optics of offshore is not good in general it’s considered a little bit fishy, it doesn’t play well with a judge or a jury to say yeah well he’s got all you know all these millions of dollars sitting in this foreign trust, it plays poorly and that’s a consideration. Now sometimes we’re okay with that sometimes we’re okay if it plays poorly. If it’s a normal lawsuit where there’s not a criminal component and not a govern agency involved, I don’t really care if the judge doesn’t like the looks of it. If we protect the assets we’re gonna get this thing settled.
Buck: So if you’re a criminal the bridge might not be the best.
Doug: If you’re a criminal, don’t call me. If you’re a criminal then I don’t want to do the bridge trust or the foreign trust. I don’t want to do a bridge. But if you’re just in an industry that’s targeted, and I do have clients that are in the industries that are targeted they’re not illegal but they’re not liked, then we are very we look very closely at this entire situation and usually for those people we just go with the foreign asset protection trust or we go with the bridge knowing that the bridge in that case the bridge is not gonna help but I will tell you having the option in 99.9 percent of the cases is where we’re not talking about the government coming into your office in windbreakers, the bridge is giving you the flexibility to make those choices.
Buck: Let me ask you one more question here about you know many of people in our group because we have this Investor Group, our accredited investor group yeah primarily passive investors through limited partnerships and so but you know they you know some of these people are millions of dollars of interests as limited partners, you know so say they have something coming externally, what are some of the suggestions for these kinds of people who are invested primarily is limited partners, because in this scenario say for example you have all your interests in you know from that limited partnership or from that holding company that’s owned by a bridge or a FAP or whatever, in that scenario you may not have you may not have the ability to sell those securities because you don’t control them so you can’t liquidate them. And then I don’t know, maybe you could still get some sort of loan against them, I don’t know maybe you could sell them, I don’t know, but can you address that kind of an issue because that property affects you know a lot of people in our group.
Doug: Sure. So I’ll just give you a quick history of Lodmell & Lodmell. The other Lodmell is my father, Gary Lodmell. He became an asset protection attorney because before he was an asset protection attorney, he was a real estate syndicator in Arizona in the 80s. So Arizona in the 80s early 80s they would got do raw land and he owned swaths of Chandler and places now that are completely developed. He saw it. He was the guy that literally knocked on the farmers door and said hey you know would you be interested in selling this land and the farmer said what’s the price? So buy by the acre and then ultimately sell by the foot. The returns are big but you have a long waiting period in there in eighty six if you remember Reagan came in and he changed the tax code and he got rid of the depreciation benefits of being in a a you know a limited partnership and it threw the whole industry into complete chaos I mean it was just chaos and so what happened is a lot of his clients had serious financial troubles and their creditors started coming to him as the General Partner of these syndications and saying I want this guy’s limited partnership interest and what he was able to say to them is sorry he doesn’t have any right to it he has no right to demand that because he’s a limited partner so you can get a charge against that interest that’s what Arizona law provides for but you can’t get the interest in you don’t get to become a partner. And so who’s my father friendly to the investors that have been with him for years or the creditors he’s friendly to the investor so he didn’t he first of all this was raw land it had a long time frame anyway it just you know there was no horizon where the creditor thought this was gonna be a quick payout. He watched every single one of his clients settled with those creditors for pennies on the dollar. He was so impressed with that happening that he actually started going, well what if we did this for real, what if we actually did this on purpose for the purpose of asset protection he traveled down to Belize which just enacted a statute mirroring the Cook Islands statute he started researching. That’s how he became an asset protection attorney because the limited partnership interests were so good at protecting client assets even without the foreign component. So I say all that to come back to your question what about all the investors where they have limited partnership interests well first of all those interests are already pretty well protected because they don’t have any right to demand that money, the general partner has that right and the general partner is definitely friendly to them. So not saying it’s a guarantee that there’s not going to be a distribution if the partnership dissolves the real estate sells and there’s got to be a distribution well it’s got to be a distribution. However, if the member of that partnership is the holding company owned by the bridge trust guess who that distribution goes to goes to the holding company which in turn goes to the bridge trust so that’s a much better place to have that distribution pointed at than the individual investor. So my recommendation to all those people is that yes you want to get your name off of that limited partnership just in case you do get a creditor and they are willing to wait until that partnership distributes. Have it into your asset protection structure.
Buck: So in that case, just to just to review kind of what you said the because you’re in a bridge well that’s not that eventually may become liquid but by that time you’ve already pulled the trigger and you’re foreign and so when that you know whatever partnership that you had if you get some sort of divestment liquidity event that’s gonna go to the foreign account, so you’re you’re in good shape.
Doug: Right yeah I mean if we’re in that kind of situation we’re gonna go ahead and trigger the bridge it’s going to notify the investment partnership please make any distributions to the bridge and the bridge is gonna send wire instructions saying make them here in Switzerland. So when it finally does distribute its gonna go there. Now the creditor here can try to pierce the veil and do all sorts of things but now we’ve just made it massively more difficult and again a huge chunk of the asset protection, you said it earlier Buck, it’s about making yourself so difficult so unattractive that you can put the table back to if not level tilted in your favor so you can get this thing settled, I mean if you have a real debt, settle it. You know the number one way to solve a debt problem is to pay the debt, that’s the best way to solve a debt problem. Now you don’t have to pay it for full value you can pay it for 10 cents of value. Asset protection is designed to enable you to get that debt settlement it’s not it can tell it can be used to tell the other guy to pound sand but that’s only about 10 percent of the time, the rest of the time we’re using it to settle the debt.
Buck: Right. Great well this has been I have to say I think I feel like I understand it even a lot better than I did before. Doug the paper we’ve already sent out, well certainly by the time this is gone out we’re going to send it out. We’re gonna put it on wealthformula.com as a real estate asset protection download if you want that, but also tell us how cuz there there are plenty of people who need some help here. By the way a lot of people think they don’t. I’m talking to doctors all the time and they’re like I got insurance, I don’t need this, I mean they won’t listen but maybe you can address that and then tell people where they can get ahold of you.
Doug: Well okay so I’ll just that there’s three things that I think comprise someone’s need for asset protection. The level of assets they have so more assets you have, so the more you should probably be consider protecting them, the level of risk that you have in your life, so the more risk the more things you do that create and cause risk the more you should probably protecting and then number three is the most important, your personal level of risk tolerance and that’s the one that really matters. So I’ve got clients with just a tiny amount of money that have spent you know a significant portion of it to protect that tiny amount of money because their risk tolerance is virtually zero, they can handle no risk they have to keep this money. I have other clients with obscene amounts of money that are so risk tolerant that they don’t really see asset protection as a need because they can handle almost any kind of risk. So what I would encourage you to do is not be just an ostrich sticking your head in your sand saying it’ll never happen to me that’s unrealistic. It may never happen to you but if it does it’s much better to say hey I can handle the risk. So determining whether you need this or not my advice is talk to me or talk to someone like me that you can go over it with me and I’m happy to talk with any of your clients. The best way to reach me is just email me [email protected] my last name is Lodmell and that’s also my website which is lodmell.com. There’s a ton of information in my website, tons of videos or you can call and schedule an appointment. You can call our 800 number: 800–231–7112 just say you heard me on Buck’s show and you want to schedule an appointment. There’s no cost if you’re coming from Buck’s show I and we’ll sit down well it’ll take about 30 or 45 minutes on the phone we’ll just go through it all. If it makes sense for you to have any kind of tools or or there’s some benefit I’ll tell you what it is, and if not I’ll say well you know what you’re good you have a home in Texas and you’ve got a 401k plan you don’t need any additional asset protection if that’s the only two assets you have. Sometimes just knowing what you have that’s protected and what’s not is a huge relief so I’m happy to talk to anybody.
Buck: I should also point out that Doug did a full asset protection webinar for us sometime last year and and that is also on wealthformula.com and that’s also nice way to reach out to Doug if you want because the I just forward all those anybody who downloads that over to Doug. Doug thanks and thanks again for being on wealthformula.com and it’s always a pleasure.
Doug: My pleasure Buck.
Buck: We’ll be right back.