How is it that after 300 years of doing it right, did the U.S. legal system shift to a “sue happy nirvana?” It happened when well-meaning, but misguided judges, decided society could sue itself to their hears desire. This opened Pandora’s Box to a new breed of aggressive, hard-nosed and money-motivated attorneys attracting nothing to loose potential litigants on purely commission fees. This was the stat of “predatory-attorneys” into the U.S. legal system, and created a new era in or legal history that we must protect ourselves against. Everybody with a gripe wants to sue somebody and have them pay for it.
Asset Protection is Alive and Well
Fellow attorney Reed Scott says it great “Estate Planning is Dead! Asset Protection Planning is Alive and Well.” Death and taxes is not the threat that is destroying modern wealth, it is the American people, and the weapon being used is litigation. Thirty or forty years ago you may have gotten by with a traditional estate plan such as a revocable living trust. But traditional estate planning is 100 years behind the times and only addresses death and taxes. Almost everyone is concerned about taxes eating up their children’s inheritance at their death, yet almost none of them need to be concerned about taxes. Over the last decade, the estate tax has essentially been eliminated for most Americans. The reason this is not an issue for most people today is that the estate tax credit per person has risen to $5.4 million per person, and was again risen to $11.8 million per person in 2018 ($22.36 million per couple.) Yet most Americans and investors still believe this is something they need to be concerned about rather then our out of control litigious legal system.
What Asset Protection planning does is level the playing field by combating this out of control predatory system by controlling what you can control, how collectable you are. What asset protection lawyers do is create a sort of “legal bunker” or moats around your castle by using existing legal tools that act as a shield against predatory lawsuits and the abuse tort system in the U.S.
Some of the most important of these lines of defense are: liability insurance, mandatory arbitration / ADA, and other crafted legal tools that provide hard-to-crack shields against the threat of litigation, such as: LLC’s, Family LP, Corporations, and Asset Protection Trusts.
Everybody has heard of Limited Liability Companies (LLC). They are a great entry point. The function of a LLC is to separate and compartmentalize the client’s risky assets into protective entities by taking the assets out of your own personal name. As one of my colleagues Doug Lodmell states “An LLC is an upgrade to the C-Corp and its baby brother the S-Corp.” The LLC created an ownership class of ‘members’ instead of shareholders. What this means is no shares of stock that can be seized by a court. This makes it much more difficult for creditors to reach the assets of the LLC held by the member. The LLC also allows for the membership interest to have severe restrictions on them in the case of a creditor trying to reach assets. This is called a limited remedy of a charging order. This was a huge benefit. The LLC also solved the double taxation issue of the C-Corp by being a pass-through tax entity. The restrictions on ownership that plagued the S-Corp were also solved. LLC membership interest may be held by individuals, companies, limited partnerships and even other LLCs. Sounds pretty good right?
The net effect is that the LLC was such a massive improvement that it quickly gained popularity and by the 1990’s almost every state followed suit and created their own LLC statutes.
Real Estate Is Different
But Real Estate is different, and like everything, there are negatives to the LLC, especially for real estate investors in the U.S. legal system. Nothing in life is always sunshine and rainbows. The LLC does have a few limitations and drawbacks. States have begun to differentiate themselves to just how serious they are about the asset protection they offer. Some states are termed “asset protection friendly” such as Delaware and Wyoming, others are termed “unfriendly asset protection states” such as California and New York. As case law develops we see courts disregard the “charging order only” remedy and directly reach LLC assets. One example is the Olmstead Case in Florida. Some States, especially California, have shown a consistent propensity to disregard the asset protection features of all types of legal entities. There is always a very real concern that a judge may simple disregard the LLC and determine that it was the “alter-ego of the member and bypass the LLC statutes all together. This is what I talked about in a prior article titled “Sue Happy Nirvana and Asset Protection” and the difference between a judges ‘actual authority’ versus a judges ‘practical authority’. Judges can and do essentially whatever a judge wants to do under the protection of equitable remedies.
As I mentioned, an LLC is a great first layer of protection and entry point. They are affordable and you will get some limited personal liability out of them. But they are just “maybe” protection. As the title implies, the protection is “limited,” not absolute. A “maybe” is anything that you use to try to protect your assets with that is not an absolute exemption, for example a homestead, or has the power of “statutory non-recognition.” When solely relying on LLC’s for protection, as you can see most of the protection that you thought you were getting is “limited.” There is no guarantee a court will uphold the protection of an LLC or LP. Maybe they will be upheld or maybe not. It all depends!
What is Missing
What is missing with the LLC is the full strength that you are looking for if protection and peace of mind are important to you. This is accomplished by first maximizing and picking up all of your State and Federal exemptions, and then adding the missing offshore component. The power that comes from statutory non-recognition of other countries court orders that you receive from a Cook Islands Foreign Asset Protection Trust.
As Lane Kawaoka – the host of Simple Passive Cash Flow says “LLC’s and Series LLC’s are fine when you are just starting out or have a net worth below $1 million, but when your net worth gets at $1 million or above you will want something different. And quite frankly those LLC’s and Series LLC are kiddy stuff. They work in theory and are not entirely full proof… Get the bazooka of asset protection.”
By: Brian T. Bradley, Esq.
HNW – Asset Protection Attorney as featured on BiggerPockets Rookie https://podcasts.apple.com/us/podcast/dont-lose-your-portfolio-to-lawsuits-heres-how-to-protect/id1499646507?i=1000532349196