While building wealth takes a whole lot of time and effort, your valuable assets can be taken from you in an instant if they’re not protected correctly. In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Brian T. Bradley, the Senior Managing Partner at Bradley Legal Corp, a leading educator and nationally recognized asset protection attorney for high-risk professionals, entrepreneurs, real estate investors and ultra-high-net-worth families. Brain’s goal is to give you a peace of mind, knowing your assets are safe, by making it difficult for predatory lawyers to target vulnerable people.
In this episode, you will learn:
- What asset protection is.
- The three layers of asset protection.
- How to properly layer your asset protection plan as you and your wealth grows.
- What asset protection trusts are, and the differences between the three main types (foreign, domestic, hybrid).
- Three misconceptions about asset protection.
- And more!
Resources:
www.btblegal.com | [email protected] | Schedule an Introductory Call | Bautis Financial: 7 N Mountain Ave Montclair, New Jersey 07042 (862) 205-5000
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. On today’s show, I brought on a special guest, Brian T. Bradley. Brian is the Senior Managing Partner at Bradley Legal Corp, a leading educator and nationally recognized asset protection attorney for high-risk professionals, entrepreneurs, real estate investors and ultra-high-net-worth families. Brian was selected to the Best Attorneys of America List 2020, Lawyers of Distinction List three years in a row (2018 through 2020), Super Lawyers Rising Star List 2021 and 2015, nominated to America’s Top 100 High Stake Litigators List and the Top 100 in Real Estate. Brian, welcome to the show.
Thanks for having me on, Marc. This is an important topic, and I’m going to try to keep things fun and not legally dense.
Yeah, I’m sure that’s not easy at times.
Sometimes it’s not. But I think talking through stories helps. I’m not everybody’s legal guru here… We’re just going to be talking in generalities, and I think your listeners are going to learn a lot today. I hope that the concepts that we talk about help them understand this really weird world of asset protection.
Definitely. I’m excited to talk about asset protection. People spend so much time and effort building up wealth, but not as much attention is put on protecting those assets. Can you start off by speaking generally about what asset protection is?
What Is Asset Protection?
Yeah, it’s a great place to start. Asset protection is not traditional estate planning, it’s modern estate planning. What it does is place legal barriers between your assets and a potential creditor – a person trying to sue you and take your money/assets – before it’s needed. The key word here is before. Asset protection acts as a barrier, like a safe for your gold, guns or valuables, but it is a legal barrier.
Now, if you come to me saying, “Hey Brian, I’m getting sued. I have everything in my personal name, what can you do for me?” I’m going to say, “I’m going to exempt the lawsuit, but here’s how we should go about it for any future lawsuits.” So, again, the key word is before it’s needed.
I know it goes against human nature to take action before it’s needed, but I really like the Tony Robbins saying, “Success leaves clues.” The rich don’t own things in their personal names, they just get the beneficial use of enjoyment out of them while separating the legal liability. We want to mimic, or copy, the rich.
When I talk to clients about trusts, or protecting assets by moving them outside of their personal name, I often see people worry about losing control. What happens to the control of that asset once it’s taken out of their personal name?
That’s a great question, and this is a typical attorney’s answer, but it depends. At the end of the day, if you are in control of an asset like the entity, a judge can order you to change it. And if you don’t, you can be held in civil contempt of court and thrown into jail. So you want to manage the assets, get the benefit out of the assets, but control… I only want you to have control until it’s not in your most advantageous situation to do so… which we can talk about later when I explain what a hybrid trust is.
So remember, losing control is not a bad thing. If you have a massive lawsuit against you, you want to be legally out of control, so that a judge can’t throw you in civil contempt of court and force you to change your trust. That’s the difference between revocability and non-revocable trusts, revocable meaning it can be changed versus irrevocable meaning, “I’m sorry, I can’t change this now.” And it starts creating more legal barriers that someone has to fight through, and starts limiting what judges can force you to do.
Before we get into the details, how did you get started in this space?
It’s an interesting story… Most people working in asset protection are real estate attorneys who learn about LLCs, or business attorneys. There are not that many exclusive asset protection attorneys like myself.
I was, and still am, a litigation and trial lawyer. Going through the court system, I saw so many clients involved in completely bogus lawsuits. Some of them were truly legit lawsuits, but most turned out to be frivolous – it was just someone coming at them for a money grab, and the client’s lives were turned completely upside down.
Again, if you have no asset protection planning before being sued, it’s like trying to get car insurance after you already hit somebody with your car. Or house insurance after your house already burned down. Sorry, you’re just too late to the game.
So I watched a lot of people lose their entire legacy and life work because either they didn’t perceive the risk, they were riding their luck, or they just believed a ton of misconceptions about trusts. In the latter, many people believe all trusts are the same, just like ice cream is ice cream. Well, no… there’s a lot of different flavors of ice cream, so not all ice cream is the same. The same can be said for trusts: Not all trusts are the same.
Misconceptions About Asset Protection
Here’s a big misconception. People say, “Well, I have an umbrella policy that covers it all, right?” Well, no. It gives you more excess and capital to fight, but it still is insurance. And insurance doesn’t cover you for fraud or intentional wrongdoings. There are claim limits.
So you really have to understand that, in massive lawsuits – the ones that wipe people out – your insurance company does not want to pay that, even if you have an umbrella policy. In those instances, they’re going to use escape clauses, like intentional wrongdoings and fraud, to say, “Well, we’re not going to cover this.” That’s why there are insurance defense attorneys.
Another big misconception is that LLC’s are enough. But LLCs – limited liability companies – tell you right in the name that they can be pierced. Over the last four years or so, LLCs have become more popular – people are just throwing all of their assets into one. They think it’s like a Dracula slayer, and they’ll be perfectly fine. But it’s really created a massive mess.
Or CPA’s will create S corps to put real estate in for tax purposes, but they don’t realize the issue that comes about when you need to take assets out of these S corps. Typically you can’t, because you’re going to have to pay up all the deferred taxes back to the government. So you’re stuck, and then all of your assets get frozen and/or seized.
So there are a lot of misconceptions and miscommunication.
Alright, you made a lot of good points that we’ll come back to. But let’s start talking about the asset protection layers. How does someone begin putting the protection in place? What are some of the tools they can use?
The 3 Layers of Asset Protection
When it comes to asset protection, there are different layers.
First Layer: LLCs
The first layer is your base layer, which is an LLC in insurance. This is generally implemented when you’re just starting out, so your net worth is probably at or below $250,000.
Second Layer: LPs
As you start growing and adding more assets, you’re going to need a second layer. At this point, your net worth is probably between $500,000-700,000. If you’re in real estate, you probably would have four to eight properties. At this point, it’s time to implement a management company or a limited partnership (LP).
Third Layer: Trusts
Then, when you hit around $1 million-1.2 million net worth, you’ll need a third and final layer. This is your asset protection trust. Essentially, this is the doomsday lawsuit protection.
By layering your asset protection, you’re more flexible and, over time, more comfortable.
When a client comes to me, I know they’re going to want the asset protection structure to hit on four things:
- Effectiveness: The strategy works.
- Cost: The cost is sustainable.
- Control: The assets are managed.
- Compliance: You’re able to maintain the IRS compliance.
The goal is to be able to work the asset protection plan through each of these categories and check all four off.
Going back to the three-layered approach you mentioned, does the second layer (LP) sit on top of the LLC, or does it replace the underlying structure?
It sits on top. So the trust would actually own the limited partnership, and then you would be the managing member of the limited partnership. That’s why you use a limited partnership at that second layer, because you can do a lot more statutorily with a limited partnership that you just can’t do with LLCs (without getting really creative and out of box with operating agreements, which then have to be up for judicial review).
Okay, and is this structure more effective for specific types of assets, or could this be applicable to, let’s say, a regular business that someone owns?
It depends. I would use the limited partnership more for a management company for assets. It would own and manage your LLCs that hold real estate. And then I can put non-risky assets like stocks, bonds on intellectual property, syndication shares… anything non-risky directly into the management company.
Got it, that makes sense.
Yeah. And you just want to be the managing member of that. Then have your trust own the limited partnership and then you’re the beneficiary and creator of your trust.
Okay. Are there any states in the U.S. where this is more (or less) effective?
No. Especially when you start getting into the hybrid trust – which I will talk about – because at the end of the day, if it’s something that’s purely domestic, let’s just say LLCs, any type of business structure, limited partnerships, C corps, S corps, whatever, they’re all domestic. So we have the full faith and credit clause, the constitution, every state has to acknowledge the judgements and court order proceedings of every other state.
So let’s say you’re a California resident with a judgment in Nevada. Well, California has to recognize it, or vice versa. So when you start looking at jurisdictions for higher risk, high-net-worth individuals, that’s where these hybrid trusts really come into play. Because what you want to be able to eventually say is, “I don’t care what state I’m getting sued in, and I don’t care what a judge says, because my assets are no longer in jurisdictional control.” That’s what hybrid trusts can do.
Are these three layers of asset protection – LLCs, LPs, Trusts – necessary for all business owners?
Generally, the average client who we build the three layered system for has a net worth that’s around $1.2 million. That’s exposed net worth and risk.
I know you said that asset protection is not like traditional estate planning, but what happens to the assets in these trusts when someone passes away?
In these instances, you’ll have your asset protection plan hold, and own, all of the assets. Then, with your asset protection trust, or a hybrid trust, you reference your family estate plan, or your revocable living trust, in that asset protection trust. So you would have a clause in it that would say, “Per the death of the last surviving spouse, all of the assets are going to be passed on per the instructions of the revocable living trust.”
So the idea is you’re protecting your assets while you’re living from lawsuits, creditors and other people coming after you, but you’re avoiding probate and death taxes once you pass away. Because that’s when the revocable living trust kicks in.
That makes sense. Are all of the trusts created in the U.S., or are some foreign?
So trusts are the heart and soul of any asset protection system, and they have been the longest lasting entity for holding assets. They go all the way back to Roman times. When done right, they’re very strong, and they can be morphed to be what you need without dealing with funding issues that you generally see with LLCs and business entities.
So trusts are very powerful, but picking the proper jurisdiction is really important.
Trusts come in lots of different types, and they all have different applications. The trust that most people are familiar with is the family revocable living trust. Trusts don’t die, but when you do, your trust is transferred ownership, that way you don’t have to go through the courts on probate. This trust really changed the landscaping for estate planning.
If you’re investing in real estate, I’m sure at some point you’ve heard about a land trust. This is another kind of trust, where the land goes into the land trust and the land trust connects to the LLC. But land trusts don’t have any protection in and of themselves. And this is where the misconception of, “Oh, I have a land trust, I’m good,” comes from. No, they don’t protect you. What’s protecting you is the limited liability company, which is limited.
Land trusts are just a privacy mechanism, not a protection mechanism. Then, from there, there are higher levels of trusts called asset protection trusts. And here is where I think we can spend a little bit more time breaking down the three types.
The 3 Types of Asset Protection Trusts
The asset protection trust came about in the early 1980s. An asset protection trust is what’s called a self-settled spendthrift trust. And all self-settled means is that they’re created for yourself. So they’re for you, by you, as your own beneficiary.
They have very important spendthrift provisions in them, which let you protect your assets while you’re alive from creditors – preventing you from relinquishing control of assets like I mentioned before. The difference is they allow you to protect the assets, not just for your grandkids, but for yourself, which you weren’t allowed to do in the past.
Like I mentioned before, you probably heard of something familiar with a self-settle trust called the revocable living trust. Some of you have them, or maybe your parents have them, or maybe it’s your grandparents that have them…
The difference is that with an asset protection version of this trust, it includes those spendthrift provisions. And the spendthrift provisions allow you to protect your assets from creditors. People suing you, trying to take your money, take your assets, they’re the actual teeth behind it.
For those to work, the trust has to be non-revocable, meaning it can be changed or ordered to by a judge, but irrevocable. So it’s a very different type of trust.
Now, you can set them up onshore, in the United States, or offshore, in another country. There’s also a hybrid option, which I will speak about last.
For historical context, offshore trusts came first, back in 1984 when the famous Cook Islands created the first asset protection trust and statute. I personally like the Cook Islands, when it’s applicable, just because it has the best home court advantage. What makes it so strong is they have statutory, non-recognition of any other jurisdictional court orders in the world, including the United States.
This means that if you have a judgment against you in the United States, and then they took it down to the Cook Islands, because there’s a Cook Islands trust in play, your US judgment is worthless. It has no value whatsoever because statutorily, they’re prohibited from recognizing it.
So if someone wants to sue you there, because you have Cook Islands trust in play, they’d have to start their case from scratch in the Cook Islands, and they’re going to have to prove their case beyond a reasonable doubt ( the murder standard). Plus, the claim (the lawsuit), cannot be amended once it’s filed. So once the complaint is filed, you can’t amend and change it like you can in the U.S. And finally, the person suing you has to front the entire court costs and find a judge from New Zealand. You can’t take your US attorneys with you to the Cook Islands. They don’t take contingency fee attorneys there. So it’s no joke to file a claim down there. And the kicker is if you lose, you pay. And then there’s only a one year statute of limitations.
But now, let’s go back to that four part ECCC test (effectiveness, cost, control, compliance) for a trust in the Cook Islands:
Effectiveness is 5/5 five stars because of the statutory, non-recognition. So why not just go foreign? Well, there’s drawbacks to everything… and in this case, it falls completely short on cost, compliance and control.
Cost: The costs are going to be very high, generally around $50,000-70,000 just to create.
Compliance: You’re going to have to file a lot of IRS compliance paperwork called 3520s and 3520As. These are full balance sheet disclosures, and sometimes the entire trust agreement has to be disclosed to the IRS. Plus, you’re going to have FATCA account compliance disclosure because you’re going to have to create a foreign bank account.
Control: And of course, you’re not going to be in control of the trust. But that’s why these trusts work so well.
So a lot of clients are not comfortable with offshore trusts like these. I’d say maybe 2% of our really risky, high-net-worth, highly-exposed clients will go purely foreign.
The second option is the domestic option. This came into play 10 years later, originating in Alaska. Now, there are about 19 U.S. states with some asset protection statutes. The issue with a purely domestic asset protection trust is that in the US Constitution, there’s the Article IV, Section 1, Full Faith and Credit Clause. This means that, for example, Nevada can pass an asset protection statute, which they have, but it can’t ignore that California, or Washington, or Florida court order of judgment. Where the Cook Islands can just literally throw that California judgment of the trash, Nevada can’t… they have to respect it, and they even have to litigate it.
There are courts now that are simply ignoring the choice of law clause. There’s all this case law that came out from 2009-2012: Battley vs. Mortensen, Henry Hubbard Del vs. Del, Coker vs. Coker… great cases, great law, great facts. The judges just said, “Hey, we’re ignoring the choice of law clause. Trust fell apart. Trust is breached.”
A breach means a loss of assets, and that’s completely unacceptable. So, because of the case law, onshore trusts are not effective. So what do we do? That’s where the hybrid comes into play.
The hybrid trust, or bridge trust, combines the best of both worlds. My partner Doug created it about 30 years ago, so it’s been around for a while. What it is, it is a fully foreign offshore Cook Islands trust from the day it’s built. We just bridge it back to the U.S. for IRS purposes by staying in compliance with the IRS Section 7701. Because of that bridge, as long as we have our compliance, we’re now classified domestically.
What this means is that the trust is cheaper to set up. Generally, it’ll cost about $23,000 to set up. Plus, it’s more flexible. You have none of the IRS compliance and disclosures, and really no IRS tax filings and disclosures at all because it’s domestic and a grantors trust as well. Domestic is the classified grantors trust.
But you have that power of the offshore Cook Islands in your back pocket if and when you want. So, during a state of duress, your attorney (us), would declare the state of duress and break compliance with the IRS by removing you as the trustee. At that point, your trust is what it is. It is a purely foreign Cook Islands trust. So now that comes into effect.
That said, the hybrid trust is extremely effective. If you go back to the acronym ECCC, it’s extremely effective, you’re in control up until the last second (when you really shouldn’t be), there is no compliance while you’re domesticated because there’s no IRS tax filing, and costs are cheaper. So you really hit all of those markers.
Do you find that most of the trusts you’re creating are this hybrid, or bridge, model?
Yes, they make up about 90% of our practice. But remember, most firms don’t focus on high-end levels of asset protection, so if you went to another firm and said, “Hey, I want a bridge trust (or hybrid trust)…” Most wouldn’t even understand what that is. We serve high-risk, high-net-worth clientele, so this is what our business is primarily focused on.
Right, that makes sense. Well, we’re just about out of time. Brian, I want to thank you for being on The Agent of Wealth Podcast today. You gave some great information on asset protection. How best can someone reach out to you to find out more about what you do?
Your listeners can find out more on my website, www.btblegal.com. It is designed as an educational resource with lots of case law, frequently asked questions and client case studies. You can also email me at [email protected]. Generally, I will do a free 30 minute consultation to see if our services are a good fit for your needs.
Great, we’ll link to all that in the show notes. Thanks again, Brian. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.
Bautis Financial Advisor Commentary: November 16, 2022