We’re going to break everything down, from your personal to your business assets. And I’m going to show you how to create an asset protection structure barrier.
The legal instrument for asset protection is the asset protection trust, with its pros and cons, and one of its subtypes which is the irrevocable trust.
Well, whenever I sit down with a client, what I’m looking at is all of their assets. And there are four areas or segments
Personal Asset Protection: The Living Trust
The main tool we will analyze here to protect personal assets is the asset protection trust.
You have personal assets that are unrelated to your business. They are for your personal use or for the use of your family.
Your personal assets are your car, your motorcycle, the checking account you have, because from there you perform the payment for utilities, also non registrable assets like your computer and so on.
We include jewelry that you or you wife use, a painting you bought.
The most important personal assets are however, your home, your personal residence and your retirement accounts, IRAs, gold IRAs, annuities.
Your life insurance and your homeowner insurance are two entities that we must include inside your personal assets.
So those assets are unique in the sense that we do not business entities to protect them and they are on our name.
However, we can seek protection for these personal assets through a living trust. This is actually an estate plan.
Your living trust is going to make sure that everything I’m going to put therein gets passed on to your beneficiaries and not to any creditors, or any third parties.
Right? Make sure that they receive them. And when they inherit them, if they’re going through a lawsuit or a divorce, it’s not going to go to creditors. It’s not going to go to an ex-spouse, and make sure that your kids stay on the right track.
Make sure that when you pass away, your spouse is left behind,your spouse will have complete control over everything.
So you don’t have to go to court. You have to deal with attorneys in order to gain control over the financial account.
So the Living Trust, it’s the most important entity you’re going to set up.
Now, to end with this part, and from a tax perspective, all those trusts are going to be ignored for federal tax purposes. Still in the personal segment or quadrant we have the residence trust. The residence trust is different from the living trust.
Personal Asset Protection: The Residence Trust
And just as that may imply by its name, you’re going to put your personal residence into a residence trust.
So the Residence Trust is designed to protect your personal residents,to get it out of your name.
And why would I want to do that?
Because if I’m sued and somebody gets a judgment against me,then what they could do is they could take that judgment and record it in the county in which I live.
And if they recorded in that county, then the judgment will stick to my house.
And if I try to sell or if I try to refinance that property, my creditors are going to get paid. So what I want to do is I want to get my property out of my name.
So that if somebody did get a judgment against me, it wouldn’t stick to my house because it’s now in the name of a trust, the special trust we call Residence Trust.
And now it gives me the ability to sell, gives me the ability to refi, and I wouldn’t have to pay a creditor.And the best thing about a residence trust as well is it provides anonymity for you.
So if there are crazies out there that may be customers, you don’t want them toknow where you live. They can’t just search you online. That’s why you want to use the residence trust.
Personal Asset Protection: The Self Directed IRA And A Solo 401K
And then the last thing we’re going to look at in this personal segment or quadrant would be either be a self-directed IRA or a solo.401k
And the reason why I’m going to do that is for my retirement assets.
I’m a strong proponent of this. If you have an IRA or you have rollover funds with a prior employer and a 401k plan, I would tell you to seriously consider setting up a self-directed IRA or solo 401k because with those types of accounts you have control over them, meaning that if you want to invest in something other than equities, you can do so because these types of plans allow you to buy real estate, buy crypto,buy notes, invest in syndications, do the things that the Fidelity and Schwab they’re not going to allow you to invest in because it’s on their platform and you’re using their plans.
So these are great because opportunities come along like this, great opportunities that is. And if you’re not ready to take action, you can miss out on those.
So if I see a deal that I want to take down. I don’t have enough cash in my own name, but I have enough cash in my retirement account.I can make that deal happen thanks to my retirement planning and asset protection planning.
Now, to think about what I’ve just shown you here, all of these items are trusts (living trusts and residence trusts are well, trusts) and a self-directed IRA, a gold IRA, and a solo 401k, although they don’t have the word trust in them, they are trusts.
So for your personal assets, you will be using various forms of trusts to provide protection for these types of assets. Okay.
No-Risk Investment Segment: Protection Through A Wyoming LLC
So that brings me to the next quarter,No Risk Investment which is going to be the no risk investment quadrant.
And these assets that go into this quadrant, do not create liability for you, meaning that you re not going to be sued. It’s not like real estate, which we will study well below.
Here we are dealing typically with intangible assets and the threat is always going to be you. You’re the risk for these assets.
So what type of assets are my referring to here? No risk investment assets: your savings account. And this one is something that oftentimes throws people off because they think, hey, I have a personal savings, I’m going to put it in my personal quadrant.
No, you don’t put your personal savings over here in the personal quadrant, because if I had $80,000 in a personal savings account and somebody sues me, that’s $80,000 they could potentially get by a garnishment of that account if they get a judgment against me.
What that means is that if I they get a judgment, they just take that judgment. They go to the bank, Wells Fargo, whomever I have my account with and they say, Oh, Mr. Kunz has a savings account here, we’d like to garnish it. The bank would then take that 80 K and pay it to my creditor.
It happens far too often where people leave money in their personal savings account and they’re involved in a lawsuit and then they lose that savings account. So you got to protect it.
No-Risk Investment Segment: Stocks And Bonds:
Apart from savings account, we have stocks and bonds.
So it’s going to go over here on the no risk side, stocks and bonds. So if you have a trading account,you put your trading account over here into this no-risk investment quadrant as well.
Now, I’m not referring to the ones that are in your IRAs and solo. For one case, what I’m talking about is your personal brokerage account, the stocks and bonds.
Crypto too. That would be here if you invest in crypto metals, right?Things like that, stamps, collectibles, would be over here. Other things I would think out, syndications,
Also, private notes, and lending.
In all these cases, anyway, my main concern,again, is that if something happens, I engage in, say, a lease and I break the lease and I get sued, or if I’m in a car accident or my children are in a car accident and they try to say it’s their fault and they sue us and they get a judgment against us, these assets are now at risk.
So there’s lots of different ways personally we can end up in litigation. And I want to make sure that if there is an unfavorable outcome as a result of that litigation,that my wealth on the investment side, (the no risk investment side) cannot be used to satisfy my creditors claims.
The way I’m going to do that is I’m going to set up one entity for all of this and that one entity right here will be a Wyoming limited liability company.
All these assets on the no-risk investment side will be in a Wyoming LLC: This company will encompass saving accounts, stock and bonds, cryptocurrencies, metals, stamps, collectibles, syndications, lendings, private notes, and so on.
Now, why am I saying Wyoming?I get a lot of questions from individuals they want to know. Clint, you talk about Wyoming. Why not California or Oregon?Nevada, Delaware.
All right. So there’s a several reasons why I like to use Wyoming.I’m going to show you what those are.
But keep in mind that what we’re doing here is we’re putting all these assets into this entity which you will own.
And we’re doing it to ensure that if somebody sues you personally and they get a judgment against you,they can’t take that judgment for whatever that amount is and then use it to collect on all of these assets held inside the no-risk investment area .
So we got to make sure it’s protected from our creditors.
I also want to make sure that if there’s a judgment entered against me,they can’t take my LLC from me.
This point is obvious:
What’s the point of having this LLC architecture if all they have to do is say, Oh,you can’t take the assets inside of the LLC, but you can take the LLC. If you take the LLC, then you get the assets.
And now additionally, as an additional requirement I have, is I want to make sure that a judge wouldn’t order me to appoint a receiver over my company
Because if that happens, that receiver would sit there and oversee everything that’s going on inside of the company,
So we want a legal structure that is simultaneously going to protect my assets, keep these assets away from my creditors, and keep them away from receivers.
And more importantly, it’s not going to disrupt my investing, my life, and my wealth.
So this is why I’m going with Wyoming.
Number one reason why I like Wyoming, it’s because they have what are called charging order protections,and their charging order protections are what we call the exclusive remedy.
So here’s the first reason why we like Wyoming as a limited liability company.
Wyoming LLC has what I refer to as strong charging order protections and the exclusive remedy.
Now, if you’re not familiar with this term, become familiar with it,because whenever you set up an LLC of which you’re going to be a member and you use any service, attorney or Legal Zoom to create your structure.
And there you will talk to someone. You have to ask them:
Hey, does this entity have strong charge in order to protect us? And is it the exclusive remedy available to a creditor?
Now, if they can’t answer that question, then, you know, you’re probably not working with the right type of professional to set up your asset protection structure,because what that means, if you have strong charging protections and that’s the exclusive remedy,if someone sues us and they have this judgment against me, then they have no options, meaning they can’t break my LLC,get into my assets, everything that I just covered above, breaking the LLC, taking over the LLC, appointing a receiver, none of that’s available to a creditor with this structure
Now a lot of states allow creditors to do those certain types of things just discussed above.
California, for example, you can break an LLC,you can take the LLC, and get a receiver appointed.
And so as you know, it kind of begs the question, why even set up an LLC in California and try to use it to protect my assets from creditors? Because there’s really no point.
But in Wyoming the way the law is written is that a creditor is only entitled to a charging order.
And what that means is that if they get this judgment,then any money you take out of the LLC as a distribution.
So if I take out money as a distribution to myself.
Now, a distribution is a payment from the limited liability company to its member for being a member.
So we’re distributing assets to the owners of the company and you label it as such.
So if I take out a distribution, then that distribution, would have to go to pay off my creditor until that judgment is completely covered in its amount and thus the creditor is satisfied.
So if I took out 80 grand and there’s a $200,000 judgment against mewith a charging order on my interest, then I’d have to keep paying the money that 80,000 to them until that judgment is satisfied.
So that charging order is like a lien on my interest
If they entered a charging order against you or on your LLC interest,what they would tell you is that: “Hey if you pull any money out as a distribution, pay it to your creditor until his satisfaction”.
So by having a Wyoming LLC, it offers strong charging protections. A creditors only remedy, exclusive remedy then, is to get this charging order that says: “If you distribute, first you have to pay your creditor”.
But that is it with the charging order. They can’t break my LLC, they can’t do anything else, they can’t disrupt my life.
So that puts me in a position where I can continue to invest because I have assets to invest.
Many times I’ve heard from people who will say, Well, that doesn’t make any sense. Why set up the LLC if you can’t take any money out of it because it’s going to go to your creditor if you do it?. So it’s locked inside of there. I get it.
But ask yourself this question:
Would you rather have an LLC with assets than no assets or LLC to worry about? I think the answer there is pretty obvious. I’d rather have this LLC with the assets.
Alternatives To Distribution In A Wyoming LLC
Now you think I’m going to lock up my assets inside of an LLC? If I had a judgment against me, never have access to them?
There are other ways to get the money out. It’s just not through a distribution.
So let´s see. How could I get money out? I know I could loan money to myself. This is my LLC, right? I’m the member and I’m the manager and I want to take out a loan. I’m going to give myself some really good terms on that personal loan.
So you see where I’m going with this. You do not need to perform a distribution because you have a lot of ways to access these funds.
You can loan them to yourself, as we just described briefly above. You could pay a management fee, you could loan them to another entity that can go out there and buy real estate.
There’s lots of different things you can do. You have access, and it’s because of these strong charging order protections.
For example, people who is involved in lawsuits with this structure, what do they do? They tend to walk away just settling for their insurance policy limits.
That’s it. Creditors look at it and they go, Oh, wow, we’re not going to be able to collect on this. What does it take to settle?
And they want to get out because attorneys don’t want to waste any more of their precious time pursuing a claim against somebody where they can’t collect on the assets.
So they’re looking for an off ramp.
A person has a huge claim against him but has a Wyoming LLC for protection. The opposite lawyers finally can only settle for the insurance policy.
So I like to use a Wyoming LLCs because it offers the charging order, it states in its statute that it’s the exclusive remedy.
So you’ve got to have this in your operating agreement and you’ve got to have state law backing you up here.
Anonimity In The Wyoming LLC
The second reason that I like Wyoming LLC is for this anonymity.
All right, so what does that mean? When you create your Wyoming limited liability company, your information is not submitted to the secretary of state.
So if somebody looks at that LLC, they’re never going to see your name associated as a member or the manager.
For example, if I created an LLC in Texas or Utah,Colorado, my information is going to be submitted to the Secretary of State.
So if somebody was coming after me and they wanted to know. “Hey, does John Doe have any businesses? Does he have assets?”
They will run a search and you’re going to see all these things pop up.
And then what does that tell an aggressive creditor attorney? “Hey, let’s squeeze them, see what we can get out of this person because they have things to lose in this type of structure”.
You aren’t going to be in that position where people can find your assets because that Wyoming LLC isn’t tied back to you.
No one knows that you’re the owner, the member or the manager,because all that information is not collected by the state of Wyoming. So there’s nothing to disclose.
Now, there are other states that offer this as well, and people say, well, why not use Delaware?
Well, we do use Delaware in certain situations.
The reason why we tend to go with Wyoming is because it’s less expensive to maintain a Wyoming LLC for the benefits that it provides you.
So that’s why I prefer Wyoming over Delaware and Nevada.
Nevada’s more challenging with the anonymity aspect, so not my preferred option for this asset protection architecture.
The Architecture With The Wyoming LLC
So let´s recap and analyze your portfolio of assets and how this Wyoming LLC architecture fits here.
So if you had a savings account, you open a savings account under the name of the LLC.
A brokerage account now. Let’s say that Fidelity Account opened a new Fidelity account under the name of your LLC. Well, if you have three brokerage accounts with different brokers you will then open up three accounts under that Wyoming LLC.
So imagine any type of financial assets, you put them all in the name of the LLC.
Also loans, as we said before. None of that creates any risk for me.
So that was for our personal assets inside the Wyoming LLC structure.
But what about the business assets, how do we perform asset protction on them? This leads us to the segment or quadrant referring to the business assets.
So what am I talking about? When I say business, it’s any activity that you are engaged into generate income that you’re part of, that you have to work to generate the money that’s coming in, or you have employees.
So somebody’s services are required. The assets themselves just don’t produce the income.
So what’s an idea of a business in regards to “business assets”? Maybe you’re a real estate agent. Maybe you like to flip property, wholesale property. If you have a residential assisted living (RAL) facility, we include it. Turo would be down there too or Uber driver.
Maybe you have a restaurant that would be also considered. A roofer installing shingles and replacing roofs, and the list goes on.
All these examples above ae businesses active in nature. They’re out there producing income.
The first thing to look here, is what type of entity we should use
So then when we’re dealing with businesses in this business asset segment, we have to look first at the type of entity we will use and the tax status.
Also, we are concerned about liability in the business segment.
So the liability means that if something goes wrongi nside of my business, that I’m not going to be held personally liable.
So I want to make sure I have a shield there, a strong shield that’s going to protect me. So if somebody slips and falls as they walk into my business, they don’t turn around and sue me personally for them falling down and breaking a leg,they can sue my business, but they’re not suing me.
So liabilities are super important and then the other one is going to be taxation, right? Taxes. How do I keep my taxes low?
Not only maintain taxes low, but also have total control over my taxes, meaning that I can decide how much taxable income I’m going to be reporting personally.
The business entity gives us opportunities by writing off certain things like, say you wanted to buy a car, all right,you’re going to run it through your business.
Well, if you do that, then that’s a way in which you’re reducing your taxable income. So you have that ability to control your taxes there.
And the third thing about the business that we look at is information reporting.
It has to do with what type of information from your business shows up on your 1040.
That’s really important if you’re a real estate investor, because in many situations, if you’re bought buying property,you’re obtaining a loan, usually a mortgage loan. The lenders, if you have to qualify for it personally, are looking at your 1040.
And the question is, do you want a lender to scrutinize your business because they see that you’re in business for yourself and they’ll oftentimes ask for balance sheets, P&L (profit and loss statement) and information on your business activities to determine whether or not you qualify for a loan, if you have solvency as a borrower of that hard money loan, jumbo loan, mortgage loan, or maybe even an FHA loan, who knows.
And you might think, well, what is the relation between the business aspect they scrutinize and my personal aspect?
From the lenders point of view, if your business is in trouble, they’re afraid that you’ll take money to cover the business problems and not cover your mortgage loan.
So that’s why it comes into play. So knowing that, what do we often then look at setting up here in this business segment? What tyoe of entity?
An INC Or An LLC For Business Asset Protection
So I’ve got two choices here that I can look at: a traditional INC or an LLC.
If you set up a traditional INC, you can have it treated as a C Corp or an S corporation for federal tax purposes.
Now, an S corporation is a flow through, so it’s going to flow down to your C corporations tax at a flat 21%.
Now an LLC can also be taxed as a C or an S corporation. In fact, your limited liability companies can can even be set up as a partnership or as a disregarded entity.
But the thing is, on the business side, a major mistake that people make when they create LLC for their active businesses is they choose to treat their entity as a partnership or disregarded entity.
And from a tax standpoint, I mean,you just want to pay as much as possible because that’s what you’re doing. If you choose a partnership or disregarded entity for an active business that you’re involved with, you’re going to be treated as a sole proprietor and sole proprietors get zero or the least amount of benefits when it comes to tax planning for their business income.
So I will discard completely partnerships and disregarded entities.
When it comes to structuring an active business, we’re either going to go Traditional INC or an LLC,and then we’re going to tax it either as a C or an S.
Okay. Now I’ll explain that just a moment.
On the tax side, the first thing I want to address is how do you determine whether or not you want an INC versus an LLC?
Now, a lot of practitioners, attorneys and CPAs, if you go to them to create a new business,they’re probably going to recommend you create a limited liability company right here.
They’re going to say, I just set up an LLC and well,they may even tell you to tax it as an S corporation. I see that all the time.
I’m not saying you shouldn’t do that, but what I want to expose you to understanding is that sometimes a traditional INC is better than a limited liability company when it comes to planning.
So what I find is that a lot of people don’t know the right questions to ask or the professional themselves are not asking the right questions to their client and making that determination as to whether or not it should be a traditional INC or an LLC.
So what are those questions you need to be asking yourself to make this determination or a professional should be asking of youwhen you’re setting up a business and trying to determine whether or not it’s an INC or an LLC to get started.
All right, so which are these important “questions” to ask ourselves?
Number one, you’ve got to ask yourself. This is do you plan to sell the business? All right. So that’s one thing I want to do. I plan to sell the business in the future at some point in time.
And number two, do you think there’s a possibility the business might fail then? The reason why I say that is because many times when you start a new business,the business, you know, in the first two or three years, it could fail.
And then the last thing that I look at here, number three is, do you buy real estate? Do you buy real estate or invest in real estate?
So those were the three questions that we have when it comes to determining if it is an INC or an LLC. And that is, do you plan to sell the business? Is that a possibility in the future? Is there a possibility that you may lose money in this business and end up shutting it down? Or, are you a real estate investor?
If you answered yes to any of those questions , then there’s a strong possibility you should be setting up an INC and not a limited liability company.
And let me show you why.
So why the first one? Do you plan to sell the business? Why is that important?
Because when you set up a traditional INC and you’re thinking, you know, five, ten years down the road you may sell it.
When you sell that business 5, 10 years down the road,you can avoid paying tax on that sale on the first $10 million in gain.
Think about that. That’s a $2 million tax savings on the sale of your business. Now you do not have to sell for 10 million. You could sell it for, say, $1 million. And it’s a $200,000 tax savings only, but it’s a huge benefit.
So if I’m setting up a business that I plan to sell, why would I ever put myself in a limited liability company? Because an LLC does not get that same benefit.
What I’m referring to to here is small Business Corp stock treatment that you have. This is something that has to be elected when you first set up your business.I f you don’t, you’ve already lost this. You want to make sure that you’re putting that into play.
That’s why these agreements are so important.When we’re setting up organizational meetings for corporations or operating agreements for LLC, there are provisions in there.
And that’s why working with someone when when you’re going to set up your entities, you should be asking these types of questions, Hey, is this small business corp stock? Can I sell tax free in the future
If they don’t know what you’re talking about,well, then maybe they are not the right person to help you.
And now the second thing, is there a possibility, a business failure?
So if you set up your new business when you’re running it for a couple of years and let’s say I’ve got this business here that I’ve set up and I’ve invested $60,000 into my business, me and my wife have to get this business going and it just really never takes off. And it’s an INC and I decide, Hey, I’ve got to pull the plug. We thought we were going to make it here and we didn’t.
Well, if this is an INC that $60,000 you can write off as an immediate deduction on your 1040.
So if your spouse was still working and your spouse she’s bringing in a 100 K year from her nursing job, part time nursing job, you’ll get a $60,000 tax deduction. So this year you only pay taxes on $40,000 of income if you chose to set it up as in INC .Now, how do you do that? Well, when you set up your corporation, you want to make sure that your corporation has what’s referred to as “1244 stock”.
That’s what you need. And it’s just an election. That’s all you got to do is like, “hey, I want this. The shares that I’m issuing fall under Section 1244”.
We do this in all of our companies that we set up. We give our clients 1244 stock loss provisions in there.
So if this happens, they can write it off. They can write off that entire loss up to $100,000.So let’s assume that you followed the CPA’s adviceand you set up a LLC. If this was an LLC right here and not a corporation,then that loss at $60,000 loss, you can only use 3000 of it against your $100,000 in income.
So now you’re going to pay taxes on $97,000. Well, what about the other 57,000 that’s still there?You’ll get to take that the year after that, the year after that, and so on. So for the next 19 years, you’re going to be deducting $3,000 a year. Why not take it all up front?
So that’s a reason whywe ought to go with a traditional INC is 1244 stock lost the abilityto deduct everything in the event we have to shut the business down.
Now the last thing I point out here is do you buy real estate?
I have to consider if it is an S corp ir a C corp.
So when we say that an S is a flow through entity. What am I referring to here in the blog?
Well, if you had a an entity set up and this is an S corp for federal tax purposes, it doesn’t matter if it’s an INC or an LLC.
And this company that you had generates $80,000 in income. Well, that $80,000 in income will flow down to your 1040 and your have to pay taxes on it regardless if you take it out or not.That’s what I mean by flow through.
Now, if this same company here was a C Corp, none of this is going to flow down to your tax return unless you take it out as a dividend or you paid out a salary, a C Corp files its own tax return. It’s going to file an 1120.
So on your 1040, if somebody looks at your 1040, they’re not going to see that you have a position in a corporation. They won’t know anything about your corporation because there’s nothing that’s flowing down on your 1040 that would tell a third party you own another business.
Whereas if this was the S Corporation, it filed a tax return 1120 S, and when you do that, since it’s just an informational return and you have to report the income, it gives you a K1 and that K1 is what shows up on your 1040, and that K1 is what alerts anybody who looks at your 1040 that you have a business that you own and it tells them how much of that business you own.
So why is that important then,if you’re buying real estate, why does that make a difference to me?
The case in when you are potentially losing money in your business.
So I’ve got an S corporation losing some money, so I get a K1, and it shows that I lost $30,000. Right? It’s on my 1040. Well, we’re going in to get a loan and my wife’s going to go on this loan and she’s applying for the loan so we can buy a another rental property. And the lender asks to see a copy of our 1040 and she turns over a copy of the 1040. And on that 1040 they see the K1 for my business, which is an LLC.
And on that K1 it states that we lost $30,000.The underwriter is going to ask for a copy of this tax return balance sheet and P&L (profit and loss sheet), and they’re going to scrutinize your business.
This is what’s going to potentially cost you a loan because they’re going to get concerned that you have a business that loses money. It’s going to affect your ability to repay.
Now, what happens if I set up my entity as a C corporation? If I set it up as a C corporation, then what will happen is nothing shows up on my 1040.
So when my wife goes in to apply for a loan, all they’re going to see is our income, our active income. So maybe our active income shows that we made $120,000 this year. They’re not going to see that $30,000 loss because that’s locked up here inside of the corporation.
So it makes us look more attractive to lenders, so we can grow our real estate portfolio.
See, that’s an important question that oftentimes gets missed when CPAs are working with clients or attorneys are working with clients and they’re starting a new business,they don’t ask, Well, what are you doing on the outside? It’s just not about the business. Do you intend to invest? How are you going to pay for those investments?Are you going to be using lenders to finance it? If so, do you want to protect your any potential losses so it doesn’t show up in your tax return?Do you want to keep underwriters out of your business and asking for P&L and balance sheet statements? If the answer is yes, yes and yes,don’t set up an S corp. Set your business up as a C Corp, to keep your tax returns private because there is no flow-through of information.
So in the business quadrant, liability protection, that’s a no brainer.
It just happens from a tax standpoint. How do we reduce our taxes? Well, choosing S versus C, you have to decide.
You’re going to give yourself control: more control with a C Corp than with an S corp, as in the latter, you have the flow through. So the income flows down to you.You pay taxes on that income. It doesn’t matter if you take it out or not yourself (as dividend or salary) to pay taxes on it.
The C Corp is flat 21%. So here’s the strategy. If you’ve got a successful business that you’re running, I was talking to a client about this the other day and that business is generating I don’t know, maybe $500,000 a year in profit. And that’s after you’ve taken a salary, and after your spouse’s salary. And you guys are in a high tax bracket, say 37%. If you are an S,you might want to consider changing it to a C Corp.
Why would I tell you to do that? So then that 500 grand will be taxed at a flat rate of 21% (company tax rate) rather than pass through to you (because of the passthrough of the S corp) and be taxed at 37%, (individual income tax bracket) plus your state taxes on top of that.
I’d rather keep it in a flat 21% (company tax in the C corp) rather than throw it out to myself because by keeping the money in the business,it gives me options, number one, to grow my business so I have more money after taxes to put back into my business for growth.
Or number two, I loan the money out to myself and I use it to fund my investing or growing other businesses.
So 500 K per year in our example, a tax rate of 21%, that’s going to equal roughly $105,000 in taxes. But if I had that in an S Corp and it passed down to me, I’m in a 37% tax bracket as a physical person, and add state taxes as well. I would just make this 40% with the state taxes to make it easier.
So at 40%, you’re going to pay $200,000 in taxes on that same amount of money instead of $105,000 in taxes with the C corp.
So by using the C Corp and leaving that money in my business just saved $95,000 in taxes per year.Now, what could you do with that extra $100,000 on $500,000 in income? Why no grow the business?
Or, like I said earlier, borrow it out to yourself, loan it out yourselfand go invest it somewhere else. You borrow it at three and a half, 4%, and you go and you invest it in real estate.
So you’re making money off of the government’s money.So you’re using Uncle Sam now to fund your real estate deals.
The other thing I want you to keep in mind in the business quadrant,the thing you never want to do is own assets here.
So what do I mean by assets?What I find is a lot of business owners, they tend to accumulate cash many times in their businesses. So let’s say you have your business and this business is a restaurant and I’m looking at your financials for the restaurant and you disclose you have 600 K sitting in this restaurant business.
Now, why do you have $600,000 in there? Because there’s a lot of liability with the restaurant. Right? People get injured. Employees can sue you at any time. People get drunk and they go out and drive, you name it.
So if I leave that money in there, that is at risk in the event of a lawsuit. So if you have a business that has a lot of cash inside of it, the number one strategy I recommend for business owners is to pull that cash out and put that cash in a protected entity, that Wyoming limited liability company, put it inside of there, and get it out of your business.
So if your business gets sued, that cash can’t be claimed by a creditor. So we take that money out, put it in our individual name as a distribution, a dividend or whatever. You put it into your Wyoming limited liability company that we discussed earlier to hold your safe assets.
Now, before your your CPA or your financial advisor has a coronary on you making that move, because they’re going to tell you, hey, we need money in the business for later on. Well, let me just tell you this: If you need money in this business later on, you’ve got thisWyoming LLC that you can control. You can loan yourself money, you can loan yourself money.
Now, I can actually get even more asset protection with this strategy because if I loan myself money, then I can secure the assets of my business for that loan that I’m making to myself.
And if my business gets sued, then I’ve really made it difficult for a creditor to get anything to put me out of business. And basically I’m forcing their hand just to take the insurance policy and leave me alone.
So do not own assets where you conduct business. So cash is a huge problem that comes up a lot.
Another problem that comes up a lot is people will tend to own the building, right? So they have an office building with their limited liability company or their business and that they’re operating out of like, hey, it’d be a great idea. Rather than pay rent, I’m going to go buy a building.
But then they buy the building in the name of the business. No, what we’re doing now is we are putting the building at risk in case our business get sued. So do not own assets in the business name.
Now, some people say, well, that means I shouldn’t have any vehicles in my business. I’m not saying that there is a level there where you can make it too complex, where it no longer makes sense.So you just kind of balance it. It’s something you look at and you say, Right, at what level do I want to go to obtain protection? If you’re one of those that is completely neurotic about it, you don’t want to lose a single thing. Well, we can get as complicated as possible with our asset protection planning.
But if you’re more on the I would saylet me guess that you hate to use the word reasonable, but if you’re more like, all right,
So it is a cost benefit analysis, I don’t want to overcomplicate things, but I want to take some reasonable steps.
On the risk investments, it’s going to be real estate.
All right. So so this makes sense. So why do I call these risky investments? Because the assets themselves can generate liability, even when they generate income for us as assets in other quadrants (like a savings account) whothout having to do anything.
But what makes this quadrant different than other segments we have studied is that these assets in this quadrant, they can get you sued. The assets in this quadrant or segment can generate liability.
See an asset like my savings account. Nobody will sue you for having a savings account, for having gold coins or having some company shares. These assets do not create liability.
In the case of no risk investments, like the ones we discuss here, for tax purposes, it just takes one entity. Set up a Wyoming limited liability company. This Wyoming LLC will be a disregarded or a partnership for federal tax purposes.
But some assets create liability
Yeah, you wake up one morning, and hey, you just got served because somebody blew their hand off who is visiting one of your tenants and they happen to be drunk and using illegal fireworks, but was on your property. So there you go. Or better yet, just happened to one of our clients owned some lots raw land. Didn’t put it in an entity because they figured, hey, these are just lots I’m going to build on. Could there be liability there? Absolutely. When the kids on the quads and they go racing around on your your lots and they crash into one another and they get severely injured, your fault.
So real estate creates risk for us.
So what we’re going to do here is we’re going to use entities to minimize that risk, break these assets up.
I want to make sure that if something happens here, a creditor doesn’t sue me personally, and if someone sues me “personally”, they csnnot reach my assets.
So what types of structures do we use in these situations of “risky investments”?
Well, number one, we’re going to use limited liability companies we’re all familiar with if you are a reader of this website.
So we’re going to use LLCs, and also for our real estate (which we know now is a risky asset) is land trusts.
So for risky assets we will be using LLCs in general, and for real estate we will use land trusts for asset protection. We can also use Series LLC, and Wyoming Statutory Trust.
As a conclusion so far, if you have risky investments, the four entities you need to be looking at for asset protection are going to be:
- an LLC
- a land trust,
- a Wyoming statutory trust
- or series limited liability company,
Those four aforementioned entities are the most importantwhen it comes to determining what type of protection you need.
Why four types of entities? Can´t we just have an LLC for assets in general and land trusts for real estate asset protection and that is it?
Now, the reason they are four, and not just two types of entitiesm is because when it comes to protecting risky assets like real estate, it’s not a one size fits all approach.
You have to know the following:
- You have to know where the property is located.
- You also need to know where the individual investor lives because that’s going to influence our decision as well.
- And you have to know the type of asset that we’re investing in. Is it short term? Is it long term? Is it residential or commercial?
- And then you want to look at whether or not there’s a loan on the property as well. Because in this environment, with rising interest rates and you have lower interest loans, you got to factor that in.
And when you start breaking those numbers down and looking at the demographics that I just described above, that’s going to drive the decisions for us.
I don’t want to be in a situation where by putting property into a limited liability company, it forces a reassessment with the county.
So now my property taxes go up or they treat it as a taxable transfer. So now I’ve got to pay a huge transfer tax by moving it into that entity.
Or it creates just a general income tax liability by moving it out at a later date to do refinancing on the entity.
So there are things like that that we’re looking at or the entity itself costs me $800 a year just to maintain it.
So having ten entities is going to run me $8,000 in state filing fees.
All those are important considerations.The most important one for a lot of people right now is whether or not the bank will accelerate that 3.5% mortgage and try to force me into an 8.5% mortgage because they saw that I put property into an LLC.
Tax status in these cases is typically going to be a disregarded entity or a partnership. Those are the two we are using in the risk investments segment or quadrant. We’re not using corporate tax status over here.
We analyze what is asset protection and how to structure an asset protection trust to protect your personal assets. That type of trust is a legal instrument coming with its pros and cons and two main options: An asset protection trust as a revocable trust versus an irrevocable trust, where we prefer the latter.
So that means that our preferred option is not the revocable asset protection trust. I explain this better in a comparison between asset protection trusts vs living trusts.
The activity of setting up a trust for asset protection is relatively complex and has its costs, depending largely on the number of beneficiaries, the US states where these asset protection trusts are available and the assets transferred to the trust.