CW 948 - Asset Protection from Outside Threats with Rich Dad Advisor Garrett Sutton, Part 2

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Welcome listeners to episode number 948. 948. This is your host, Jason Hartman. Thank you so much for joining me today. So we're going to have Garrett Sutton back today for part two as we take a deep dive into asset protection strategies. So we will have him up in just a moment. But I have an announcement for you. We have gone the extra mile as we always do here. I had our photographer from Meet the Masters do just a very minor edit to the photos with Ron Paul from Saturday morning for you VIP and elite and Venture alliance attendees and we have some great looking photos for you. Yes, when you went into the green room and you took the pictures against the step and Repeat backdrop with Dr. Ron Paul or well, he doesn't want to be called a congressman, former congressman because of being a doctor is much more respectable and I agree by the way. So we have some great photos for you and hopefully by the time you hear this, they will all be Posted@jason hartman.com photos and this is just the first batch because we have a lot more photos from the Ron Paul dinner that we had on Friday evening from the event in general. I tell you, you're a good looking crowd people and we got a lot of great photos for you. I'm really excited. I was looking through them today and I tell you, you all look great and some of the the poses with Ron Paul, they're just funny. So good job on those and you can find those again@jason hartman.com photos. Now I want to tell you about two other things. One, of course, just to mention it again, the ice hotel trip coming up in April. We got to get a few more people to greenlight this trip. It's a venture alliance trip, but it is open to non venture alliance members. You can apply to join and go to Jason Hartman icehotel.com Jason Hartmanicehotel.com this is a once in a lifetime bucket list trip. That's the famous, famous ice hotel. And you know, you can look it up. There's all kinds of cool stuff out there about it. There's that program, it's, well, it's on Netflix. I don't know where else it aired, but the most amazing hotels in the world. And hey, the ice hotel is in there. You can, you can watch, watch that whole program about it. I did and I just can't wait. I'm excited and hey, I gotta tell you, I'm excited and I don't even like cold. Okay. Now I just have to tell you that we very strategically picked the beginning of April because it will at least normally be quite a bit warmer than going in the dead of winter. So, you know, as spring approaches, the ice hotel is going to melt shortly after we leave. But it won't be as cold. So you know, we're going to have dog sled rides, we're going to go snowmobiling, we're going to do some ice sculptures. We're going to sit in the spa, hopefully under the stars and the northern lights. And it's just going to be an incredible bucket list experience. Plus that hotel is just stunning the way they do these ice sculptures and light them up and you know, we'll hang out at the ice bar and drink out of those specially made ice glasses as we have swanky cocktails and all of that stuff. So that'll be a lot of fun. Check it out. Jason hartmanicehotel.com we also want to announce our next event. We have a Jason Hartman University coming up in San Jose. Yes, Silicon Valley, California. You know, we were going to get back and do an event back east and we will eventually do that maybe, I don't know, maybe in Washington D.C. or something like that. But it's not going to be this one. So, you know, come out and see us. If you live back east, just come out to nice, nice, pleasant, warm, beautiful Silicon Valley and see us on March 3rd. March 3rd. This is a one day event. Jason Hartman University. Now this is the event where we dig in deep. We do this event about once a year. We dig in deep, we learn how to do the math of real estate. That's a big part of it. We do. This is our most interactive event of all. Basically, I lead you through math Exercises so you can really own it and understand how returns are calculated. We lead you through building a portfolio, mortgage sequencing, all kinds of great stuff. And we will probably get a couple of our local market specialists and property management people there for you as well. So you can talk to them and get questions answered and meet them in person. So look for that. That is on the website@jason hartman.com, click on Events and that'll be there for you. Let's get to part two of Garrett Sutton and that deep dive into asset protection strategies.

Foreign.

Okay, so here's the thing, Garrett. You know, most people are thinking and look, never say never. As the old saying goes, anything can happen. And that's the problem with legal advice, right? Because anything could happen. But I will tell you that I have never had any liability created by one of my tenants. And I've had hundreds of them over the years. I never really hear of people getting sued by their tenants. I think most of the problem comes from outside of the property. I mean, there are two areas where I think owning real estate can really create liability for you. And these are areas that are maybe impossible or at least difficult to insure around. I mean, if you have good insurance on your rental properties, you're probably covered for most things. But two areas where you really gotta be careful. Number one, fair housing laws. Discrimination. Okay?

Right.

And if you have a property manager, you know, you have created an arm's length barrier. But by the law of agency. And again, I'm not a lawyer. You're the lawyer. Okay, but you know, so critique anything I say, of course, disagree with me. But by the law of agency, you know, the principal is responsible for the agent's actions, then that's kind of unfortunate because you can have an agent, like a property manager or a lawyer being your agent or whomever creating liability for you. So that's why you got to get a good one. Okay? But it does put some distance between it, right? And if you self manage your properties, you got to just be careful. I mean, the fair housing laws are easy to follow. They're not complicated in my opinion. Just read up on them and understand them and obey them. Okay? That's the first thing. And you know, be careful how you treat tenants data. You know, if they fill out applications and they got their Social Security numbers on them and you know, you got to be careful of that stuff, obviously. But the other part is safety, right? Like if you are a negligent landlord and you just ignore repeated requests like to fix the lock on the door, you know, if someone could break into the house because the lock broke and you just ignore that and you don't fix it, you could create some liability for yourself. But outside of the, outside of those things, I don't think there are many other areas. Like the old cliche slip and fall, you know, that's what insurance is for. Okay, now granted, the slip and fall could be higher than your insurance. You could have a cheap, crappy insurance policy that doesn't want to pay. There are things. But I mean, am I missing something?

No. And really we should think back to government housing. Do you remember government housing?

Sure.

Where they had all these units and the government ran them and they were poorly.

Poorly, yeah.

They did not take care of them. The examples still exist in San Francisco. The city of San Francisco has public housing. There are rats everywhere. It's unsafe. And so a lot of our remembrances of these unsafe, unsanitary housing developments are from the government. I would argue that private landlords who have an interest in their property take care of their property. They have to pay insurance based on the safety of their property. There's an incentive there to maintain your property, not only so you won't get sued, but so your insurance premiums aren't through the roof. So you're right. I don't hear about too many slip and falls from tenants.

I think the thing, the real threat for most people comes from outside of the properties. And look, folks, you know, I hope I'm not discouraging anybody income. Property is the most historically proven asset class in the world. It's the best investment going. Okay? You just got to know what you're doing a little bit. And hey, you got all sorts of free education here and cheap education if you come to any of our live events. But the thing is that you can have this liability with any asset. Look at if you're going to acquire assets and if you're going to make money and create wealth for yourself, hey, they can take your brokerage account, they can take your bank account, they can take your business, they can take anything you have. They can take your Bitcoin, you know, it doesn't matter. Any asset, they can take it. They can take your gold and your silver on these interrogatories that are created in a judgment debtors exam. And you know, I've got some judgments against people I'm trying to collect. So it's interesting to see how this process works. You know, you send over a thing, hey, list anything in your house that's worth more than $500. Tell me where you have all your safe deposit boxes.

Right.

You know, this is not a joke. If you lie, you could go to J. Okay, this is perjury, right? So you know, you got to tell them honestly, you just have to protect it with proper entity structuring. So regardless of the asset, this is not a discussion really about real estate except when it comes to the internal threat, which is low. You know, we talked about that. And you know, get insurance and then do some smart things, fair housing safety, obviously, you know, those kind of things. Protecting tenants data, if you're even receiving it. You know you're only going to receive that if you're self managing. If you have a manager, you're not going to receive it anyway. So those things. But, but it's, look at, if you're a doctor, if you drive a car and you're under the influence of drugs or alcohol, you know, your insurance may not cover you if you're under the influence. Okay. They, you know, I've heard of cases where, I mean, definitely don't drive under the influence, obviously. But hey, people do it right? So these are areas where you're going to create liability for yourself. That's the, it's the external threat that is the biggest threat. I think I agree.

And here's the thing. A lot of doctors, lawyers, professionals, real estate investors have brokerage accounts. They have stocks and bonds and cash in the bank. And if that's held in their individual name, someone could reach it on the outside attack. Now do you need that for the inside attack? Of course not. Your brokerage account is not going to sue you. It's not going to get sued for just existing existing. But you certainly need to have brokerage accounts of a sufficient value in a Wyoming LLC for the better protection. Because you're right, Jason, the main attack comes from the outside.

Yes, it certainly does. Okay, so let's finish that up and then let's talk about LLCs versus corporations. What else is there? Like on slide number six, you've got an inside attack on a Utah LLC in this example. Then you've got the Wyoming LLC that also owns, while they own the Utah LLC and a Florida llc. And then there's a car wreck victim, the outside attack. What do you want to tell us about slide number six? And again, these slides are going to be@jason hartman.com in the podcast show notes.

The key thing is that if the tenant sues, you know, it is somewhat of a risk. It's not a huge risk. But if the tenant does sue and they were Renting from the Utah llc. That's where the attack is directed. The tenant does not have a claim against the Florida llc. They didn't rent from them. The tenant does not have a claim against the Wyoming llc. They had nothing to do with the Wyoming llc. So the inside attack ends at the Utah llc. That's good. We don't want to have too many properties in there. We certainly wouldn't put properties from all over the country in1 Utah LLC. We'd want to split them up. So the inside attack, if we structure it right, is going to be minimized. Now, the outside attack, where the car wreck victim wants to get at, Joe, the car wreck victim did not interact with the Utah LLC or the Florida llc, but they'd like to get at it at those properties. They'd like to foreclose on those interests. As we said earlier in the show, Jason, if that Wyoming LLC instead was a California llc, the court would say, sure, car wreck victim, go ahead and foreclose on the interest inside that California llc. You can force a sale of the Utah and Florida properties. We don't want to use a weak state to be our holding entity in this case. We're using a strong state, Wyoming, which, you know, the annual filing fees are only $50 a year, and they don't list your name on the Secretary of State's website as an owner. So it's very affordable and comes with great privacy. But as you said, Jason, when you go into court, when you are subject to those interrogatories, you've got to tell the truth about what you own. And you're going to say, your honor, I own a Wyoming LLC that owns a Utah and Florida llc. And the court will have to follow the Wyoming LLC rules if we do it right. And so that's why we set up the Wyoming LLC to hold the other state LLCs.

Okay. So if you're unfortunate and you get a judgment against you, that judgment then. And here's the process that, you know, I've learned, trying to collect from other people. What you have to do is you have to domesticate that judgment in the states where you want to pursue collection, I guess. Right, Right. And that's all set out by the interstate commerce clause in the Constitution, I believe. Right. That the states have to cooperate with each other. Maybe you can elaborate on that.

What it's called.

What is it called?

C O M I T Y Comedy.

Okay. And it's not funny. Like, it's not funny. E D. Yeah, it's definitely not funny. So what's going to happen is they're going to go and if live in, you know, Florida and you've got the properties in several states, Tennessee and Texas and Georgia, for example. And then your LLCs in Wyoming, they're going to go and they're probably going to domesticated where you live. They're going to domesticate it. I mean, this is. If they're smart, this takes quite a bit of effort and cost, by the way, to do all this. Then they're going to domesticate it in Wyoming also. And who knows what court they're suing you in, in what state and county. It's going to automatically be there without doing anything. Right. Once you get the judgment. So do you want to talk about that at all, how that works? Because, you know, for listeners, listen, this can help you not only if you're on the negative side of this where it's against you, but on the positive side where you're trying to collect from some other deadbeat. Right. You know, so, you know, you, you're learning both ways here. This can work in both directions. Do you want to educate people a little bit about that?

Yeah. When you domesticate the judgment, you need a attorney that is licensed to go before the court in that state. So you need to. The person coming after you has to hire an attorney in that state. Which, you know, it's not hard, but.

Or you do if you're coming after someone else. Yeah, right.

It's more expense. And so we want, you know, and that's a good roadblock that. Yeah, you're going to have to hire someone in Wyoming. But if they're really pursuing you, they would go to Wyoming. And this is where having all your records and your corporate minutes in order makes a lot of sense. Because the court's going to want to see that you followed the corporate formalities or the LLC formalities. You've had the meetings, you've paid the annual fees, you're operating as a legitimate.

LLC and you're keeping your bank accounts separate.

Yeah, absolutely. But if you can show the court that you're entitled to Wyoming protection because you followed the laws on corporate formalities, you've paid the fees every year. The court in Wyoming is only going to award the charging order. That's the exclusive remedy listed in the Wyoming statutes for someone coming after Joe in this case.

Yeah. So you say corporate formalities when we're talking about LLCs. And we're going to go into the LLC versus corporation differences here in a moment. But on a corporation, you do have to Have a, you know, if it's just a single member, you got to have a meeting with yourself every year. I believe you have to do that on an llc, too. But on an llc, it's a little easier, right? You don't have to keep minutes. I mean, you probably are going to say you should do it, but it's not required, I guess, right? Or maybe it depends on the state. So I'd like you to talk on that and then talk to us about the differences of an LLC versus corporation.

Okay. Well, on the requirement for meeting minutes, some states do require it. Now, others don't. But even though the state law of your state may not require meetings every year, we found that when the IRS comes calling and they're looking for your records, they really want to see that you have a minute book. You know, the corporate book with the minutes in it. Even though the state law doesn't require it, the IRS finds it to be an indicator of seriousness of your business that you're following these corporate formalities. So I always recommend that our clients do annual minutes for the llc, no matter what state they live in. And this is not hard to do, Jason. I mean, we give you a book that shows you a template for how to do it. I mean, it could take 10 minutes a year. We do provide the service for people, but you can certainly do it yourself. You know, it's like the joke was, they call them corporate minutes. They're not corporate hours. It's not hard to put together a meeting, even though it's with yourself. So I always recommend that you have the meeting minutes. Now, on the final slide, we do have the difference between an LLC and a corporation. And these are both entities that are chartered with the state. And so with a sole proprietorship, with a general partnership, you don't have to do anything with the state, you don't have to do a filing. But by taking that easy route, you also don't have the protection. So in the left hand column, under llc, we have the listing Better Asset Protection, especially Wyoming and Nevada, because in most states, the charging order is the remedy that is provided to people suing on an outside attack.

Now, interestingly, and I know Nevada is desirable, it's just a little more expensive. And we both happen to live in Nevada. But you don't mention Delaware. And everybody talks about why Delaware is so great. I hear that all the time. Is that only for big companies? I know it's great for big companies. There are a lot of them are big. You'd be surprised how many giant Corporations are based in Delaware and nobody's ever been there. They just have a P.O. box. But I think Delaware is the state with more P.O. boxes than any other state in the union. Probably.

I think you're right.

Yeah. But just out of curiosity, what else besides Wyoming and Nevada? Anything else?

Well, Delaware is certainly a state that a lot of the big corporations go to. And Jason, if some of your clients are looking to get funded, sometimes venture capitalists will insist that you set up in Delaware because they're familiar with those laws. Delaware has good asset protection. It's just that they have some additional requirements that you don't have with Wyoming and Nevada. And when it comes to issuing shares in Delaware can get pretty expensive for corporations. So we just like Wyoming and Nevada. That's where we set up.

Most people listening aren't issuing any shares. They're just going to be single, manager, member, or maybe them and their spouse or something. Yeah. Okay, go ahead.

Right. So with a corporation, it's important to understand that on the outside attack, you get in that car wreck and someone wants to collect, they can reach the shares of a corporation, whereas an llc, they can't get inside and they have to wait for the charging order. By contrast, with a corporation, if the person you're suing owns 60% of the corporation, you can take control of those shares and sell the assets to satisfy your judgment. So the corporation does not have as good of asset protection as an llc. Now, to change that, Nevada applied the charging order standard to corporate shares. So Nevada is the best place to set up a corporation because you have the charging order protection even for corporate shares.

Okay, but the best place for LLC is really Wyoming and Nevada's second best. Maybe the only difference is the fees are a little higher in Nevada. They're like 300 a year, I think, versus Wyoming's 50 bucks. Right?

Well, 50 versus 350. And then Wyoming does list your name on the Internet. So with wyoming for only $50, you have that privacy as well.

You mean Nevada puts her name on the Internet? I think.

I'm sorry, Nevada put your name on the Internet? Wyoming. Wyoming does not.

Okay, so why an LLC versus corporation, though? Keep going down that list.

Okay, with the llc, you can choose how you want to be taxed. You can be taxed as an S corp, a C corp. If you have two or more members, you can be taxed as a partnership. If you have only one member, you can be taxed as what they call a disregarded entity, meaning the LLC obligations and all flow onto your personal return. You don't even have to file federal LLC tax return.

Okay. So an S corp means that all of the income passes through to your personal tax return. And so you can have an LLC taxed as an S corp. It basically duplicates that. But there's another distinction between. Now, C Corps are big corporations, usually, that have double taxation. They double dip on those. But with the llc, there's another distinction besides an S election, meaning telling the IRS you want to be taxed as an S corp even though you're an llc. It's the same thing. But you can also have an election to be a disregarded entity.

Right.

What does that mean? Go into that a little more.

It means that you are the sole owner of that llc. There's no other partner to account for. And so instead of having to do a K1 for each of the two partners, two or more partners, the tax obligations flow directly through that LLC without the need for a tax return. The obligations show up on your personal return, and you pay taxes at that level without having to file an informational return. The LLC itself doesn't pay the tax. It's paid by the individuals.

Okay, so would most real estate investors listening do an S election on their LLC and be a disregarded entity? Would that be what most people would do?

You can't be both.

Oh, you can't be both. Okay.

No, no. You can either be an S or C disregarded or partnership. And a real estate investor typically is going to be taxed as a partnership or if there's two or more people, or as a disregarded entity if they're the sole owner. You wouldn't have S corporation taxation for holding real estate. If you're doing real estate management, real estate brokerage, then you would look at the S corp because that allows you to minimize payroll taxes. But in a holding setting where you're holding the real estate for investment, we don't want to pay payroll taxes. So we just want everything to flow through without worrying about salaries and payroll taxes. Just have it flow through as either a partnership taxation or disregarded entity taxation.

Okay, so disregarded entity. Basically, it sounds like what that you're doing there is you're saying to the irs, just act like this isn't even there. Right, Right.

You still have the asset protection. Right?

Right.

The title will be in the name of the llc.

Got it.

But the irs, if it's just you, they're willing to let everything flow onto your return. They're going to get paid no matter what.

Yeah, yeah, yeah. In other words, when you're a disregarded entity. You basically are in the world of asset protection. In the court system, you have the asset protection that we've been discussing, but in the world of the IRS and taxation, it's like it's not even there.

With one wrinkle, Jason. Okay, some states are not providing asset protection for single member LLCs.

Ah, yes, good point.

Okay, so. So if you're a single member llc, you get to be a disregarded entity. That's great. You don't have to file that extra tax return. But if you're in a state like California, Utah, Kansas, these states do not. Or Florida, these states do not protect the single member llc. So that's why we like using a Wyoming llc, where the state law specifically does protect a single member llc. So there's a little wrinkle there.

Okay, so do you want to mention which states like, which states we got to watch out for?

Well, it's a trend across the country, and the reason behind it is the charging order is there to protect the innocent partner. So you have two partners, and Joe gets sued in the car wreck. But John didn't get in the car wreck. It's not fair for the car wreck victim to barge in and force the sale of the assets. That's not fair to John. So the charging order is a way to protect the innocent partner. Well, if there's no other partner, if there's just Joe. Some states, and you could see why they have this rationale, some states are saying, well, there's no other person to protect. So we're not going to give a charging order to a single member llc. When the guy got in a, you know, there's a victim that it got hurt, we're going to allow the single member LLC interest to be foreclosed upon. And that is a trend across the country. Yeah.

So let me explain why that's there. And Garrett, we'll wrap this up in a second here. But the reason that's there is because it protects your partner, your other shareholders. It wouldn't be fair, you know, if you got in trouble and you had a big judgment against you, and you have two other partner shareholders in your business, with you in your llc, and they could ruin their asset by foreclosing on the LLC's assets and taking the property away from it because one person got in trouble. Right. That's the reason. That's like that reason.

Yeah.

Right? Yeah. Okay. Got it. Okay, good. Good. Garrett, anything else you want to say? You talk about 40 years. LLC has a short history. Corporations have a 500 year history, the corporate veil. Do you want to mention anything like that before you go?

Well, I just wanted to mention that piercing the corporate veil for not following the corporate formalities has been with us for a long time. The courts are starting to pierce the LLC veil for the same reason. And so when we mention minutes, I like having those minutes in the minute book to show that you're following these formalities. So just know that even though the LLC is a new entity less than 40 years old, courts are catching up and they're starting to pierce the veil on LLCs.

Yeah, you don't want that to happen for sure. The veil is there to protect you. So make sure you do the things to make sure that bill is protected. And I'd say the number one thing you got to do is you gotta not co mingle money. You gotta keep your accounting separate for your entities. Right? Yeah. Good stuff, Garrett. Thank you so much. Where can people find you and your great books?

The website is corporatedirect.com and we have a lot of reports there and we'd be happy to get on the phone with you. We have incorporating specialists. Lisa was at the Meet the masters, had a great time talking to all your people, Jason. So you can call 800-600-1760 and talk to someone, get a free consult on what entity would be best for you. I'm just here in Reno, so if you're in Reno or you're skiing or whatever, just I'm around.

Good stuff. And Garrett, you previously offered a discount to our listeners. I think that was like 100 bucks off an LLC. And do you want to share that? I don't know if you're still doing it, but if you're doing it, great. And mention the prices too.

So the regular price for setting up an entity, be it an LLC, corporation or limited partnership, is $695. And then the filing fees vary from state to state. But if you mention Jason Hartman, we give you a hundred dollar discount. So it's $595 per entity plus the state filing fees.

Good stuff. Garrett Sutton, thank you for joining us. And thank you for that discount offer, everybody. When you talk to Garrett's office, make sure to mention my name. You get a hundred bucks off. And really appreciate the education today.

Great to be here, Jason.

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