BiggerPockets Real Estate Podcast - 838: How to Not (Accidentally) Lose Your Portfolio to Lawsuits w/Brian T. Bradley, Esq.

Episode Date: October 31, 2023

Without asset protection, your wealth is as good as gone. One slip and fall from a tenant, one angry ex-spouse, one jealous onlooker, and you could have your real estate relinquished and your bank accounts drained. And as the economy continues to get even more rocky, lawsuits that threaten your hard-earned nest egg are becoming more and more common. So, how do you build a legal fortress around your fortune? Brian T. Bradley, Esq., our go-to asset protection expert, is back on the show with news that could affect all real estate investors. A recent case surrounding LLCs (limited liability companies) has completely changed the landscape for investors, businesses, and anyone who operates within an LLC. Now, the LLC you so carefully set up could mean nothing if you eventually get sued. But there is something you can do about it. In this episode, Brian goes over the changes in this new LLC law, how you can start protecting your assets (even if you only have a couple of properties), how to NOT commit “accidental fraud,” and the rise of “Robin Hood” lawsuits you MUST protect yourself against. In This Episode We Cover: The asset protection “layers” anyone can use to protect themselves from lawsuits  A new court case on LLCs that could change the way business is done  “Piercing the veil” and mistakes you’re probably making that could cost you everything The “accidental fraud” actions MANY investors make when protecting their assets Why you NEVER want to put your rental properties into an S-Corp The rise in “Robin Hood” lawsuits that target wealthy, successful investors And So Much More! Links from the Show Find an Agent Find a Lender BiggerPockets Youtube Channel BiggerPockets Forums BiggerPockets Pro Membership BiggerPockets Bookstore BiggerPockets Bootcamps BiggerPockets Podcast BiggerPockets Merch Listen to All Your Favorite BiggerPockets Podcasts in One Place Learn About Real Estate, The Housing Market, and Money Management with The BiggerPockets Podcasts Get More Deals Done with The BiggerPockets Investing Tools Find a BiggerPockets Real Estate Meetup in Your Area Davids's BiggerPockets Profile David's Instagram Subscribe to David’s YouTube Channel Rob's BiggerPockets Profile Rob's Instagram Rob's TikTok Rob's Twitter Rob's YouTube How to “Layer” Legal Protection So Lawsuits Won’t Touch Your Wealth Don’t Lose Your Portfolio to Lawsuits! Here’s How to Protect Yourself Asset Protection for Rookies: 7 Wealth-Saving Answers from an Expert 10 Landlord-Tenant Laws Every Landlord Should Know Books Mentioned in the Show: Pillars of Wealth by David Greene Connect with Brian: Brian's BiggerPockets Profile Brian's Website Click here to listen to the full episode: https://www.biggerpockets.com/blog/real-estate-838 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast show 838. What's going on, everyone, it's David Green, your host of the Bigger Pockets Real Estate Podcasts, the biggest, the best, the baddest real estate podcasts on the planet. Every week bringing you the stories, how-toes, and the answers that you need to make smart decisions in this current market. Today is all about protection, and I will be joined by the Honorable Rob Abasolo. I hold myself in contempt. Today's show is all about protecting yourself from potential lawsuits, as well as

dispelling so many of the myths that you may have built your foundation of knowledge on that are not true. And we get into that today with returning guest Brian Bradley. Brian was previously featured on the Bigger Pockets Rookie episode 106 and 107 as well as our show, the Bigger Pockets Real Estate podcast episode 595. He is an asset protection attorney and he brings the heat today. Rob, what were some of the things that you think people need to look out for to protect their well? Listen, we're going to get into some pretty technical stuff, but we really really make it digestible for everybody at home. And so whether you've been investing for 20 years, 15 years, or you're just getting started, we're going to lay out the blueprint for how to protect your

assets. And we get into that towards the end of the episode. So you're definitely going to want to stick around. That's right. No matter where you are in your journey, zero or a hundred million dollar portfolio, you want to protect what you've built. And we're here to help you. Today's quick tip is simple. In today's episode, we talked about a recent change to landlord and tenant protections within the legal system. If you're not sure about landlord and tenant laws, the Bigger Pockets blog has a great post on this. Check out the link in the show notes and go read the blog.

It's got charged for specific issues like security deposits, lease violations, and more. Rob, anything you want to say before we bring in Brian? Um, yes. A goose. 1% of people will understand that joke. But y'all are the real ones. And if you're part of the 99% that don't, make sure you're following us on YouTube so you can see what

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slash flagship. This is a paid advertisement. All right. Let's get to Brian. Brian Bradley, welcome to the big. Pockets Podcasts, how are you today? I'm doing great. Thanks for having me back on, and this is going to be a lot of fun, and we have a lot of important changes and the law to go over as well as myth-busting,

a lot of misconceptions and questions that I get. All of this, like I go in a lot of detail over my new book that's coming out, overexposed where I break all this crazy world down and this mess in that we're living in and investing in, but I think we're going to have a lot of fun in today's topic. Well, it's great to have you here again to give our listeners a heads up on where we're headed with your insight today. We're going to be talking about why your risk as a real estate investor has changed and what you need to know because of that.

How to not accidentally commit fraud, it is way more common than you think and exactly what to do to protect your assets the right way at every level of wealth. So one of the reasons that we're talking here today is that there's recently been a court case with pretty big implications for people who own rental properties. Can you tell us about the Mallory v. Norfolk case? Yeah, yeah, absolutely. So it goes to when we're talking about asset protections and layers, right? First layer of asset protection.

Like think of cold weather. You're going to wear a nice, thin t-shirt or a nice thin shirt underneath all of your other layers. This is your base layer, your LLCs. It sits on your skin. Asset protection 101. And so there's a lot of confusion when it comes to asset protection. Like where do we even set these things up? And you're like, do we go to Delaware, Wyoming, Texas, Nevada?

And this is where we really need to break down these modern myths, you know, and through the, case law, because we're talking about charging order protection and corporate veil piercing, just like, you know, big legal fancy words. And so what we have is, you know, for example, a lot of California residents running off to other states, you know, like Wyoming, to create Wyoming LLCs to hold their real estate in, their risky assets and their investments in. But then you have to register those LLCs in the state that you're resident of and then pay the franchise.

tax. You can't just go and take another state's more beneficial laws and bring them to you to another state. And this is demonstrated now in a recent 2003 Supreme Court case named Mallory v. Norfolk, where the Supreme Court upheld a Pennsylvania statute that forces companies to face litigation within the borders that it's registered to do business in. And I'm going to repeat that because it's very important. And when lawyers and professors repeat things or cops repeat things, is generally going to be, you know, on the test. So I would say, you know, focus and pay attention. It forces companies to face litigation within the borders that is registered to do business in.

This case now opens the door for other states to adopt similar registration requirements. So state courts are permitted to exercise jurisdiction over registered foreign corporations that are, let's say, like, you know, being used to hold your real estate in, just as if they're domestic corporations of that state. So your Wyoming LLC that is now registered in California or registered in Pennsylvania or whatever the heck, you know, the state is that you're a resident of is subject to the laws under, you know, California or Pennsylvania or that state that is registered in. And remember, you're legally required to record your out-of-state LLCs known as foreign entities and pay the franchise tax. Again, you don't just get to take Wyoming or Delaware tour and damage and personal injury laws

with you to other states. You can't just go. and purchase other states more beneficial laws. And this case now is kind of put, you know, like the nail in the coffin on that. So what you're saying here is if I live in a state that has unfavorable laws, I can't just open an LLC in a state with favorable laws, hold my properties in that LLC and then benefit from those favorable laws. Correct. Your general rule of law, you know, thought is we're going to use the state that the asset is in.

So if you own a rental property and it's in California, it's going to be a California LLC. If it's in Tennessee is going to be a Tennessee LLC. So what you're saying here relates to the belief that a lot of investors have that they figured out a loophole. They figured out a secret. There's a way that they can get around being sued or losing things. And you're saying it's not as cut and dry as that sounds. Correct. And what it is is really saying for some reason there's become this weird thought that I have an LLC.

I'm good. That's all I need. It's this dragon slayer. And they forget first word, first letter limited. They tell you this straight up in the name. And then we have now transitioned from ignoring the decades of case law about LLC and veil piercing. And veils are very easy to be pierced. And all you got to do is think about, you know, the thin, flimsy piece of fabric that goes over a bride's face on a wedding day.

It's the same weakness. It's very weak. There's a seminal case on this. It's called Associated Vendors Incorporated v. Auckland Meat Company. It came out in 1962. here the court of appeals gave 20 reasons for justifying piercing your bill i'm not going to go over all of them you know it's too tedious but i'm just going to do like the five heavy hitters commingling of funds you know of other assets using funds for something other than corporate uses

failure to maintain adequate corporate records or the confusing of the records use of corporation as a mere shell under capitalization that's just five of them and i'm pretty sure you and your listeners that probably were like i probably check a couple of those boxes boxes off already. And that's just five. And that's going to pierce your veil. So like piercing a veil, for example, is if you have like a LLC for your rental properties and then you're using the credit card for that LLC to buy personal purchases or groceries. Okay. That would be a case to pierce the veil because you are co-mingling personal funds with business funds. Correct. Like, hey, babe, I forgot our credit card, but I got the business card. I'm going to go get some groceries.

Oh, boom. Now you're commingling and mixing assets. You know, transfer the money out from your person from your business account, put it into your personal account, declare it on your taxes, you know, at the end of the day, and then go use the money to go buy your car, you know, if it's not a business, you know, for the business, or go to pay for the groceries, go on your nice vacation. But as you start mixing, you know, accounts on commingling assets or undercapitalizing your corporation, which is very vague, like there's not even a clear distinction on what undercapitalization is, especially if you're starting up. So it's an easy way to pierce the veil, though. And so people need to realize this is why LLCs are the bottom of the wrong of protection and why as you grow and

you scale and you keep getting more and accumulating more, you add more layers. You add the management companies. You add the trust. And we're going to talk about those. This is scary stuff because I think a lot of people, exactly like you said, Brian, are under this impression that they got from some Instagram graphic that they read or some free webinar that they attended that said, hey, look at this little org chart with circles. They're always circles. And it says, here's you and here's your LLC. Now, if you get sued for the property, it stays within this self-contained LLC and it can't come out and you're protected.

And what you're basically describing is when the judge actually has that case and they look at the, you know, you were negligent on your rental property. Something terrible happened. Somebody was hurt very bad and they're suing. If you're thinking, well, there's only $50,000 of equity in the property, that's all they can get. that's not necessarily true. The judge is going to be looking at the intent. Was this really a business or was this your house that you just registered as an LLC? Judges look at intent all the time.

And you're giving examples of things. Judges hang their hat on and say, no, no, no, that wasn't its own business. That's very correct. And that's the scary thing is especially when it comes to LLCs is you hear a lot of promoters. I'll call them salesmen promoters because a lot of them aren't even attorneys. They're saying, oh, we'll get really creative with the operating agreement. And we'll put this all in the operating agreement. What you don't realize is you submit that operative.

agreement to the judge for a judicial determination. And so you're sitting there, please judge, please judge agree with my operating agreement. Well, that operating agreement is probably not valid and it doesn't hold up to statutes. And so that operating agreement gets pierced, which means in the bill gets pierced, which means now you're held personally liable, good buy properties in the LLC and good by other personal assets as well, like your brokerage accounts and another another assets. So it's very, yeah. Brian, can you just quickly define just the basic concept of piercing the corporate veil. I think we can probably get it from context clues, but just to give us a very simple one line, what is it? Holding you personally liable. So the veil is

separating out the member, the managing member of the LLC and saying you can only get a judgment against what's inside that LLC. The rest of the member's assets are completely protected. Now, some states are different with charging water protection. Some are stronger, some are weaker. But if the veil gets pierced, no matter what, that means we're no longer providing that. that one layer of separation between you and the rest of your assets. Now everything is fair a game to be used to collect on for a judgment. Okay, got it. Yeah, yeah.

And David, I feel for you on those Instagram, TikTok, where I, those reels or whatever where it's like, hey, do you want to not pay taxes ever again or ever get sued? Set up an LLC in Wyoming. And I'm like, I'm pretty sure all that doesn't work that way. But not a lawyer. Yeah, and we'll get into that with like, that's a great one for like when we start talking about fraud and scams because there's a lot. that we can dive into on that.

Yeah, okay. We'll get into that here in a second, but before we do, I do want to ask, with the new law change and everything, what does this actually mean for investors and what are some of the impacts that you think will see

as a result of this court case? So I think that now you're going to see other case instituting similar statutes that Pennsylvania did. It's fair game now. And so what you're going to see is that essentially if you went down this route and are just like randomly using Wyoming to hold real estate in or as a management company and you

have no connection to that state, you just bought a false sense of security, which sucks. You know, like you thought you did something beneficial. Then you get sued. And when you need it to work, you're like, oh, my God, it didn't work. What do I do? That's horrible. And that's a really expensive learning lesson, right? Like I spent money on this system.

I thought it was going to work. I lose the case, spent all this money on the system, paying this damage award. And now I have to redo my entire asset protection plan. So it's going to cost more money. So this is really when you start going down this route of purchasing and setting up a plan to protect your assets, you really just have to look at, you know, what's the case law, ask good questions, you know, use these cases that we talk about and ask the promoter or the attorney. What about this case?

What about that? If they don't have an answer for you, which I had literally had a client or a potential client call yesterday who was, thank God I went through your website and was going over all these case also I asked this person and all these questions, they said they'll get back to me. I've never heard back from them and they ignore all my emails, which means their system doesn't work. So go through a checklist. How effective is the system? What's the cost? You know, is it easy to maintain IRS compliance on? Do I maintain control of my assets or not? That's kind of the checklist that you want to go into, especially like effectiveness. And what we're going to realize is

jurisdiction shopping like this is just not going to be effective. Okay. All right. And, you know, I know you've mentioned, one of the things you've encountered kind of a lot in your legal work with real estate investors is that people have accidentally committed fraud. Can you walk us through a story of how someone could accidentally commit fraud doing, you know, in the inner workings of LLCs and legalities here? Yeah. So there's three realms of fraud. One is divorce, which will come into because that's not, you know, accidentally stumbling into that. That's just you, you know, trying to hide assets. So we'll break that one down after. But there's two good tax scams that, you know, relate to accidentally stumbling into, you know, a scam and fraud.

It's essentially tax trust myth busting. It's insane how many times I get this call thinking that asset protection means not paying taxes and, you know, moving and hiding assets so that you lower your taxes and not paying it at all. The question generally is asked, I want to set up an asset protection plan. I'm tired of paying taxes. This is just illegal and is tax fraud. And that's, you know, when people potentially go to jail. But tax mitigation is legal. So just realize you can mitigate your taxes, right?

Pay less in taxes. That's done with your CPA and wealth managers and using the tax code, like a treasure map, setting up different investment types of stuff that you guys talk about and different types of investment accounts. That's legal. That's using the tax code how it's supposed to be used. Now, as to protection is about limiting liability of risk from loss. and creditors, you know, people coming after your money and your assets through legal means,

not hiding and moving assets. So let's start with like the easy one that you can stumble into when you're calling people in my world, you know, the high end offshore trust. What we need to understand is that offshore asset protection planning will not reduce your taxes. If someone is telling you this, it's a scam. And this is why we don't use the Caymans. We don't use the Bahamas. We don't use the Bahamas. They're all red flagged and used as tax havens. The scam works by a promoter or sometimes an attorney or a CPA, generally just a salesman who's not even a legally licensed attorney, trying to sell you the idea that if you don't have your money in the U.S., then you don't have to pay or owe any taxes on it until you bring the money back to the U.S.

So just don't bring the money back. This is just false. The fact is that the IRS taxes you on worldwide income, plain and simple. You have annual factored disclosures, offshore wire transfer disclosures, 1035s, 1035As. It doesn't matter where you earn your money. If you're a U.S. citizen, you're a U.S. taxpayer and you owe the taxes. You have to disclose it, especially when it comes to offshore stuff, right? The problem with this scam is that when the IRS takes a look at your plan,

it not only will not protect you, but it may leave you with this massive tax bill. The bottom line is that asset protection planning and tax planning do not go together. It's rule number one is oil and water. Anyone promising to help you legally evade paying taxes, using any offshore entity is certainly lying to you. And if you're involved in a scam like this, whether you were duped into it, it was non-intentional, you just listen to some promoter talking to you. You're like, God, this sounds amazing.

Like, I hate paying taxes. Great. You know, like I believe you. Or you didn't intentionally. It doesn't matter. It all comes down to you. You're the one that's signing on your taxes, you know, under penalty and perjury. You're the one going down for this.

Right. So let me see if I can paint an analogy here, since we're on the protection theme. Let's look at this stuff like body armor. There's body armor that is really good at protecting you from ballistics, heavy rounds, and then there's body armor that's easier to move around in and it's more comfortable. They are rarely ever or never going to both provide maximum benefits on both of those. It's either easy to move around or it's going to be protecting you more, but they're not the same thing, right? When it comes to asset protection strategies that can protect you,

that does not mean they will also be great at saving you in taxes. though the entities that you create to claim your income are similar, right? It's like they're both forms of body armor, right? And then your CPA can then do their thing and what they can do within the tax code to then mitigate the taxes. And so essentially the CPA just needs to know, how is this own, is it owned personally, is it owned in a corporation, is it owned in a trust? Now we know what section of the tax code we can do our magic with.

Gotcha. Right? But the asset protection plan is tax neutral. You can't call an asset protection attorney and say, hey, I hate paying taxes, put it in a trust and hide it. Or vice versa. You can't tell a CPA who wants to save in taxes and also make sure I can never get sued. Those are not the same areas of expertise. But it's a common thing that people, you know, my accountant's always like, people ask me so much about LLCs and there's like a big misconception on like, starting an LLC is not going to save you thousands of dollars in taxes. Like that specific DAC. You know, it's the actual tax stuff, you know. But trust are magical, you know, right? There's a lot of things that you can do with them. strong, they're flexible for asset protection, like we're talking about, just not for income tax

avoidance. But you got a really big one, you know, which you can stumble into this scam is called, this is a 643 domestic abuse tax trust scam. And the IRS are like heavy on this and I hired, you know, 800 more auditors to check this out. And basically you get some salesman or a promoter talking about a special new trust where you can save on taxes and, you know, particularly you don't have to pay on the sale of a business. You know, you can sell your business tax free. This is just BS. Like, at the bottom line, like, this is just messing with the definition and misusing Section 643, the tax code.

Section 643 relates to distributable net income as it relates to, you know, to how you tax a trust. The basic rule is that, you know, the taxation of a trust is, you know, for income is going to be to the settler, meaning the person that created it or the beneficiary or the trust itself or some kind of combination of the three. What these promoters are doing is they reference an actual accurate, you know, authoritative source, like citing the IRS code. But then they intentionally misinterpret what the code actually means. But the taxpayers, you know, you can't freely self-interpret the meaning of the tax code in a way that you want it to be. This is where you get in trouble.

And then essentially you're up, you know what, creek without a paddle. So it's very important to understand that even though trust are magical, creating a trust does not somehow magically create. an ability to defer or avoid paying income taxes. You know, Elon Musk can go and make a trillion dollars mining some sort of mineral on an asteroid in space. And so he made a trillion dollars in space, but he's still going to have to pay his taxes on it. So that is ways people accidentally commit fraud as they are under these erroneous beliefs. All right.

Now, what about divorce? Yeah. So this is the other one that I get, the big D word. You know, asset protection plans cannot help you in a divorce. You can't hide assets, you know, or unilaterally change the. character of an asset from community to single, period, the end. You know, a judge will determine that through the ruling or you and your ex-spouse must agree. And all assets, when you go up to the table in a divorce court, are all presumed community.

And then you have to prove what's not community. All right. It's hard to imagine in any scenario that in a divorce, some portion of the assets are not going to be community assets. And that, you know, some of them won't be awarded to the ex-spouse. This is just the reality. So you start hiding assets. It's going to be considered fraud and the system is going to be pierced.

So the way you go about protecting your assets, if you're thinking about having a potential divorce is you plan individually, meaning only with separate assets that were agreed upon before the marriage with a prenuptial agreement. Or you plan with the spouse, even though you're going to get in divorce, but to protect it from lawsuits coming in while you're figuring out who's going to get what. or you can plan individually but exempt the divorce proceeding. It's got to be about protection planning. Correct. There's no secret. I move here. I'm correct.

And this is, yeah, and this is the Dale versus Dale case, all right? This is a 2015 Supreme Court case that made a major blow to domestic asset protection trust. The deals were going through a very contentious divorce. Ms. Dale claimed that she was entitled to the assets that her husband placed and hid in his own domestic asset protection trust, one that he called. created just for himself. Then two big things happened in this case. First, the court's considered Mr. Dill's assets that he placed in his own domestic trust as community assets. And they joined

those assets as a married couple. So the asset protection trust was pierced and it didn't work for the divorce. The second thing that happened, which is why I like to use this case, because it talks about both divorce and asset protection is you can't rely on choice of law recitals that are in the documents to establish jurisdiction. The court ignored the choice of law clause and found that a violated top public policy, meaning ultimately the court will decide, not your documents. Now, what about the popular case in the news about the soccer player that was married to an older gal and she divorced him and tried to take his stuff and he had moved his assets into his mom's name. Are you familiar with this? No, I haven't heard about that one. So I had to give you some.

So the idea was he was, it was in another country and he was married and he felt like his wife might be looking to marry him just for his money. So he put the majority of his assets in his mother's name. He didn't own them. She divorced. She divorced. She was. you went after him and he said I didn't own anything. Is there a scenario where that could work? Yeah, no, that won't because what a judge will generally do is consider that fraud and that you're just hiding the assets and changing title into somebody else's name. Undo it, call it community and you're back into community assets.

Now in another country, they might have different laws when it comes up, not in this career, right? Yeah, and you hear something similar to that when it's talking about, you know, like doctors who are investing in real estate and then saying like, oh, for a lawsuit, you know, just put it all in your wife's name. And then if you get sued, it's all the assets are in your wife. name. That doesn't work because a judge will just call that fraud or married as community. Yeah, it's community property. Yeah. So there are, again, same theme. These shortcuts when you're

actually in court standing in front of the judge, they get revealed as not being accurate as the same as the YouTube video that you watch with somebody telling you this is all you got to do. Or season three of suits, you know, I really felt like that prepared my real estate journey with the LLC stuff. So the rise of the tech savvy investors here. You don't need a huge team or tons of overhead to manage rental properties. Just the right tools. So, I want to tell you about how I use rent-ready to get ahead. For landlords who treat their time like capital

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Moving on, Brian, one question I did want to ask was, you know, LLCs are always the thing that people get caught up on, especially in the real estate world. They're like, oh, can I start a business without LLC? And then I also see a lot of stuff about S-Corps. I understand that there's some misconceptions about the S-corp side of things, too. Can you shed a little bit of light as to some of the misconceptions around them that you're seeing? Yeah, yeah. Absolutely. So S-Corps aren't fraud, right?

Like, you can use S-Corps. Like, you can use C-Corps. They're more set up for tax mitigation strategies, right? The problem here when it comes to lawsuits and asset protection is when a lot of people get into these situations like this, I'm creating a business. I want to go talk to my CPA. Hey, CPA, Dave, I don't want to pay that much taxes. So what system should I set up or what should I do to mitigate, you know, as much

taxes I can, as I can, you know, pay, escort. First thing the CPA is going to do, they're not thinking about lawsuits or not thinking about anything like that. They're just thinking about keeping more money for you. So you create this S corp and then you start investing in assets like real estate or it could be you own a truck bed business and you have like a hundred now truck beds or you're a doctor and you have all your equipment in this S corp. This is the general problem. And then 10 years later, you call me and you're like, hey, man, Brian, I realized this was a really bad idea. I got $100 million worth of real estate all on this one S-Corp. I need to take it out.

Or, you know, I have my medical practice and I can't have all my assets in there because of the medical practice suit. I still got to practice medicine. What can I do? Probably nothing because I can't take assets out of the S-Corp without you owing all the deferred taxation back to the IRS. The problem with this situation is most people don't have that kind of money just sitting around liquid in their bank account to pay the IRS back.

So the assets are stuck. I can't do anything with it. and or S-Corps have shares that can be frozen and seized by judges, which means all your assets are now frozen. So setting up an S-corp is good for tax mitigation, money coming in. But what we want are assets to be held in LLCs, lease the assets back to the S-Corp. And that's how, you know, you kind of marry the two together. But your S-corp should not be just holding, you know, large amounts of assets.

Because then you get sued, there's literally nothing that we can do. Got it. Okay. Cool. Cool. Thank you. Thank you. Well, I'd love to move into how to protect your assets. I think asset protection in general is a pain point no matter what level you're at. And really, there aren't a ton of great resources. There's not a lot of education on this. I have students ask me all the time about asset

protection and LLCs. And I legitimately refer, when someone asked me a question about asset protection, I refer them back to the episode we did with you about a year ago because that was such a great master class in basically the basics, right? But it is, I've found that it is a hard to, it's a hard, I found personally that it's hard to set up a system that grows with your portfolio. I have figured this stuff out as I've gone versus having set it up, versus having set up the foundation at the beginning of my journey. So what I'd like to do is actually take people through the different pillars of, I guess, of income and maybe talk through the plan that someone might want to consider at that time. So for people that are in that zero to $250,000 of

expose assets, what might that look like in terms of real estate? Yeah. So first I, so like, what do we do shopping for an asset protection plan? This is where I think people need to, before we even talk about the pillars, do it before it's needed, right? You know, asset protection only works before it's needed. That's it. You know, it's a barrier. It's a safe for your gold or your guns. You can't set it up after the fact. The two big takeaways that I really want people to understand is there's this case called SEC versus Solo. Here's a single. Here's a situation where Ms. Solo's trust was attacked by the SEC to collect her husband's fines, you know, from engaging in fraud and, you know, a fraudulent trading scheme. So just say like bad people

doing bad things. You know, they're the villains in the story. The court found that, you know, Mr. Solo made a fraudulent transfer after the SEC judgment was entered. So after the judgment was put up against him. So what he did was he assigned his assets over to his wife's trust to protect them after the judgment. This is just no Bueno, you know, like this is just straight up fraud. You know, Mr. Solo was held in contempt of court. The good thing is 100% of the assets were protected because he put it in an offshore trust, but he was still held in civil contempt of court.

I like this case because it demonstrates two things at the same time. One is just the power of an offshore trust, which can, you know, we'll recap as we go through the layers in a second. But it shows what really needs to be done is it goes to a timing issue. The timing of the trust has to be set up before the wrongdoing, before anything happened. So Mr. Solow was blatantly wrong. He's the bad guy. You know, but the strength of it, point one, the assets were protected. But why was he held in civil contempt of court? Because of the timing issue. He did everything after the fact, after the lawsuit, after the judgment. And that's fraudulent. So the big takeaway, number one, when you're shopping around for asset protection is do

this stuff beforehand, right? Don't, you call me after the fact, there's literally nothing I'm going to be able to do for you or anybody. Anybody that tells you that they can run away from them. They're just trying to take your money from you. Now when it comes to the layers, right, think about winter. I always like to use a winter reference because we layer up when we go outside, you know, in wintertime. Entry level, first layer, you said, you know, you're 250,000 or less, you know, in net worth, maybe zero to three properties. This is when we use L, LC's in insurance. It's that thin layer that you, your base layer goes straight on your skin. This is where you're starting at. Then as you're scaling and you're growing, you're adding more

assets and you hit that, you know, probably four unit mark and you're investing probably in multiple states. We got three or four LLCs set up. You have around $500,000 to $700,000 net. You want a mid layer. You know, you want something that's a little bit thicker like a, you know, Moreno wool sweater. This is a management company. Some people use a Wyoming LLC, but you know why I don't. We use a limited partnership for this layer. Then you keep growing. You kind of hit that one million net worth mark.

You know, you're also a doctor, high-risk professional with assets. This is where you want that last layer, that outer shell waterproof layer, that, you know, really nice winter jacket. This keeps you nice and dry and warm with the weather is really bad. That's your doomsday lawsuit protection. layer. That's your asset protection hybrid trust. But by layering like this, you're more flexible. You can adjust and make yourself more comfortable. You know, your skiing, you're getting hot. I'm going to take the mid layer off. Like, oh, I'm sitting at the lodge, getting some drinks with

some friends. I'm just in my base layer. Oh, my God. This storm came in and we weren't expecting that. Now I'm going to throw all three layers on it. We're going to go hit the powder. That's the purpose. And we want the same thing that apply for asset protection trust. Okay. So to recap that, if you're saying when you're starting out, it's best to start out as soon as possible because if you don't have these systems in place and someone sues you, there's nothing you can do after the fact, right? And if you try to transfer it after the fact to an offshore stuff that you talked about, that's fraud. So the first layer is going to be, I think you said, is it zero to 500,000 and that's where you have a couple of Ellis?

Zero to 250. Generally is where that is. Yeah. So you're going to start with just the base layer LLC and insurance and go get to some good insurance. then the next layer, you'll start growing, you're going to expand, you're going to need more than just the LLC. Because we know we just spent, what, you know, like 20 minutes bashing LLCs. So now we know why we need the next layer, right? So we need to do something more. So that's where those management companies come in. You know, like some people use Wyoming LLCs as a management company.

You know, we use limited partnerships as a management company. But you need that another layer. That's the second layer. And then you're going to keep growing. Hopefully you become a millionaire. and you have like 10 properties or, you know, you're high-risk professional. That's where you need that third layer that asset protection trust.

And it's a combination of all three together that really provides you really strong ironclad protection. It's just wherever you fall on that at the initial stage. I'm not going to advocate for somebody just starting out to say, hey, let's go spend $30,000 today and create the Taj Mahal of all asset protection. That's stupid spending of money. I mean, honest to God, start small. You're just starting LLC insurance.

We scale as we go. If you're coming in big time with me already, I'm a doctor. I got six properties, all my personal name. We're going Taj Mahal. We're going LLC's limited partnership and bridge trust. That is something I did want to follow up on was when I've talked to a real estate attorney before, you know, obviously LLCs are a layer of protection, but he's always kind of maintained, and I'm curious on your POV here, that really that first layer of protection is

insurance. Like insurance is usually what kicks in before. we get to the lawsuit side. Is that is that kind of like one of the first things you need definitely for sure? For sure. Insurance. Like obviously, you know, if your listeners go back to our prior episode where we talked about what's wrong with insurance, you know, to recap that, they're good for the little things. And then you have claim limits. What happens if you have an above claim limit? What happens if there's an allegation of fraud or intentional wrongdoings in the lawsuit? Insurance doesn't cover you for intentional wrongdoings or fraud. And virtually every case that's filed

nowadays will always have an allegation of intentional wrongdoings and fraud. So if you have now a million dollar case with some form of intent, which could just be sending an email, yes, the plumbing was done, send, and then you have a mold issue, a multimillion dollar lawsuit now, what is the insurance company going to say? We're not going to pay you a million dollar claim for something that has an allegation of intentional wrongdoings. If you think we're wrong, sue us, goodbye. That's how they wiggle out of big lawsuits. So do you need insurance? Yes, get good insurance. It's good for the little things. What you need to know is what are my claim limits? What are the wiggle outs? And from there, you start scaling as you go. But absolutely get insurance and get the LLC. Just realize the weakness of it,

which we've been talking about, and the need to scale as you go. It's like the first line of defense, but it's not the silver bullet. And from the insurance company's perspective, if we're just being smart and taking a wide range and not just narcissistically look at our own needs, they're going to pay out on small claims because it doesn't make sense for them to hire someone at a six-figure salary to go look at small claims. They're looking at, oh, we got to pay 10 million for this. Let's find a way to get out of it. So by having them cover your small stuff, they're not going to fight you on it as much. It's fine for that lower zero to $250,000. But when you get into having a higher net worth, the risk of lawsuit goes up. Now that thin layer of ballistic armor that may

have worked for like small firearms or something isn't going to be a good when you're getting into light machine guns or something, right? Correct. And the piggyback off of that, the same analogy and principle goes to the next layer of insurance, you know, umbrella policies. Because people like, oh, why don't I just go get an umbrella? It's the same. It's the same exact argument. Just realize all umbrella policies do is provide you more capital to fight. But generally, all that money is going to be eaten up in litigation and trial expenses. So you need to realize it has the same loss, the same limitations, the same exit strategies, and then think about the cost of trial and the cost of litigation. That's generally going to be like, if you're going to go really fight, that's going to

probably be $250,000 to $500,000 of legal battle. Okay. And then the ultimate protection for when someone gets to a net worth of a million dollars or more are these offshore accounts, but they have to be set up before you're in trouble. Again, there is no get out of jail free. Trump card that you can throw down and say, no, no, no, the judge said that I have to pay this, but I'm just going to move all my money to the Cayman Islands and then he'll never be able to touch it. I outsmarted the law. Correct. Because people are like, oh, well, you're, you know, you're Mr. Offshore anyways. You're doing all these Cook Island trust. Why can I just put it in there and have, you know, jurisdictional non-recognition? Because even the Cook Islands, even though they don't recognize

you as judgment and court orders, you're doing this after the fact. So they're going to look at it and say, if you set this up beforehand, yeah, it's completely legit. Like, we won't recognize it, but you did this after the fact. So they still are going to say, no, sorry. They can force them to bring the judgment down to the Cook Island. So we have a little bit of negotiating rule, you know, leverage there and say, cool, you got it. They won't recognize it. But you got to go take the judgment down there anyways. So that could get us back in the negotiating table. But it's nothing like nana, nana, nana, like we threw your judgment in the trash. Like take my penny on the dollar. That argument is when you set this up beforehand. I think it's funny that as human beings,

we all have that what if like, I think I know the loophole because I've watched season three of suits Yeah, I saw a YouTube video. Like, if it ever comes down to it, I've got this super secret five-finger death punch that can get me out at any fight. And we don't think about the fact that you have judges that are incredibly smart people with extensive law degrees in a practice for 20 years. And that that is the person you're going up against with your, I'm going to outsmart them with this strategy. And that they're going to do what you said. They're going to look at your intent. Was your intent to get around my judgment?

Because I'm not going to let you do that versus was it in place? before I issued the judgment. Correct. And like we kind of like identified what the term of fraud is, but you keep hitting the nail on it. I'm like, what is the intent? So when we're transferring assets, a judge literally is going to be when we transferred it, what was the intent? If you had no creditor and you had no lawsuit, then there is no fraudulent transfer because you had no intent to hinder delay, you know, the claim of a creditor. Now, if you're coming to me after the fact and we transfer an asset, that is the exact definition of fraud. You just intended to transfer an asset to hinder or delay,

you know, a legitimate credit. Now, Brian, when people are setting up these legal entities, at least in my experience, I've had to probably reshuffle things around like four different times. That's partially because I often have to switch CPAs and, oh, I just get PTSD thinking about what it's like. I did it a year ago and I'm still talking them every week trying to figure out how we're going to set it up. But a lot of it is because, like you said, changing needs, equity, your net worth changes, the ways that you make money change. This is like a living, breathing organism. It's not like pouring concrete and you could do it one time and you could just let it sit for

50 years. What advice do you have for people who maybe think that they're doing something wrong because they're frequently having to have conversations about how to structure their entities and how to take advantage of taxes? I think that what you need to realize is those are the conversations you should be having consistently. You know, as you're becoming successful and you're making more and you have more risk and you have more assets, you honestly should be talking to your CPA and your advisors more regularly.

You know, like people, and I love it because one of my, my good affiliates who's a great CPA for investors, he's like, God, I wish my clients would call me more than one time a year and just dump a bunch of files on my desk and say, here, work some magic. He's like, you know what magic I could have done if you were talking to me and telling me about what you're doing beforehand for the rest of the, you know, like throughout the year? It's like, I could have really done something for you. And so what I think people need to realize is these are conversations that you should be get some sort of plan with your CPA where it's not just, hey, you're going to buy all my taxes at the end of the year. Talk to them quarterly. Tell them what your goals are.

I'm going on vacation next month. Like how do I, you know, say some taxes on this? I'm building this business. Involve your CPA. You know, maybe you don't need to involve your attorney on it right now because some people don't want to pay those costs, you know, for the legal fees for that. but at least start getting involved with your advisors more often and just realize that's the business of being successful. And the more you utilize your advisors, the more money you're going to probably save and make. Well, I am signing my trust tomorrow because every time I get on an airplane with my wife, she's like, she instantly goes to we're going to die.

And so every time we travel, she's like, we need to get our will and place. We need to get our trust. I'm actually signing tomorrow, signing our paperwork tomorrow. And after listening to you, I'm like, did we do it? it all wrong. Who knows? Find out on the next episode of Bigger Pockett. I'm just kidding. So yeah, there's a lot of, I've spent the past year really trying to learn the tax side of things. I certainly have not put that much effort into the legal side of things. And so I'd really like to, yeah, now I'm more inspired than ever to be like, okay, let's look at the

system cracks here. Let's make sure that all the credit cards are being used correctly. I think the number one thing that people can probably do and find education on is like how not to, how to, how to protect themselves from the, I guess, the veil being pierced, right? Some small education there can really help you break a lot of bad habits that all investors probably have. Correct. I put, I devoted a lot of section of that on my book. And then there's other good books that are like just written about corporate bail. Piercing. The problem is now it's, there's not a lot of, it's hard to get access to information, you know, and like sifting through what's a bunch of BS and what salesmanship and what's legit. And so that's where I always look at who wrote it. Do they

support it with case law? Do they have statutes on this? Like, or is it just a bunch of hyperbole and theories? You know, and we need to, you know, start flushing a lot of that stuff out. And, and I think people need to realize, like, some of the stuff, you know, estate planning, protecting your assets, talking to your CPAs. Yeah, it's not sexy, right? But this is the important stuff when we're making money and trying to, like, grow and be, you know, have financial freedom. That's the stuff where we're, you know, the knitting gritty needs to really happen. Well, we're trying to keep the financial freedom, I guess, right? Like, that's the point of asset protection is like, yeah, taxes help you get there and then the legal asset protection side. There are people out there, and this is me going into a hypothetical,

okay, I don't know this, but here's what my gut says. With YouTube, with social media, with how fast information transfers, and with the growing animosity towards wealthy people that we're starting to see as we go into recession, I think you're going to see an uptick in how much people don't like people that are financially successful. You're going to start to see information being made that teaches people how to sue in the same way that we're teaching you now how to protect yourself. You will start to see people saying, hey, I learned how to take advantage of someone by suing them in this way.

This is what I did. This was the process. This is the point they settled at. And I was able to make $180,000. As that information gets around, more and more people are going to start doing it. The protection that you need is going to need to love. up as the weaponry of the other side increases. I'm not looking forward to that, obviously. I don't think it's good. But I think it's a legit threat that we would be irresponsible not to be

sharing that that's very likely to happen. Is that like, have you seen Brian, maybe an uptick in how often this is happening? Yeah, I actually is going to say what it's an interesting thing. Whenever you look at recessions and depressions and everything, the amount of lawsuits almost doubles. So when times get, when times go bad, people start running out of money and start panicking. and what do they do? They start suing. Who do they sue? The haves. My landlord. I hate you. My doctor. You know, like you got that nice BMW. I want that BMW. So as things get harder, you have an increase in divorces and you have an increase in lawsuits. Lawyers now can advertise and have a medium of stirring the pot, right? It's really, there's no pot to stir if people didn't check out accountability and

responsibility and weren't so sue happy and weren't, you know, identifying as a victim, then there wouldn't be a pot to stir. And so it goes straight to your point of how we got into this massive mess anyways and realize things are getting worse. The world economy is getting worse. There's no easy fix, monetary manipulation, inflator die mentality. We got to protect our stuff and we got to be prepared for the tsunami that could potentially be coming ahead. But keeping a positive attitude about things and saying, where do we keep investing and growing from here? Yeah, I look at us like we subscribe to a philosophy that more or less was captured in the book that I wrote about pillars of wealth, save your money, make more money, invest it wisely.

And it's all about adding value to the marketplace, improving your skills, pursuing excellence, giving your best, educating yourself. That's how you become wealthy. There is an opposing philosophy that preaches financial freedom with the Robin Hood method. We'll just take it from those people that are rich and give it to yourself. And there is a bit of a struggle that isn't as noticeable right now. But I think as we head into a recession, it's going to become much more noticeable. And this information becomes more popular.

Totally. Yeah. Yeah. Well, Brian, you kind of mentioned you have a book. Can you tell us where we can grab it? Is it available now? Is it available with pre-order? Where can people find you all that good stuff?

Yeah. So it's in this last stage of its editing. So it should be done this week. And then I hope to have it put out and published by this week or next week at the latest. It's called Overexposed. And like I said, I break down the world of asset protection and how we got to the point of this crazy and messed up legal system that we're living in. And how we just protect ourselves from it. And then, you know, a great way to go and find the book.

You can jump on my website. I have a whole page just for the book that people can click and go to. Or I'm going to publish it through Amazon so they can just jump on Amazon and get a copy of overexposed. know, what is your website? Where can people find you? Yeah, www.bblegal.com. And like before, like I use my website just as an educational link for people, like tons of case law, tons of, you know, client facts, situations, frequently ask questions, questions you should ask attorneys when you're betting them to create this system. And what I've noticed is when people actually go in and jump on my resources and start asking people questions, they can bet through a bunch of BS.

Well, well, I rest my case, Your Honor. David Green, where can people, find more out about you if they want to learn about you on the inner webs. You can't handle more about me. David Green24.com or you can check me out on your favorite social media at David Green 24. What about you, Rob? You can find me on YouTube over at Rob Built and on Instagram as well. Got very diverse content. They're both very different.

So go say hi. Go leave a comment about my hair or a compliment about my hair because I seem to get them both every single day. Any attention is good attention when you're. You're an attention-starved person, Mike Rob. Well, thank you, Brian. We appreciate you coming back on again. This is David Green for Rob.

I rest my case, your honor, Abasolo. Signing on. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. On the host and executive producer of the show, Dave Meyer, the show is produced by Ian K, copywriting is by Calicoe Content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter,

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