WCI #199: Asset Protection with Jay Adkisson

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dali. This is the White Coat Investor Podcast 199 Asset Protection with Jay Adkisson. Welcome back to the podcast. I hope you're as excited about this pandemic waning as I am. Every week I'm looking at the cases dropping like crazy. I think in just about a month. We're recording this now on. Let's see what's today. Today's the 9th of February. Over the last month, I think we've dropped off in our case numbers by two thirds. If this trend keeps up, it's going to be dramatically better a month from now. So I'm really excited about that. Thanks to all of you who are working hard to do that and not only in your professional work, but in your homework. You know, all of us are taking steps and making sacrifices and staying away from other people and canceling activities and that has an effect. There's a certain amount of stress on all of us just from living in a pandemic. So thanks for doing the right thing and keeping people around you safe. Do you ever find yourself wishing there was somewhere to go to ask your finance, insurance or investing questions? The White Coat Investor community is a great place to turn. We have a thriving community across all of our social, Facebook, Twitter, Instagram, Reddit and our WCI forum. We have been discussing solutions to your money problems since 2011. Join the Conversation with thousands of other White Coat investors. Follow WCI on your favorite social media platform for financial resources, tips and strategies. Just head to your platform of choice and search for the White Coat Investor. You can do this and the White Coat Investor can help. All right, our quote of the day today comes from epictetus who said wealth consists not in having great possessions, but in having few. Wants a bit of a stoic? All right, next week, March 4th through 6th is WCICON 21. It's a virtual event this year, despite the pandemic waning a bit, it's still a little too early to have a big live event with a bunch of doctors. Although I think a large percentage of my readers are now immunized, it was just too early to do it in person. We are doing it live. However, there will be a number of events at this conference that are live. Some were prerecorded, but there are live events every day of the conference and you can still register for it, go to whitecoatinvestor.com conference all right. We have a special guest today on the podcast. We had an asset protection episode a few months ago and people enjoyed it. However, a lot of the feedback I got is why didn't you just have Jay Adkinson on? So I said, well, I know Jay. I can just get Jay Adkinson on if you guys want to hear from Jay. So we'll do that. If you don't know Jay, he's an attorney and a writer. He lives in Southern California. He's famous for a lot of things. He created a scam fighting website. He has been an expert witness to the Senate Finance Committee. He is known for a personal fight against eye cancer, Lost an Eye from that and supports others who have had the same issue in the past. He's actually a private pilot, one of the few that's been able to obtain a pilot's license with one eye. Speaks to the Bar Association, American Bar association, has also spoken to physician groups such as the American Society of Plastic Surgeons. He's the author of a couple of books on asset protection, asset protection concepts and strategies for protecting your wealth, the charging orders, practice guidelines. He's got a few other books that he's also published, including Lost Eye, as you might imagine. But he is going to be a speaker at WCICON 21. So if you are interested in hearing more from Jay, that is one great way that you can do it is to attend the conference and we'll be talking a little bit about that during the interview. Let's get him on the phone and get this started. Welcome to the White Coat Investor podcast. Good morning, Mr. Adkisson, tell us a little bit about your upbringing and how it affected your views on money.

Well, I grew up as a kid in rural Oklahoma, which wasn't exactly affluent. So I tend to follow the Will Rogers mantra of I'm not so concerned about the return on my money as I am the return of my money. So when it comes to investing, I'm pretty conservative. Typically my clients are too. I have some very wealthy clients and I gotta tell you, their investments are very conservative. Some of them stick to bonds, tips, treasury and inflation protected securities, things like that. My views tend to be very conservative based on my rural upbringing. Now, having said that, there was a time when I held a registered option principle, a Series 4 from FINRA and I've been involved in some pretty interesting transactions. So I'm not averse to them. It's just that again, I think it's more important to protect principle than to chase returns.

Doesn't sound like you hang out very often on the WallStreetBets subreddit chasing GameStop and AMC stocks, huh?

No, I don't. I mean, if I did, I would probably sit there, bide my time, and then if available, go out and buy a bunch of puts when they got at their high. You know, I tend to be, you know, you know, one of those skeptical people. You know, there's people that are always positive, there's people that are always a little bit negative. I'm probably in the latter category. I would be a natural short, let's put it that way.

Well, tell us a little bit about your education and career. In particular, I want to hear why law and why asset protection?

Well, I was again, kid grew up in rural Oklahoma, but I was one of those kids that was champion high school debater. When I went to college, I was initially going to study engineering and then go on to law school. That got sidetracked a little bit. Still ended up in law school and really enjoyed it. Did very well, graduated near the top of my class. I had always wanted to be a litigator, so I actually ended up in litigation. And in litigation I ended up pursuing some very high profile cases, had some, had some big cases at a very early age, had a lot of success at an early age. You know, I was in a million dollar club by the time I was 31, which at that time was a big deal. That's back when that was real money. And what happened is I got a reputation for basically going after debtors. I was the guy that people would come to if they wanted to squeeze some blood out of the turnip at a very high level. And what happened is that in the early 90s, there was the first push of asset protection planning. See, asset protection planning really didn't exist until after 1987 when Colorado Attorney Barry Engel got the Cook Island Trust statute passed. So this was at the early period, the nascent period of asset protection planning. And what would happen is that clients and attorneys would come to me and they would say, you know, hey, Jay, took a look at this. Does this work? And most of the time I would say, no, you know, it's not going to stop me, at least, but maybe here's some things that you can do to boost this and that. And what happened is that eventually I got around to where I was giving so many recommendations that I ended up being an asset protection planner. And it was, you know, it was fun. Back in the, in the mid-90s, I would say that I made the conversion to the, to the, to the asset protection site in 95. It was all offshore. And it was a lot of fun. I mean, there was a week, a month I was leaving my office in Oklahoma City and I was going down to the Caymans or the Bahamas or wherever else I needed to go and sitting with people and opening accounts and getting trust documents together and everything else, and it was really a hoot. What happened though is that we had a series of court cases that came up in 99 that started undercutting a lot of the offshore planning. And that's when things started to turn a little bit. But that gives you a background of how I got into it. Now, I will say I did have some early fame in the sense that when I was doing the asset protection planning, I would get a lot of calls from people that would ask me about offshore investments or investments that were a little exotic. These high yield interest programs and people having all sorts of schemes and things offshore. And I would warn people off of them. I would say, hey, look, you know, don't do that. You know, your money's going to disappear, or that's an obvious scam, or that's a Ponzi scheme. And I got so tired of doing that that eventually I started, I created a website. The website was called Kwatloo's. It's still around. And I started putting warnings about scams and things on that website. What happened is that took off and took a life of its own. And because of Qualtlus and my work with it, I was twice an expert to the US Senate Finance Committee talking about tax and investment scams. So that's how a poor kid from rural Cushing, Oklahoma ends up testifying before Congress a couple of times.

Awesome. Now I see occasionally an advertisement often aimed at doctors by an asset protection attorney or a firm that kind of specializes in asset protection. There's always a lot of fear in their marketing materials. You're going to get sued and you're going to lose everything. Do you think that fear is appropriate? And how much anxiety should a doctor really feel about asset protection?

Well, you know, where physicians lose money is, you know, not so much the excess malpractice. And that's what, that's the stick that these guys use to basically, you know, drive the rabbits into the wolves is to, you know, talk about excess malpractice verdicts. You know, certainly asset protection planning has a potential use against those things. The thing about excess malpractice verdicts are is they're very rare statistically in the United States. They're about as common as lottery winners. So it's just not something that, you know that you really have to worry about that much now. You know, probably most physicians out there are going to know somebody that got zinged by an excess verdict. I will tell you though, that in 31 years of practice, I have yet to meet personally a physician that got zinged on an excess malpractice verdict. I just never have met them. I'm sure they're out there again. There's about the same number of those folks as there are lottery winners, but I've never met them. So what happens is asset protection. The excess is used to basically drum up fear to scare people into doing something that probably they otherwise wouldn't think of it. Now, should people do asset protection planning at some level? The answer is probably yes. But keep in mind it won't protect against divorce. That's the place where physicians lose most of their money. The remedy for divorce is either a prenup or a post nup. It's not going to protect against the second place, that investor or that doctors lose money, which is bad investments in tax shelters. You beat that by getting a second opinion. Then after that, your first line of defense is always insurance. The more insurance you have, the best thing in the world is if you get sued, you call up your agent and say, hey, there's a check in the mail for $2,000 to you which covers my deductible. It's now your problem. It's not my problem anymore. Asset protection's way, way down the line. Do people need it? Some people need it depending on what they're doing. You know, if you're a neurosurgeon, it's probably worth thinking about because you're going to get sued a number of times. Obstetricians, same way. If you're a general practitioner, I'm pretty doubtful. You know, again, it just kind of depends on, you know, what's your real chance of being hit with an excess verdict. And I would say for most physicians it's pretty low. But it is used as a hook. No doubt about it. The fear is used as a hook to get people to do planning that, you know, they probably would just buy insurance and call today and they would probably be correct to do that.

Can you describe your basic framework for thinking about asset protection? How should people think about an asset protection plan, for instance?

Well, when people think about an Asset protection plan. They need to think about it in sort of basic building block terms or think of it maybe as lines of defense. And they need to do the simple stuff first. So for instance, you know, you know, when somebody comes to me, you know, I'll do an evaluation to see what their risk are, what assets they have. You know, we'll look at insurance because insurance again is the first line. We want to make sure people are insured. I'm not an insurance agent, but I frequently tell people they need to have a heart to heart with their insurance broker. But some of the things people are going to look at are things that are specific to their state. In given states, people have statutory exemptions that are classes of assets that are not available to creditors. And so what you have is you have things like Homestead. In some states you might have annuity contracts. In some states disability insurance is always protected at some level. Sometimes the pension plans are protected. You want to do those things first because that's stuff that the legislature has said, hey, you can do that. Those assets are protected. We want them to be protected because we don't want people living on the street that's a burden to taxpayers. So you can do that. And the other thing is that's free. So you do that. Then the next thing you look at is in a given state, are there things that we can do to recharacterize property to make it a little bit tougher for creditors? Can we change property held in a joint tenancy and a property that's held tenancy by the entirety? So. Or if we're in California or Texas or a number of other states, can we get rid of the community property? Can we divide up the property so that it's only sold on separate property and that way it's only exposed to the creditors of one spouse? Those are the kind of things you look at doing first. That stuff is it works, it's entirely effective and it's pretty cheap. Only after you exhaust that stuff do then you start looking at, at the more what I'll call advanced forms of asset protection planning. Now let me give this warning though. If you go and you talk to most people about asset protection planning, they'll do that in reverse. They'll try to sell you the big ticket item is your first line of defense because that's where the money is. You know, there's a joke that goes around in asset protection. There's no money in Homestead, you tell somebody to put their, you know, put money into their house. Okay, great. That takes about two minutes and I'll bill you $8. And so you don't get that advice. People want to sell big ticket stuff. And so the process, many times, I would say ordinarily, gets flipped on its head.

That's kind of the impression I've gotten over the years looking at what a lot of people in asset protection are doing. I think it's unfortunate, but it's not that different from a lot of things in financial services, really. Let's talk a little bit about hiding assets. I'm not talking about fraudulently hiding assets or fraudulent transfers. I'm talking about making it harder to see what you own. And some people seem to think there's some value in hiding how much you have by carefully naming your LLCs and other entities. But it seems like in a lawsuit all of that becomes discoverable. And I understand it's relatively easy for a background sleuth to figure it out anyway. How much protection is there really in just being discreet?

The answer is close to none. I mean, what you've described is exactly right. If a person is wanting to find information on somebody, they can go hire a private investigator or there's a number of services out there that they can use. And I use, my law firm uses that will in about two minutes print out about a two and a half inch dossier on somebody that gives all sorts of things like gas bills, telephone bills, cable bills, credit cards, all bank accounts, all banking inquiries, car leases, credit applications, you name prints all that stuff out in about two minutes. And the cost per person, per debtor or potential debtor that I'm looking at is a whopping $3. And so that information's out there. It's fairly easy to get. And I will tell you from practice that most lawyers don't even look at that stuff before they bring a lawsuit. They don't really look at the collectability of the defendant that much. Maybe in some cases they do. Certainly in some cases they do. But most of the time they don't. Most lawyers have a sue first and see what's their later mentality. So it doesn't keep people from being sued. And then once they're sued, then you start having subpoenas and depositions and all sorts of discovery that will usually flesh out to some degree what a person has even before there's a judgment. Once there's a judgment, then it's just an open book. There's cases out there that basically say a creditor is allowed to leave no stone unturned in the pursuit of assets. And the courts generally mean it. Discovery is very broad. So I think privacy is one of those things that may be good for snooping neighbors or maybe if you don't want your kids to know how much money you have. Other than that though, it's a great big placebo. It may make you feel better, but it's a sugar pill. It's not going to do anything.

Can we talk for a few minutes about domestic self settled asset protection trusts? These seem to be becoming more common. Are they reliable and if so, why do they really work? And why don't we all just put all of our assets into one? And also if you think they're reasonable for people to use, how should one decide whether to use the one in their state or to use an out of state trust?

Well, the answer to that is pretty simple in a sense, and that is the domestic asset protection trust is simply the flavor of the day. Just as financial products go through flavors of the day. Once upon a time, mutual funds were everything. Then hedge funds were everything, then quant funds were everything and yada yada yada, domestic asset protection trust is just the latest flavor of the day. Now do they work? The answer is yes and no. If you get thrown into bankruptcy, they don't work very well at all. And keep in mind that most financially distressed people end up in bankruptcy. So if you you can imagine those scenarios, but let's say that you only have one creditor, the creditor can't force you into an involuntary and so you stay out of bankruptcy. You don't have to worry about the bankruptcy aspect. The question then becomes do you live in a state that that has self settled trust legislation, that has this dapt legislation? If you live in one of those states and you set up a trust according to the laws of that state and there's really no sense in going out of state, if you set up a law according to a trust, according to the laws in that state, there's absolutely no reason to suspect that the courts are not going to respect that trust. The legislature has said, hey look, you may not like it, but this is what we're going to allow. So if you live in one of those states and there's about 20 states now that allow those trusts, but if you live in a state that doesn't allow those trusts, states, and it's usually the larger, more populous states, the California, Texas, New York don't allow self settled trust, do they work in those states? When people try to set them up and say my adoptive home state in Nevada or South Dakota or Delaware or Alaska or somewhere. And the answer is no, they don't work at all. The creditor is going to be able to blow right through them as if it were a great big nothing. I mean, it's not quite like that. It's going to be a little bit of work for a creditor, but a creditor's going to be able to get through it with some level of ease and it's not going to protect the assets. So what you're left with is if you live in a so called dapt state and you can stay outside of bankruptcy, it's probably going to work. If those conditions do not prevail, it's probably not going to work. And you have to look at again for people that just sell as the flavor of the day because they frankly know not what they do.

Now what happens in bankruptcy exactly? Does the judge force you to pull the assets out? Is that what happens?

Well, bankruptcies change. Bankruptcy, when I came out of law school was this nice warm bath that you went into and it kind of washed your debts away and left you feeling clean and refreshed. Then in 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection act, that's called bapcpa. And it turned bankruptcy into this cold acid bath that basically strips you down to your bones. So the entire purpose of bankruptcy is to marshal assets for the benefit of creditors. Now the courts give some lip service to saying that the purpose of bankruptcy is to have what amounts to a fresh start for the debtor. And sometimes they even mean that. But I'll note that even in cases where the debtor is denied a discharge, the marshaling of assets still goes on. So the whole point of bankruptcy is to have a bankruptcy trustee appointed that goes out and grabs all the non exempt assets of the debtor and applies them to the debts. And the courts have all sorts of equitable powers, legal powers that they can cut through stuff with domestic asset protection trust, the biggest bomb in their arsenal are the fraudulent transfer laws. And that's in section 548 of the Bankruptcy Code. And Congress has given bankruptcy trustees a 10 year statute of limitations to go and attack transfers to self settled trusts and similar vehicles. Now we're still not sure what similar vehicles means exactly. The courts are still sorting that out. But self settled trust is pretty easy to figure out. That's one of these domestic asset protection trusts. And so a trustee can go back 10 years. What that means is that even if you live in a dapt state, if you've made a transfer to One of these trusts for the purpose of asset protection, that's all that's necessary to prove intent, then the trustee is going to blow through it. If you don't live in a dapt state, then it wasn't protected under what's known as applicable state law and the trustee is going to blow through it. So in bankruptcy, it's one of those things that don't stand up now. Interesting. And I see this all the time. A lot of attorneys in their engagement letters when they're setting up a domestic asset protection trust, will disclaim that it works in bankruptcy. They will tell you right up front this probably doesn't work in bankruptcy, which should cause anybody a lot of pause because sometimes it's not always your decision as to whether or not to go into bankruptcy. Sometimes a creditor can either maneuver you into bankruptcy by making your life miserable or in the case of physicians. Physicians usually want to go into bankruptcy because their biggest asset is their future income stream, and creditors can otherwise garnish their future income stream. So a lot of times when physicians in particular get into trouble, they want to go into bankruptcy so that they can wash out their present debts and at least going forward they can have that income stream. But if they have an asset protection trust and they go bankrupt, trustee's going to cut right through it and get at the asset. So they accomplished pretty much nothing.

Doesn't sound terribly useful then.

Well, again, it's like anything else. A scalpel has utility for some things. A scalpel can make very precise cuts, but you don't want to have to saw through a bone with it. A domestic asset protection trust is kind of the same way. Let's say that I'm a doctor living here in Las Vegas where a lot of people retire to, and I don't really think I have any problems. But who knows, Maybe I left a sponge in somebody a year ago and I just haven't discovered it yet. I'm getting ready to retire, but. But if I do retire and something happens, I'm just going to have that one creditor. In that case, Nevada being an asset protection trust state, I might set up an asset protection trust just to give a little bit more comfort for my retirement. But outside that, I wouldn't get too far away from those sort of scenarios because again, it becomes awfully dangerous. And if you live in a state that doesn't have domestic asset protection trust laws, I'm just telling you it is not going to work. Now, the trust companies and the attorneys and financial planners and whoever else you'll talk to. I'll swear up and down and recite all sorts of theory on why it should work. Negative. It hasn't worked so far and it ain't going to work in the future. It's just a bad idea. For people that do not live in a dapt state.

Now I live in Utah. Utah is a dapt state. Our homestead exemption is only $40,000 for a married couple here. What's the downside of me putting my home and my taxable investing account inside an asset protection trust? Do I lose the ability to do something with my home that I'd like to do? Do I lose the ability to tax loss, harvest my investments? Aside from the cost of setting up and maintaining the trust, what are the downsides?

You know, again, if you live in a dapt state, you know, you're in a different scenario. As long as you're not worried about bankruptcy, it probably is going to afford you some level of protection. It's sort of the same thing. The cost of a trust is typically not that expensive. I will usually put my clients in what are known as fixed fee trustee services that charge maybe 2,000 bucks a year, just flat fee, as long as they don't have to do anything. So that's not much. I mean, if you're concerned about spending 2,000 bucks a year, quite frankly, maybe you don't have enough to really worry about it too much. Again, you live in a dapt state, that's not such a bad deal. Now, all these trusts are structured as grantor trust to somebody, whether or not it's you as a settler or the kids as beneficiary. So in terms of tax and investing, from an IRS standpoint, it's as if the trust doesn't exist. It's not going to affect that. There are, however, these trusts have to be irrevocable. So. So there are, however, some federal gift and estate tax considerations that you have to keep an eye on. Now, the federal estate tax exclusion this year is going to be, as I recall, it's going to be 11.7 million for a couple. That's a lot. So if you're below that mark, maybe you don't have to worry about it, but you start getting above that mark, then you also have to kind of keep an eye on the gift and estate tax ramifications. But generally it's not going to affect your investing. It's going to be okay. Now, what you got to look out for is this. Despite the fact that Utah has its statutes, as do all the Other states, you always have to be careful of arguments of alter ego. There's a growing body of case law out there that says that if the trust and the debtor are basically one and the same, they represent a single enterprise. The court can basically disregard the trust instrument, disregard the trust and allow the creditor to invade the assets. And where that comes up is it comes up because somebody has too much control. And the control that you see is that once upon a time, people set up trusts and they got a good trustee and the trustee went out and invested and did everything for the trust. These days, what you're starting to see are things like investment trustees or distribution trustees. People are making up roles for trustees and, and doing things, and they're inserting the people that set up the trust into those roles. And the problem is that there's a chance that a creditor can come along and say, look, on one day the money was in their left pocket, they controlled it, they wrote the checks. The next day the money's in their right pocket, they control it, they write the checks, it's still their money, even though you have the artifice of this trust. And so what happens is there's a sliding scale, there's a continuum. The more control that you have, the more likely that something is going to be set aside as alter ego. The less control, the less likely it'll be set aside as alter ego. So even if you live in a dapt state and you got the most wonderful attorney in the world to draft your trust, you had to be very careful of those control issues because that's probably where a creditor is going to try to get around the trust.

Now, that money, even if I were the beneficiary of the trust, the estate tax and gift tax exemptions still apply.

That's correct. That's the way it works. Now keep in mind, the trust is outside the estate. If it's an irrevocable trust, which it is, if it's a dapt, the trustee and you are separate for gift and estate purposes. So if you make a gift of a million dollars to the trust, you have to report that as a gift to the trust, as opposed to income tax, which is treated differently. The, the income tax simply flows onto your balance sheet. So if you make a trade in your account or you make a trade in the trust, it's all going to flow onto your balance or onto your own tax return. And so there's a difference there. And that's how these trusts work. And these trusts were actually not created for Asset protection purposes initially. Initially they were actually created for state tax purposes to allow people to get more money outside their estate, but to have the trust taxed as a grantor trust so that they avoid what's known as a compressed trust tax rate. So if a trust is taxed as a trust, then you have tax rates where the highest brackets begin about 7,500 bucks. And so that becomes very, very onerous for people. So planners started devising these trusts. Sometimes they're called incomplete gift trusts. Sometimes they go by the name defective grantor trust because they intentionally violate certain IRS rules. It causes them to be grantor trust. They're designed so that the income tax consequences stay with the grantor or maybe one of the kids. But it's an individual and not a trust. But the estate and gift tax is outside the estate and that stays with the trust. So there's a disconnect there. Now Congress has been looking at fixing that disconnect for the last 20 some years. And every year they threaten to fix it. And this year they're threatening to fix it again. We'll see. Don't hold your breath so far, but we'll see.

Yeah, they sound pretty serious about having the estate tax exemption. I haven't heard about this particular change, though.

Well, what they're thinking about doing is they're thinking about basically requiring a consistent treatment for income and estate tax. That is, if you're going to treat it as outside the estate, you got to treat it as not your income either or vice versa. That's probably where they're going to go. They're probably going to get closer this time than any time in the last 20 years since they've been trying to do it.

Yeah, it's a little easier when one party is controlling both the legislative and the executive branch.

It is.

All right, let's turn the page a little bit and talk about insurance briefly. How much do you think a typical doctor ought to carry in personal liability, umbrella coverage, malpractice coverage, etc.

You know, malpractice coverage, you know, I would max that out if you can reasonably afford it. You know, if it becomes onerously expensive, then maybe think about it. But when it comes to malpractice insurance, it's much better to be, you know, pound wise than, you know, than penny foolish when it comes to things like liability insurance and umbrella insurance. You know, it's hard to say. It's going to depend on what people are, you know, doing in their assets. I've got 3 million bucks through State Farm cost me about $700 a year. And I feel comfortable with that for the reason that as a lawyer, I don't believe that the plaintiff lawyer has been born that won't take a $3 million check and walk away with a smile on his face. I just don't think that plaintiff lawyer is out there, don't think they've been born yet. You know, but if it doesn't cost you much to get more, get more. You know, at the end of the day, you really don't care what the plaintiff gets paid as long as you don't have to pay. And the only thing you're really paying is, is your deductible. And I don't think it makes you a bigger target for lawsuits either. Contrary to what goes on, liability is what liability is. You either have it or you don't. When you get time for settlement discussions, that's. That's what's going to go around. And I don't think it really changes the numbers nearly as much as somebody thinks.

So in a true asset protection situation, let's say there's a judgment above policy limits, it's not reduced on appeal. What percentage of the time does the client actually declare bankruptcy? And what percentage of the time is the threat of the client going into bankruptcy used to force a settlement?

You know, it's hard to say because nobody really keeps any statistics on that. Anecdotally, I will tell you that even in those excess malpractice situations, the case usually settles without the physician going into bankruptcy. At least those are the ones that I've seen. And to know why, you have to understand how the plaintiff bar works. The plaintiff bar works by having attorneys that are good at zinging insurance companies. Their whole deal is to file the lawsuit, work it for a while, go to settlement conference, get a settlement, and get a check from the insurance company. What plaintiff lawyers do not do is they don't. They don't go out and collect judgments. Frankly, they don't know how. Every now and then, I get calls from plaintiff lawyers that have judgments. And as a last resort, they've called me because for whatever reason, they couldn't get the case settled. But most of the time they'll settle. And the reason is because if they go out and they hire me, and my practice is about 60% on the creditor side, 40% on the debtor side, but I'll take judgment's contingency fee. If they have to come to me to collect it or somebody like me, we're going to want 40% off the top. And so 40% off the top is pretty hefty figure. And a lot of plaintiff attorneys would rather write down their claim, 30% and settle it. And then they're that much ahead. And so the bottom line is that not a lot of collections go on, even on these excess malpractice cases for the reasons that most of them get settled, because the plaintiff attorneys either don't want to have somebody do it and they don't know how to do it themselves. And because of that, I don't know that I've ever seen an excess case going to bankruptcy, although I'm sure it happens.

Back in 2013, you did a post on the White Coat Investor about the California private retirement plan, and there were both a qualified and a non qualified version of that. And I found the non qualified version of the plans to be particularly interesting. Can you tell us a little bit more about what you call the California private retirement plan?

Sure. So again, every state has their exemptions. Texas, Florida have unlimited homestead in Texas, Oklahoma, Kansas, you can have so many head of cattle. In some states you can have a family Bible, it's exempt. And then you start saying, well, what if I go out and get a Gutenberg? Is that going to be exempt? And people kind of play games with some of the exemptions, but the exemptions are there and you can use them. California almost uniquely has this provision in its law. It's known as a private retirement plan. It's about five words in the code of civil procedure that basically tracks their language for public retirement plans. In California, if you're an employee of a public utility or local government or something, you can set up a retirement plan or the city can set one up for you. And it's completely protected from creditors. Not only is it protected from creditors, but it's protected as the money comes out. What happened is at some point the California assembly said, well, you know, golly, it's probably not fair that we do that for municipal employees and government employees, but we don't let private people do it. So they modify the code to allow for private retirement plans, perhaps not realizing that, you know, and maybe at that time they didn't. But, you know, now, of course, it's entirely possible for folks in the private sector to make a lot more money than folks in government. And so these plans exist. They're basically a trust that's created by the business for the benefit of the employee. You put money into the trust, or rather the business does. The business contributes. It's held in the trust and it's exempt. And as long as it stays in the trust, it's exempt. And then when it comes out of the trust, it's exempt so long as it is kept in a separate account. That is, you can trace it back to the exempt source. So it becomes a very, very powerful thing. Now, qualified plans are a form of private retirement plan and they're exempt. IRAs are not, they're not considered private retirement plans. So in California, the exemption for an IRA is subject to what's known as the means test. How much money do you need to live on in retirement? That's not measured by somebody in La Jolla or Brentwood. It's measured basically by somebody living in a box outside lax. It's very low amount. But qualified plans are protected and non qualified plans are protected. And so there's the potential that if you don't include the rest of your employees in the business, you can set up a private retirement plan. You can have the business make contributions to the plan. You're going to have to pay the taxes yourself because it's non qualified and the money can sit in the retirement plan and it can grow and it is going to be protected from creditors. And I've, you know, I've litigated those probably a half dozen times now. And creditors simply cannot bust those private retirement plans unless somebody has seriously messed them up somehow.

So should a DOC in California even have a taxable investment account if they have the ability to set up one of these non qualified private retirement plans?

You know, the answer to that depends on other financial planning. You know, what are they going to need to live on in retirement? You know, the whole deal with qualified plans, as you know, is you put the money in now, you take a deduction and you're going to take the money out at a time when presumably you're in a lower tax bracket. So that's a financial and tax planning equation. In California, it can either be qualified or non qualified. I mean, you go set up a 401k, it's going to be considered a private retirement plan. Whether it makes sense to do it as qualified or non qualified is, you know, is something that's going to be determined by other factors. But you can have them both. They can run side by side. You can have a qualified private retirement plan and a non qualified private retirement plan. There's no prohibition on doing that.

And the money in that non qualified plan, do you still qualify for dividend rates, long term capital gains rates, or is it all taxed as ordinary income.

Well, it's not qualified, so it's going to be taxed. It's almost like a grantor trust. It simply flows onto the, the balance sheet of the participant. So whoever the participant is is going to file taxes on that money every year.

So it's the same as if it was in a taxable brokerage account.

Correct.

Doesn't sound like there's a lot of downside to using that if you're in California and can set it up.

Well, the downside is like anything else, you know, in my world, there's a rule. Pigs get fat, hogs get slaughtered. And if it is being abused, if somebody is being a hog and they've got a lot more money in there than they'll ever need in retirement. And I've seen people, you know, in excess of 15, 20 million dollars, you know, and that's, you got to remember the guys that are looking at this are judges that are making quarter of a million dollars a year and are going to retire on 125 grand a year. There's been decisions where the courts have said that folks have been such hogs that it really wasn't a retirement plan and they've lost their protection. So it's like anything else. As long as you do it reasonably, you're a pig, not a hog. It works fabulously. But if you start to be a hog or if you try to do it at a time when you're in financial distress, it may be, and it's kind of an open question the way California law is shaken in. It may be that creditors may have some other challenge to those sorts of plans. And certainly there's been cases where the plans have from time to time been set aside for various reasons. But usually those were extraordinary circumstances where people were doing some awful, screwy things. And if you use the plan conservatively, again, be a pig, not a hog. They do for folks in California, work just fantastically well.

Any other interesting quirks of California asset protection law while we're on the subject?

Well, every state has its, you know, has its quirks. California, California tends to be very creditor friendly. I think you start looking at more Texas, Florida, when you start looking for the quirks in California, frankly, there's not a lot to do. Now, California did just raise the homestead exemption up to a minimum of 300,000, but possibly as high as 600,000, depending on median home price in a given county. But still, you know, we still have a house in Laguna in California. I mean, you know, show me a mailbox that's worth 600 grand. You know, that's still not, that's still not great. California is a tough place. And a lot of times in California when people get into trouble, they will migrate elsewhere. They'll migrate to Texas or Florida and become what's known in Florida. You know, they have snowbirds that go there in the winter and they also have what they call debt birds that go there in tough economic times. California, just not a lot you could do. Again, it's a very, very creditor friendly state.

Speaking of homestead law, do you think it's worth trying to do something special to protect your home equity in a state that doesn't offer much homestead protection? And if so, what?

Well, you know, yay. Fairly. That's a good question. There are typically two ways if folks live in a state that doesn't have much in the way of homestead protection. And by the way, that may be fixed this year. It may be fixed in the early part of this year under new bankruptcy legislation that Senator Warren has come out with, which is going to substantially raise the federal homestead limit in bankruptcy very substantially. Basically takes it up to the allowable limits of a conforming loan. But if a person lives in a state that doesn't have substantial homestead protection, there's basically three things they can do do. One is they equity strip the property. Equity strip means you take a second mortgage or you don't, you know, or you keep your first mortgage to interest only and you do things that try to keep the property at least close to the exemption amount. That's tough to do and it's usually inefficient based on the fees. The second thing that people do is they can do a deal called a qpert Qualified Personal Residence Trust. And a QPERT is kind of a funky estate planning tool that actually has an asset protection benefit, which is that you gift the trust or you gift the house into a trust for the kids, but you retain a right to live in it over some period of years, say 15 or 20 years. If you get past that period, then the house passes to your kids outside your estate. QPPERTs are used frequently for very, very wealthy real estate. We're talking, you know, estates that are $20 million and that very, very wealthy pieces because it allows a huge chunk to pass outside the estate. Now the downside is when you hit that age, if you're still living, you got to start paying rent back to the trust. And the rent back to the trust may be sky high. So you have to kind of be careful with how QPORT works. But Cuperts are very, very effective for asset protection. We've only had one case that broke them. That was a case in. That broke a Cupert that was in Newport beach. And that was a trust that was just terribly messed up. The third thing that people can do is pretty complicated, but it tends to work. And that is you have somebody create a third party trust. That is, you have one of your parents, if they're still alive, create a trust for your benefit. And then what you do is you take your house and you sell your house into the trust and you take back a note. So on day one, you have a house, it's available for creditors, they can get it. On day two, you have a promissory note from the trust that may only pay out in 10 years or something, or 20 years. It's not as attractive to creditors. It may be that creditors can unwind that on a fraudulent transfer theory, but it's not as easy as maybe it sounds. The creditor court may rule that the creditor's rule remedies to sit there and collect on the note, depending on how the note is structured. But that gets the house outside the person's name. That's something else that was also designed for estate planning purposes because it gets the house outside the estate for estate and gift tax purposes. The idea being that if you put the house in there, the house may appreciate much more quickly than if you took a note, particularly at today's interest rates where long term AFR may be 2.5% or something.

So I get a question frequently from direct real estate investors. They've got multiple properties and they're trying to decide whether to put them in LLCs, whether to put them each in their own individual LLC, whether to use a series LLC. You know, in some states, an LLC is really expensive. I think in California it's like $800 a year to set up an LLC. So what's your recommendation for somebody with multiple properties? Should they all be in their own LLC or what's the best setup?

Well, I only get this question about three times a week. And the reason is because a lot of people, not just physicians, like to invest in property, single family homes. There's a lot of people that take their excess earnings and when it gets to a certain amount, they go out and buy a house. What do you do with it? And most people would like to stick the house into a llc and that way if something happens, it's sort of isolated from the other assets. And that makes sense. And that's why people do it. Now, here's what you have to be careful of. Here's the flaw in that thinking. So let's say that I go out and I buy a single family residence and I rent it out, I put it into an llc, but I'm still the one that goes out and manages the property. So one day the tenant calls me and I go out to the property and the tenant points out, you know, hey, the water heater's leaking. And I look at the water heater, yeah, it's leaking, but you know, it's probably going to last another six months. So I'll wait till it gets a little closer to failure, then I'll replace it. So I don't replace it. A month goes by, the water heater explodes, skulls a little girl. There's $8 million in damages now for disfigurement and everything else. Is the LLC going to protect me from that lawsuit? And the answer is no, because I am responsible for my own negligence, for my personal negligence. So even if I was acting on behalf of the llc, I was the one that was negligent and not replacing the water heater when it should have been replaced. And so even if the LLC is there, I am personally going to be held responsible. Now, let's change the facts a little bit and say that instead of me going out to the property personally, I hire a management company. I hire some local property management company and they send somebody out and they look at the water heater and it's the same deal. They don't think it needs to be replaced. It explodes. There's a big judgment. Do I get sued? The answer is no. And the reason is because my liability or the liability is now encapsulated within the llc. So within the llc or the plaintiff's going to get a judgment against the LLC and they're going to clean up whatever assets are in the llc, but the liability is going to stay, stop there. It's not going to come upstream to J. Now the property management company is going to get sued because it is now their personal negligence that is at fault. And hopefully they have a lot of insurance or maybe done their own asset protection plan. But I really don't care as long as I'm not the guy getting sued. So that's the first thing. Are you managing the property or not? And you really don't want to be managing the property if you don't want that liability. And if you are managing the property, you want to have a ton of insurance against negligence. And property management and all sorts of stuff. Talk about that all day. Now the next question then is how do you figure out which properties or how many properties go into each llc? Well, we can start out with the ideal, which is one property for one llc. So that's pretty easy. So if something bad happens to a particular house, then the liability is encapsulated within that LLC. And if you have eight different houses and they're all in separate LLCs, there's not going to be a contagion of liability that spreads to those other LLCs. It's going to stop and you would have only lost your investment in one llc. But the problem is, as you say, is that depending on what state you're In, California has $800 minimum franchise tax for LLCs. That can get real expensive real quick. Now again, don't be penny wise and pound foolish. That's one. The second is that what you may end up doing is you may have to do some intelligent grouping of assets into different llc. So if you have eight different properties, what you may decide is that, well, maybe it's too expensive to do one for each. Maybe we put two properties into each. Maybe we kind of spread this out a little bit or you know, maybe we have two LLCs, maybe we have four LLCs. We don't have eight LLCs, but we're still kind of dividing our property. It's more of a matter of how much risk do you want to take. And to some degree it may also depend on your insurance and the rates that you get on your insurance and how they're going to treat these entities together. Hopefully you can get some sort of master policy. That's about the only advice I can give because it really does become very fact specific as to how you do it. If you have a real employee, valuable piece of property, if you have eight rental houses out there that are 75 grand each, but then you got this one big property over here, it's worth two and a half million, it's probably going to go on its own LLC and you're going to keep those other Separate Now Series LLCs. I know a lot about Series LLCs because I was on the drafting committee as an American Bar association advisor for what became the Uniform Protected Series Act. The problem with protected series is this. There's only about eight or nine states out there that have series LLCs. And in those states it's kind of like these domestic asset protection trusts. It probably will work if you live in those states and you stay outside of bankruptcy. But it's not going to work if you don't live in a state that has protected series legislation. Because what'll happen is, so let's say you come into California and you try to set up a series LLC and you put, you know, you have 100 different series. The most likely outcome is that the California court will simply treat that as a single llc. The California court will say, we don't respect protected series. That's all we care. It's just one llc. And that you've tried to, you know, divide up what amounts to tranches of equity in an llc. Cause that's all a series is, is really tranches of equity, but that have some liability protection with them, you know, is we're just not going to respect that. Now, what you have to be careful, though, up in California is that somewhere back around 2005, there was an attorney who actually heard me speak on protected series, and I was kind of talking about him. I say, look, 10, 20 years in the future, you know, this is going to be something we're going to be looking at more and more. He got the idea of going out and taking real estate developers and putting them into series LLCs. And so he formed several of these deals. And these series had literally hundreds and hundreds of series under them. So there's all these series floating about. Well, California came in and said, the franchise tax board came in and said, well, as far as we're concerned, that may be 1 LLC for purposes of liability. We're not going to opine on that either way. But as far as we're concerned, each one of those series LLCs is an LLC for franchise tax purposes. Pay us the 800 bucks. And so then the guy had. It would have a protected series organization that had 200 of these series in it is now paying 200 times 800. And suffice it to say, all those got wound up very, very quickly. And folks in California have. Have eschewed that particular planning technique ever since.

Now, what in your experience is the big misconceptions? What do doctors get wrong about asset protection? What do they all think that's not right?

The most important thing is that a lot of the asset protection that is sold to physicians, that is hawked to physicians, is stuff that may sound good at first glance, but probably doesn't work and is really a subterfuge to sell something else. And that something else 95% of the time is, you guessed it, life insurance. And what you have to realize is that for physicians, a substantial part of the asset protection that is sold to physician is simply junk that was sold to them to try to get them to invest in some life insurance product. And all the money was made on the life insurance side. So let me give you an example. You know that to do a junkie asset protection plan, the typical cost is somewhere between, let's say $20,000 and $30,000. So whoever the planner is may make $20,000 or $30,000. The Commission on a whole life policy, by way of example, is usually somewhere around 80% of the first year's premium. So if you design this asset protection plan and then you say, look, because of tax reasons, it's just ideal that you put life insurance into it. So we're going to sell you a million dollar whole life policy. You're going to fund it. 200,000 a year over five years. Somebody just made $160,000 commission. So what's more important, $160,000 commission for the life insurance or the $30,000 to do the asset protection planning? And you see that's very, very lopsided. And so asset protection, unfortunately for physicians, is usually a hook to sell them something else, something that's not too hot. Now, there's a few good asset protection planners out there that work with physicians. And you can usually tell them because they'll have long conversations with you about what kind of insurance do you have. And they'll spend a lot of time looking at your office procedures, making sure you're doing arbitration and trying to do as much as possible to make sure you don't get sued in the first place. And then they kind of have some backup plans that in case the world falls apart, a lot of it tends to be offshore. And who knows, you may have to leave the country for a while until things are sorted out. And that's kind of the way they look at it. But at least they're going to be trying to do things up front to mitigate the liability in the first place. Because the best asset protection plan is not getting sued, quite frankly. The next line of defense is insurance. And again, asset protection is only that last ditch. When everything hits the fan, what are you going to do? That's just a much longer discussion.

Now you'll be speaking in the upcoming White Coat Investor conference. What can attendees expect to hear from you there?

What they're going to hear is some of the same stuff that we've talked about. I try to give some structure in order to how people should approach asset protection planning. Kind of the steps they go through physicians and some of the things to Be on the lookout for. I've had hundreds of physician clients over my careers, and so I know what they're thinking. My little brother's a surgeon, and so I see all sorts of stuff pitched to him. And you kind of. There's a process of one sort of de. Education of the bad and education of the good that people have to go through. And also how to approach asset protection planning on a very commonsensical basis. If you don't understand, it probably doesn't work.

All right, how can people who want to learn more about you or potentially hire you, how can they find out more about you and contact you?

Well, I'm easy to get a hold of jayadkisson.com, jayad.com I'm a contributor to forbes.com, i do the wealth preservation column and. And write an article on there. You know, the truth is, I'm just not doing asset protection planning these days. If somebody wants to call and chat with me, you know, I'm always happy to talk to folks. Maybe I can make a referral, maybe not. Who knows? You know, I've gone back into litigation. That was always my first love, and I really enjoy it. Sitting around drafting trust documents and LLCs. That's for the birds. It's a lot more fun to be in the cafeteria at the courthouse doing a debtor's exam, you know, while there's lots of people around you, which is kind of my operating theory. It really is. It's a cafeteria in the courthouse. But if folks want to get ahold of me, I'm pretty easy to find. And, you know, again, if folks just want to chat, you know, feel free to call me up. But keep in mind that I don't do this planning, and I don't accept engagements to do asset protection planning anymore. I did that for a number of years, and I've moved on.

Awesome.

And happy that way.

Jay Adkisson, asset protection expert, author, Forbes columnist, speaker at White Coat Investor Conference. Thank you so much for your time today on the podcast.

All right, thanks, Jim.

All right. I thought that was awesome. The best part about Jay is that he's been on both sides of it. He's both litigated against people trying to do asset protection, and he's set up asset protection plans himself. And so you really get a unique perspective from him. And I think he really comes across as an expert because. Because of that, if you want to hear more from him, you can register for that White Coat Investor conference. That's March 4th through 6th. That's Whitecoatinvestor.com conference. Do you ever find yourself wishing there was somewhere to go to ask your finance, insurance or investing questions? The White Coat Investor community is a great place to turn we have a thriving community across all of our social channels, Facebook, Twitter, Instagram, Reddit and our WCI forum. We've been discussing solutions to your money problems since 2011. Join the Conversation with thousands of other White Coat investors. Follow WCI on your favorite social media platform for financial resources, tips and strategies. Just head to your platform of choice and search for the White Coat Investor. You can do this and the White Coat Investor can help all right, I don't know if you've heard the Milestones podcast yet, but these are podcasts that are short. We basically bring one guest on, usually a regular listener, a regular reader, or a member of the White Coat Investor Facebook group, group or forum, and we celebrate with them their accomplishment. Maybe that's getting back to broke. Maybe it's paying off a mortgage, paying off their student loans, becoming a millionaire, becoming financially independent, becoming a DECA millionaire. Whatever. If it's a big accomplishment to you, it's a big accomplishment to us and we want to celebrate it with you. If you want to be a guest on that whitecoatinvestor.com milestones if you just want us hear the other episodes, it's whitecoatinvestor.com Milestones to Millionaire. All right, what else can I tell you about? The White Coat Investor Forum has got an asset protection sub forum. It's not the busiest part of the forum, but if you want to talk more about asset protection, that's a good place to do it. We try to list attorneys that can assist you on the whiteconeinvestor.com contract negotiation and Review website. We have primarily contract review attorneys there, but also some estate planning and asset prot protection attorneys there. If you are interested in hiring someone. As Jay mentioned in his interview, he's not doing this now so don't call him up trying to get him to set up an asset protection plan for you. Thanks to those of you who've been telling your friends about the podcast and leaving us five star reviews. Our most recent one came in from Krydell O D said, I'm not an md, but I am an optometrist and my wife is a pharmacist and so much of this podcast and also the blog website are so helpful. Learning the step by step process to do a backdoor Roth IRA is a loan worth listening to. Every other episode I learn something new every time I listen. Thanks for that review. Keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor Podcast.

My dad, your host, Dr. Daly, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney, or financial advisor. So this podcast is for your entertainment and information only and should not be considered official, personalized financial advice.