When do I need my first LLC? When do I need a Series LLC? Do I need a Delaware Statutory Trust?
When should I implement more advanced (and potentially more costly) options like domestic asset protection trusts or foreign trusts?
It's hard to make the best asset protection decisions without understanding your options. That's why Douglass S. Lodmell says it all starts with education. A lawyer with deep experience in estate planning, taxation and strategic asset protection, Doug got his start by watching his father, a real estate syndicator and lawyer who was one of the first attorneys in the country to use offshore trusts. Doug joined him in 1997 and together they began offering clients seamless asset protection structures that used both the domestic and offshore tools in simple and effective ways.
Doug says the first step in helping investors is determining their risk tolerance.
“I have clients that have massive amounts of assets and lots of risk, but their risk tolerance is so high, they’re only semi-motivated to seek asset protection," Doug says. He has other clients who are extremely motivated because their risk tolerance is low.
Helping them understand their options so they can make an educated decision is key.
"I find if you give clients the data and let them make their own decisions, they make good decisions about their own life."
So, as an investor, how do you determine your risk tolerance?
“If you don't know your risk tolerance, then you need to assume that it's low,” Doug says. “It’s just like taking somebody to Vegas for the first time. How much are they comfortable pulling out and losing right now? If it’s a hundred dollars, okay, great—that's your risk tolerance."
While every investor has different needs based on their situation and their risk tolerance, good fundamental planning has elements that are universal. For example, if you're buying a rental property, it needs to go into an LLC.
In fact, if you're in the business of real estate in any capacity, then you need to use LLCs. However, how you use those LLCs will depend on your unique situation. Here’s an example Doug gives in the video linked below:
Say a real estate has 10 properties in her portfolio and the total equity between the 10 properties is $1.5 million. How many LLCs does she need? She may want 10 (one for each property) or she may want a single LLC (with all 10 properties in the same structure).
“How much would she feel comfortable exposing to any one risk, inside of any one basket, out of her $1.5 million? (The answer is) usually somewhere around the $250-400,000 range. So if we broke the $1.5 million up into $400,000 tranches, let's call it four LLCs.
"That's where the risk tolerance conversation comes in," Doug continues. "It's just helping them understand how to maximize the protection but not overkill on the amount of maintenance they're gonna have to do."
What kind of maintenance is involved, exactly? It could be the amount of time it takes to manage the entities, or it could be the associated yearly fees.
"You can do single-member LLCs held by a holding company or series LLCs. So the cost for additional LLCs is minimal. But if you have a group of assets that are fairly low-risk and they're well insured, you don't need a separate LLC for each $100,000 rental home that you have. Why bother? Because even if the costs are minimal and there's no separate tax returns for each LLC, having too many LLCs might be overkill.”
As with many things in life, it's all about balance.
“So clearly domestic is the first part you build," Doug says. Once you have enough value in assets, whether it's in one LLC or multiple LLCs, you really should look at a holding company. The holding company concept is powerful because it gets things consolidated."
Even though your CPA is charging you for each tax return, they don't like to do more than necessary. So the LLC with holding company consolidates your tax reporting and simplifies things.
You should start looking at a trust somewhere between a half a million and $1 million worth of net equity—in other words, exposed equity value.
"Once we get to $1 million I really think you should be looking at some type of asset protection trust on top of the holding company and the underlying LLCs. Beyond $1 million I decline to take a client for (setting up an LLC and nothing else), especially if they have 2 or 3 million dollars of total assets and they just want to do an LLC and a holding company. I'll say I just don't feel comfortable because it's not enough protection. Or I'll do it with the very clear caveat that this is not my recommendation and they really need to have the trust on top of the domestic structures. As good as (those structures) are, they're domestic and they're still subject to the U.S. courts and the discretion of a judge. And if you have been around long enough, you'll have seen crazy judgments from crazy judges.
"When you're dealing with someone's entire life's work, messing that up and having them lose their money is not something you want (as their attorney)," Doug continues. "So once they're above that $1 million dollar mark of taxable equity—not total market value but equity (after the mortgages have been deducted and we're really looking at what the asset values are worth)—you really should be looking at the whole thing."
How does Doug help his clients see the value of strategic asset protection?
“You're spending money on some paper that you somebody told you you need," he says. "And now it costs you even more money to maintain, because now your accountant has to file more paper for the paper that you created. Do I really need this stuff?"
The answer is most likely a resounding, "YES."
"I had one client from California who's been doing real estate his entire life," Doug says. "And the way he started was just buying property in his own name. And after 40 years of doing that, he had tens and tens of millions of dollars in real estate in California—all in his own name.
“He did it that way because he didn't know any better. Today that would be insane to start like that because you're effectively risking your entire net worth and hoping that you don't have a bad day.”
"Most people understand the litigious nature of society. The fact is, lawyers are out there trolling for clients with billboards and ads and TV. Your tenants are are being trolled all the time for all sorts of lawsuit opportunities. The cost of you worrying about it is more than the cost of setting it up and maintaining it."
There's a tipping point for most investors where they suddenly see the value in protecting what they have. When they're just starting out, they don't have any money. So they're not worried about losing it.
“Then you buy your first house," Doug says. "You're still not worried because you're in your old mindset. Then you buy your second house, say a fix and flip, and and you say ‘I'm going to keep that as a rental.' The next thing you know you look up it's 10 years later and you've got $2 million worth of properties, you're married, you have two kids and all of a sudden it kind of hits you—'Oh my God I have something worth protecting!'
When you're worried about losing your money, you can't make as much money. Give a kid a piggy bank and teach him to put money in it and he will learn to save. Give the kid money without a piggy bank and he has no awareness; he won't ever focus on putting those coins away for later.
Getting good information is key. Know what experts can do for you. They can filter out information and give you the nuggets of wisdom that help you with your situation. Remember: information nowadays is free; the Internet is full of it. But to get it distilled and curated so that it's valuable to you—that's where experts come in. So use them.
“The most successful people I know have a team of experts around them. They rely heavily on those experts and they make sure they know how to advise them. We distill that information. We give you what you need to know without you having to go to law school and do the research and keep up with all the journals and constantly read the cases. That's our job. If we can be helpful in that then we're doing our job and believe me, it is more than worthwhile for you.”
“I once had a pilot tell me, 'They don't pay me to fly the VIP of these companies $250,000 a year to fly a jet for a two-hour flight. They pay me for the 20,000 hours that I've already flown because that makes me a safe pilot. I know how to handle the emergencies.
"It's the same with your experts. You're not paying for the piece of paper. You can get that piece of paper online at LegalZoom or somewhere else for virtually free. You're paying for the expertise to know if you need that piece of paper and how to use it to protect your assets."
For more information on Asset Protection Planning using The Bridge Trust® visit www.lodmell.com
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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