On today’s episode of The Real Estate Nerds Podcast, Jason Hartman joins our intrepid host and attorney Scott Smith take an inside look at what a conversation between a seasoned real estate professional and asset protection attorney actually looks like. Jason has been involved in over 1,000 transactions, and because of that alone, has been involved in lawsuits. Tune in to hear a fascinating discussion between two high level professionals, effectively giving you a peek inside their world.
Listen To Episode 32 of The Real Estate Nerds Podcast Now
Jason Hartman and Scott Smith on Asset Protection for Real Estate Investors
Jason sits down with Scott to discuss his background for context on their legal discussion. The two investors share some realities about lawsuits and asset protection in a lively question-and-answer format.
- [2:00] Jason began investing in his first year of college and has over 30 years of investing under his belt. He is now considered the most expert on his niche.
- [03:12] The two investors dive right into a discussion of litigation, liability, and the world of real estate lawsuits. “Liability doesn’t come from where you think it does,” Jason explains, pointing out that he hasn’t handled disgruntled tenants but has instead had to initiate litigation against representatives stealing client lists and other less expected legal clashes.Jason shares about litigation from the plaintiff side, explaining most investors don’t understand the liability and risks of being a plaintiff. He is blunt about the obligations of attorneys: “When your lawyer doesn’t do their job, you can get in trouble. It’s amazing how much liability a bad lawyer can create for you.”
- [6:00] Jason brings up compartmentalization in the context of the Series LLC. Scott points out additional benefits “You can create one company that can have as many “children” as it wants. The children all have full liability protections…You have an infinitely scalable design that makes a lot of sense for real estate investors above everybody else.” He also points out the fatal flaw of holding multiple assets inside of a Traditional LLC, as well as the fact that there are no additional costs for operating the far more effective Series LLC.
- [8:31]Scott shares his top picks for the best states for forming a Series LLC: Texas, Delaware, and Nevada for their strong asset protection laws. Wyoming has strong asset protection laws, but no formal Series LLC legislation or options yet. Fortunately, investors from any state can take advantage of the Series LLC.
- [9:30] Scott discusses how easy it is to create a new child series, or company, in minutes for free on your Another FAQ Jason presents: Do you need separate bank accounts for each series to remain protected from merging? Scott’s answer–and insider tip on avoiding comingling easily through simple banking and bookkeeping–may surprise you. He offers a method for using a Series LLC with a single bank account.
- [13:50] “I spent the first half of his career, creating wealth. Now I spend most of my time managing it,” Jason tells Scott. Jason shares some of the challenges he has experienced. He brings up banking regulations and the real-life impact of legislation such as the Patriot Act. Managing entities can be equally complicated, but he is interested in the Series LLC because it makes it easy to manage your real estate business. He asks Scott about which states are the least hassle.
- [15:27]Scott confirms that he uses Texas Series LLCs in part because there are no ongoing fees, and only a single filing declaring “no taxes due” annually. There are no tax obligations beneath the first million dollars worth of income, which can be “chopped into entities to spread out anyway.” Scott’s firm, Royal Legal Solutions, also provides compliance and check-ups to asset protection plan and follows current evolving law for a flat fee. In addition to creating Series LLCs, Royal Legal Solutions gives clients the option of outsourcing maintenance. Scott has built up the Royal Legal Solutions staff to be as authoritative on these structures as he is.
Asset Protection Essentials: Series LLCs, Shell Corporations, Trusts, and Understanding the Business End of Lawsuits
- [18:00] Jason asks if the Series LLC is a common starting point for his clients’ asset protection plans. Scott states that for most investors, he uses a two company structure: a Traditional LLC operating company and a Series LLC as an asset-holding company that does absolutely no operations. The liability is insulated within the Traditional LLC, which owns nothing at all. Because an effective Series LLC is an asset-holding company alone, it does no business with the public to perfectly separate legal liability from the assets themselves. He advises doing all business with the public “If anyone sues you, the either get blocked by the shell corporation or the problems of suing you personally, because you have nothing to take.” Jason asks if this means the Series LLC is a special purpose vehicle. Scott quickly recaps: “A shell corporation is an entity that handles operations but doesn’t own anything.”
- [22:03] Scott mentions how these companies are technically owned by the investor’s estate plan in the form of an estate plan, that keeps your estate plan up to date as well as offering yet another layer of asset protection. Further, the investor’s assets won’t get caught up in probate court in the event of their passing. Scott clarifies the difference between a living trust, which does not protect assets, and a land trust which does protect assets when used with the Series LLC. He also points out the value of using anonymous trust structures to create anonymity for the investor. The way Scott sets up these anonymous land trusts also happens to be protected by attorney-client privilege, further preserving the client’s anonymity. The two investors touch on some other issues about trusts, including the benefit of pass-through tax treatment.
- [26:45] Scott redirects the focus onto how Jason addresses his legal strategy. Jason advises investors to “Really pay attention to insurance.” He highlights the importance of good insurance, vigilance about how insurance companies operate, and maintaining anonymity. He also gives an example of unexpected liability when he brought an action against a seller who defaulted on their contract. “I love the law,” Jason states sincerely, “but these arbitrations operate outside of the law. That’s what’s really scary about it. They’re a private kangaroo court with no public record.” Jason’s own arbitrator had a massive conflict of interest which he failed to disclose. Jason lost the arbitration but a judgment was issued–against him, complete with trumped-up legal bills.
- [31:00] Jason ended up taking his conflict-of-interest case against his arbitrator, who essentially represented the opposing side. He also shares about an alarming discussion he had with their collection attorney who knew the exact balance of a bank account the attorney couldn’t touch.
- [33:00] Scott shares a brutal reality of the business of lawsuits. “People think lawsuits are about truth and honesty. Throw that way out the window. They’re 100% about who has what information and leverage.”
- [34:00] Jason mentions his effort to help investors resolve disputes while staying out of court and arbitration–totally free of charge. It’s called FreeCourt.com, and is free for anyone to use. The system uses anyone who wants to participate in a crowd-jury, rather than a conventional jury.
Connect With Jason Hartman
Connect with Jason Hartman through his personal website, JasonHartman.com. He researches and advises investors on markets and also hosts the Creating Wealth Show. He also has an upcoming event in Hawaii–a 2 day conference in November called Profits in Paradise. All of the conference details are on his website. Scott Smitha may be dropping in as a speaker.
Thank you for joining us on today’s episode of the Real Estate Nerds Podcast. For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook.
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Hosted by Scott Smith, Lead Attorney and Founder of Royal Legal Solutions
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About Jason Hartman
Jason Hartman is a successful real estate investor, author, speaker, and podcast host who owns property in 11 states. He is the CEO of Hartman Media Company and JasonHartman.com, where he has authored 11 books and is the producer of 15 podcasts, including the popular Creating Wealth Real Estate Investing Show. He is dedicated to educating investors on the economy, markets, and strategies for how to create positive cashflow from income property investments. Jason is also started The Jason Hartman Foundation to provide Financial Literacy for Youth. His work has been featured in Forbes, NPR, MarketWatch, Investor’s Business Daily, The Wall Street Journal, Realtor.com and many more. For more information, learn more about Jason from his full biography on his website.