How the Rich Use LLCs to Hide Their Assets

In today's video, I'm going to break down the five main ways, really the only five ways the wealthy use LLCs to protect their assets and maybe even save on taxes. My name is Mark J. Kohler. I'm a CPA attorney, best selling author and owner of multiple tax and legal businesses. And after working with thousands of clients, I've seen firsthand how LLCs fit into the bigger wealth building picture. I want to caution you, LLC is in and of themselves don't save taxes. But if you can structure a deal or a structure properly with some LLCs, there are some tax saving opportunities. But the problem, most business owners misinterpret what an LLC is for and as a result, they often pay more in taxes because they think the LLC itself will save them. Not so. So let's cut through the noise and I'll show you the exact role LLCs play and introduce to you by Trifecta strategy and then walk you through the five different types of LLCs the wealthy use to build, protect, pass on their wealth and save on taxes. Let's get started. Let's talk about the Trifecta framework first. At the base of the trifecta is your Revocable Living Trust. The Revocable Living Trust is an estate planning tool that can ultimately connect everything back to you and your 1040 tax return. Now, on the left side is your operational income or ordinary income from your side hustle, your businesses, or even your day job. On the right side are your assets, investments, passive income. Now this could be rental properties, notes, even your IRAs and 401ks and health savings accounts, anything where your assets are working for you. Or on your right, you're the one working on the left. Now the trifecta connects this all together and brings it down to the trust, your operations, your assets, your legacy, creating a structure for saving taxes in the right spot, protecting your assets and building that legacy. Now with the legacy on the table, we can start filling it in, we can start building it and everybody's trifecta will look a little different. No matter your age, what you're trying to build, are you married or you're single? The trifecta is a starting point and again, that foundation of you building your American dream. So let's talk about the first type of llc. I call this the holding company llc. It's probably the most common as well. This is used to hold assets or investments, typically a rental property. If you're going to buy a rental property, you're going to put it in an llc. It doesn't save you taxes, but its purpose is asset protection. It keeps lawsuits tied in to the property or the investments inside the LLC and protects everything outside of it. Your personal assets. Example, say you live in California, but you own a rental property in Tennessee. Well, you would form a Tennessee LLC for that property. Now, holding LLC could also add a layer of privacy. Your name isn't on the title, the LLC is. That makes it harder for creditors or lawyers to target you personally. The LLC will be also the name on the lease agreement, property tax notices. Now, what's the cost for this basic LLC? Well, you're going to pay at least 4 to 6, $600 online and hope you get all the pieces and parts. And you should have an operating agreement, an ein, minutes, membership certificates, all of those pieces create a quality LLC that actually protects you. Now, you can also Pay maybe around $1,000 to $1,200 for a lawyer to walk you through it and make sure you don't miss anything and get all of your questions answered. If you're new to setting up your first or second or even third entity, I think a lawyer is critical to help you get off on the right start and understand what you're doing. Now, pro tip, don't overdo it. You don't need an LLC for every property or every little thing. But if you've got a rental, investments or assets at risk with no llc, we've got to get started doing something. The wealthy really find a balance of keeping their administrative costs down, but at the same time doing the right amount of protection and letting that structure evolve as you build your assets. Now let's talk about LLC number two and go back to the operational side. Now this LLC is for your business income or side hustles. Now we want to get started with this LLC because it helps keep your revenue and expenses separate from your personal banking. It gives you asset protection, it gives you legitimacy and it protects you from any possible liabilities from the business. Now let's get back to this example of a California resident buying a rental property in Tennessee. Well, let's say that individual in California was a brand new realtor. Well, they'd have two LLCs. An LLC in California for the operations as a realtor and then that LLC they set up in Tennessee to hold the rental property. Two separate LLC, two separate bank accounts, two separate EINs and then tracking them to write off all the expenses we can in each structure and creating a wall of protection between the two of them. Now quickly to a reality check. This is where many People stop there and that's one of their biggest mistakes. They think the LLC alone has solved all their problems and that one sheet of paper in the drawer is going to give them asset protection as well. Wrong on both counts. We've got to continue to scale and build and grow our trifecta as we build our dream. Now, LLC number three and one of my favorite, the LLC taxed as an S corporation. Once your business gets to a certain level, and I like to see net income of around 50,000, and then we're going to be talking about this conversion, you're going to take that same LLC you already created and make an S election and convert it into an S corporation. This will unlock real tax savings. Now why are you doing this? Now remember, back on LLC number two, you're going to pay 15.3% in FICA. That's right, the F word. Self Employment Tax, FICA on all your profit. But once you make an S election, the IRS sees you as an S corporation. Now, the beauty of the S Corp is it doesn't pay any corporate tax and you're allowed to hire yourself, give yourself a W2 and then take profit distributions. The FICA or the self employment tax only applies to the W2, not the distributions. This is the beauty of the S Corp. Let's do an example. Let's say you have $100,000 in profit. The Standard LLC, you'd pay over $15,000 in self employment tax. Then your state income tax and federal tax. Ouch. But if I did an S corporation and paid myself a salary of, let's say $40,000, I just saved 15.3% on the 60,000 in distributions. That's over $9,000. That's a big deal. Now is it complicated? No. You don't have to take a paycheck every two weeks or have a complicated payroll procedure. You take money out of the business when you want, just like you did in LLC number two. But when it comes to quarterly payroll reports and the end of the year, you're going to do this tax return that splits your income into those two pieces. This is why dentists, doctors, realtors, lawyers, electricians, landscapers, online influencers, and even nil athletes convert to the S corporation. And guess what? It's pretty expensive. It's around 300 bucks. Come on now, it's not that bad. And it is super simple. Any small business owner making over 50 grand a year net, we're talking about this strategy. So people, this is a great strategy to consider when you're at that Break point. Now, number four is the partnership llc. Now, this is kind of an interesting LLC because it could be on your right side with your assets, or it could be on the left side with your operations. Anytime you partner with someone, you need to have an LLC to document it and to protect you from your partner's actions. This is a big deal. Now, for example, let's talk about a rental property. Let's say I'm going into a deal with my brother in Georgia and we're going to go buy a rental property. Well, first we know we're going to set up a Georgia LLC and we're going to have an LLC just for our relationship. So that is a passive or investment type LLC with a partner. Now, on the left side, I might go into an operational business with my sister. We're going to open up a little food truck business or something. Well, I want to have an operational LLC C owned by our S corporations. Now, the beauty of these partnerships is a clearly defined ownership percentages, voting rights, responsibilities, profit splits, and again, protect you from your partner's actions. Without it, you essentially have a handshake deal, which is a recipe for disaster in a lawsuit. And you have personal liability for anything your partner does. This is extremely risky. Pro tip, and this is the truth. The wealthy do not wing it. They don't do handshake deals. They may initially, but they document it with the proper paperwork and an llc. Nine times out of ten, this way, everyone is protected and the rules are clear. Now, LLC number five is a special type of LLC called a COPE LLC or Charging Order Protection Entity. The good thing about these LLCs is it gives you an additional layer of protection and protects assets from your personal actions. So you remember we were trying to protect you from the rental property with our original holding LLC number one, but now we have so many assets, we're going to add a special LLC called the COPE entity to be a barrier between us and our llc. And so, as you can see there in the diagram, it's between your trust and your current holding LLC right in the middle. And that barrier is called the COPE llc. And I want to throw in a bonus, a number six special purpose LLC that is really quite common, but a lot of people don't think about it. And that's what's come to be known as an IRA LLC. Your IRA or 401k does not just have to be in the Wall street marketplace. It can allows you to invest in real estate deals, syndications, crypto, precious metals, and even other small businesses down the street, you get to invest in what you know best. But your IRA at Fidelity or Schwab can't do that directly. It's got to go through a self directed trust company or custodian like directed ira and then we create an LLC owned by your retirement account to go out and invest. Now let's do a quick example here. Peter Thiel, famous for PayPal and Facebook, famously grew his Roth IRA worth less than $2,000 before the year 2000 into billions by investing his IRA in early startups PayPal and Facebook. The strategy was using self directed retirement accounts. Now a cool benefit of these is you get to even be the manager of the llc. You get to have checkbook control to move quickly, make investments and work that LLC to get a far better return than you might get otherwise with a Wall street marketable security. Now the cost for this is going to be more than your standard LLC because you must use a lawyer for this. These are not a DIY type llc. This is what the wealthy use to really build their retirement accounts. But the key is doing it right and knowing the rules to the game. So there you have it. The five LLC strategies and that bonus LLC I told you about. The rich actually use to build wealth. The Holding Company llc, the Operational llc, the S Corp llc, the Partnership llc, the COPE LLC and the Special Purpose IRA llc. And when used correctly, they let you save taxes, protect your assets and leave a massive legacy. If you need help setting up the right LLC for your situation and building your own trifecta, please meet with one of my tax lawyers and KQS lawyers. We are small business tax lawyers helping clients all over the country and we've been building these trifectas for clients across the country for 25 years. If you found this video helpful, hit like subscribe and click the bell so you don't miss future strategies for building and protecting your wealth. I'm Mark J. Kohler and I'll see you in the next video.