Asset protection and privacy is a necessity to protect your wealth in today’s litigious world. There are over 80-million lawsuits in the United States alone each year. Over $200 Billion in frivolous lawsuits every year. In our research, we found a lady that has sued over 700 people during her lifetime. That was her wealth accumulation strategy!
Here are a few fundamental tips to protect your assets before diving into the “sly like a fox” strategies.
First, separate your safe and at-risk assets. Like gold, silver, crypto, stocks, and investments (which do not cause liability), your safe assets should be in one entity, typically an LLC.
Your business should be a separate legal entity. For many of you, forming a second entity for your business to further reduce your risk may make sense. A separate legal entity should hold real estate outside your personal residence.
If you are upside down in that real estate, you may want to speak to your CPA about the tax ramifications of transferring your property to the LLC (there may be a taxable event in that situation).
The living trust will be the owner of the LLCs and complete your estate planning. Other entities may come into play as needed.
The name of the game in lawsuits is to determine how much is likely to be recovered if someone goes after you and receives a judgment. If you have nothing or appear to have almost no assets, there is typically a lesser motivation to go after you.
Your goal is not to look appealing for someone to go after. Let them go after someone else, like all those sole proprietorships around you who have many assets in their living trust but are not protected from liability, only probate.
Privacy is not illegal. It is generally oversold as a must to protect your assets, and that is not the case. One famous attorney told me, “Scott, if you want to really have protection, plan as if you will have to show the judge your entire plan, where all your entities are, the structure, your assets, and money. If you can sleep at night knowing that is the worst-case scenario, could you live with that?” He meant that if you had a solid asset protection plan for step 1, step 2 would have minimal damage.
In Nevada, many companies offer a “nominee service,” where they will appoint someone to be the manager or director of your corporation or LLC. The challenge with this type of service is since WorldCom and Enron fell apart around 2001. There is a much higher basic fiduciary responsibility for naming officers or managers of your LLC in state records.
A nominee service is where a company will “name” a real person to sign as officers and directors of the corporation (sometimes they do it for an LLC), and you remain in control of the company and the checkbook… It has been popular, over the years, for those needing privacy. The challenge is that most people really needing privacy are usually hiding from something, whether a lawsuit, taxes, a non-compete, divorce…
Some people really have a lot of wealth, and they want privacy for asset protection. Overall, we disagree with the “nominee service” because it becomes a hot spot for IRS investigations (especially those companies who obtain the company’s EIN with their SSN).
If you are in a situation where you would like more privacy and not have your name show up in state records, perhaps have one “public company,” where everything shows up in your name, and one “private” company, where your name does not show up. This may be more of a “holding company” with safe assets like gold, silver, domain names, cash…again not always necessary, but maybe an option to consider.
Here are some advanced strategies to keep “gold-digging scumbags” away from your wealth (those are the ones that make up that $200 BILLION in frivolous lawsuits each year.
- The layering of entities. This is another key component of your asset protection and privacy strategies. This means not operating your business as one LLC, where you are the owner. There is protection if you get sued personally; the “charging order” kicks in, making it very difficult for someone to get control of your operating company. To avoid a “charging order” that still may disrupt the operating entity, the way to avoid that is to require the members to have their own “safe asset holding LLC” to retain the operating company’s ownership interest. Now, if you, as an owner, are sued personally, you do NOT own any interest in the operating company. If fact, you are technically NOT the owner; an LLC is the owner. You are the owner of the second LLC. If someone asks if you are legally the operating company’s owner, the correct answer is no. This is where many screws up. They basically say too much. There are times when you are the owner: if you are applying for a business credit card over the phone and want to know if you are the owner, tell them you are. You will not explain your 2-3 levels of entities and expect the employee for the credit card company to figure that out. On a business license application, legally, you are not the owner. If you are involved in business with a partner and they own more than 50%, and they own the LLC personally, you may want to recommend they incorporate this strategy; because if they get sued personally and lose, it may disrupt operations, meaning even with the charging order, someone can still subpoena the business records, which can be disruptive.
Here are a couple of layer options that make sense:
- An LLC taxed as a partnership, owned by an LLC taxed as an S corporation or partnership (usually an LLC taxed as an S corporation with earned income and assets like real estate) would be an LLC taxed as a partnership.
- An LLC taxed as an S corporation owned by a single-member LLC taxed as an S corporation. Why not owned by an LLC taxed as a partnership? There are restrictions on who can be the shareholders of an S corporation, and it cannot be an entity taxed as a limited partnership, foreigner, or a C corporation.
- A single-member LLC is owned by an LLC taxed as a partnership. It’s common to have several single-member LLCs owning real estate individually, all owned by one LLC taxed as a partnership. That means a single-member LLC isolates each piece of real estate, and the one owner is the LLC taxed as a partnership. That means only one federal tax return, a 1065 for the LLC taxed as a partnership. If you (or your living trust) are the LLC owner taxed as a partnership, you do NOT own the real estate. If someone asks if you own the properties, the correct answer is NO.
- A regular C corporation is owned by an LLC taxed as a partnership. Remember, any time you own stock in a C corporation in your name personally or in your living trust, and you get sued personally, you can lose control of your ownership. If you own more than 50%, that means you can lose control of your entire company!
- Advanced: Any of the above with a Nevada Asset Protection Trust as the owner in the end. A Nevada Asset Protection Trust is like an “offshore trust” onshore. You do not have to live in Nevada to benefit from it. Here is a link to a recorded webinar training with Attorney Robert Bolick. He covers details of this powerful tool. After you transfer an asset or ownership into the trust, and two years go by with no legal issues, you are home free from creditors; they can’t touch it! If you have a higher net worth, this tool may be a must for you.
- Creative and Sly Like a Fox. Here is where we get into the fun strategies, the ones, up until now, we have never published anywhere. We’ve only mentioned them verbally, when needed, over the last 22 years.
- Using DBA (doing business as) names makes it harder for someone to get to first base. A DBA is in a different database than the secretary of state’s database, where most people search for an entity that you may be the owner of. As you know, an entity can form a DBA, and the proper way is to make sure the applicant is the entity, not you personally. If it is you personally, you just created a sole proprietorship.
Here are a couple of examples in practice. You own 10 pieces of real estate. An LLC owns each. Instead of being the manager of each LLC, where your name shows up in state records, you can form a single-member LLC to be the 10 LLCs manager. Form 10 DBA names under the single-member LLC and have each DBA name be the LLC manager that owns each piece of real estate.
- Using DBA (doing business as) names makes it harder for someone to get to first base. A DBA is in a different database than the secretary of state’s database, where most people search for an entity that you may be the owner of. As you know, an entity can form a DBA, and the proper way is to make sure the applicant is the entity, not you personally. If it is you personally, you just created a sole proprietorship.
It will be complicated to determine a pattern that points to you as the manager of 10 LLCs; there are different DBA names. You may be thinking, “Who is the manager of the single-member LLC?” You are. What about that? Now you show up only on one LLC in state records, with no assets, just as the manager of 10 other LLCs. The owners of those LLCs are another LLC. Starting to see the pattern?
Take that a step further: form a single-member LLC with a DBA in Delaware. Delaware LLCs do NOT even require the manager or member to be listed in the articles, meaning your name does not show up in state records! Now, the DBA (in a county in Delaware) is the manager of the Nevada LLC or your home state LLC). If someone looks for that DBA name in your county (the natural assumption), nothing will show up. Again, very hard to get to first base.
Add one more layer: the DBA name may be creative…. if you live in California, how about Florida Old-Timers as your DBA name? Would you go search in California or Florida for that name? Probably Florida, but the DBA was filed in Delaware. Are we having fun yet? How about a more creative name, like Florida Homeless Shelter, as the manager of your LLC? Does that evoke the name of an organization you want to go sue? Maybe less likely.
Creating mismatches in databases by design. Most people who work for the government do “try” their best to make things accurate, sometimes to your advantage or disadvantage. When you file the DBA or entity, what if you purposely misspelled the name, hopefully for a diligent government worker to fix it for you later on? How about…Houston Management Group, where you spell Houston, “Houston” and change the “o” for an “I”? The state or county may help you and fix that “obvious” misspelling at some level.
We have done this in the past, and the Secretary of State would call and tell us we misspelled a name, and I would tell them we wanted it misspelled on purpose! Of course, for some reason, when you actually misspell one, they seem to miss those that you needed to be corrected.
What is the benefit here? Your name may be corrected in the database over time, and, basically, when the real entity is typed in, it will NOT show up! Remember that any character on the keyboard can typically be used in an entity name or DBA name. Your DBA name could be “(-&U*@@4o0?/, LLC” what are the odds of that one getting screwed up in a computer database in the future? Probably very likely.
Of course, keep in mind, this may create some challenges when YOU want to find YOUR stuff, and now your information is not on the computer properly…this can work both ways.
Keep in mind. The primary purpose is to form a creative name you like, not to mislead people, just like the primary purpose for some structure should not be for tax saving reasons; it should be for business reasons.
We live in such a litigious society, and the more assets you want to grow and protect, the more complex your planning and structuring will become. Unfortunately, “simple” and “asset protection” are inversely related.
Wealthy real estate investors don’t have all their real estate in one LLC. They will divide their equity into different entities as a percentage of their net worth. Your goal probably should not be to disappear from the radar screen, as so many “privacy geeks” like to do, but to blend into the woodwork as an “average person,” where it appears, on the surface, you have a home in your own name, are loaded with debt (could be a mortgage from your own company), a W-2 salary from a company (yours) and debt on your personal credit cards.
That’s much better than no personal bank account, no home in your own name, and you live a grand lifestyle. That does not sound normal. You can live the grand lifestyle, control but not own everything, and be protected as you accumulate wealth for you and your family.
