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Show Summary
In this episode of the Real Estate Pros podcast, host Michelle Kesil speaks with Brian Bradley, an expert in asset protection for investors. They discuss the importance of legal structures in safeguarding assets, debunk common myths surrounding LLCs and trusts, and emphasize the necessity of proactive planning in asset protection. Brian shares insights from case law to illustrate the significance of timing and control in establishing effective asset protection strategies.
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Investor Fuel Show Transcript:
Brian Bradley, Esq. (00:00)
Yeah, so because there’s this myth out there that LLCs are a magic bullet, they’re not. People act like it’s the be-all end-all of protecting assets, but they’re limited. They tell us this straight up in the name. Now, don’t get me wrong, I’m not anti-LLC. I use them every single day in my structures. The problem isn’t the LLC itself, it’s how people use them.Michelle Kesil (01:55)
Hey, everybody. Welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil. And today I’m joined by someone I’m looking forward to chat with, Brian Bradley, who does asset protection for investors. So excited to have you here today, Brian.Brian Bradley, Esq. (02:13)
thanks for having me on. know, this is going to be a necessary conversation, especially now, like we’re living in a moment in time where the legal and regulatory landscape is shifting really fast and especially depending on who’s in power at the time. so most people, even successful investors and professionals are either relying on outdated asset protection strategies or they’re just being sold a bunch of myths and half truths that don’t hold it up in court.Acid protection in today’s age isn’t a nice to have. It’s preparedness, just like you’re not going to go on a camping trip without gear, right? So you shouldn’t be building wealth without legal structures. And so today, I’m going to do two things in the time that we have is bust some scary misconceptions and then try to explain this through some case law.
Michelle Kesil (03:01)
Amazing. Thank you for bringing that value to our audience. excited for you to dive into all of that with us. So first off, for those who might not be familiar with asset protection, can you maybe give a understanding of what that is?Brian Bradley, Esq. (03:19)
Yeah, so at its core, like it’s this big weird word that people hear but they don’t really understand what it even is and they misconstrue a lot of different areas of law into one. So asset protection is simply putting a legal barrier between your assets and a potential creditor, right? Like the person suing you, trying to taking everything from you before there’s a problem and that’s it. It’s not about secrecy, it’s not about hiding money or evading taxes, right? That’s illegal.You know, it’s about legal structures, not concealment. So think of it like a safe or a firewall. You you wouldn’t leave your guns, your gold, your gems, or your valuables just sitting out on the front porch for someone to easily take them. You’d lock them up behind a barrier like a safe where they can’t be easily taken. And so asset protection does the same thing for your investments, like your rental properties, your stocks, your bonds, your cash, your businesses, by moving them out of your personal name and behind the legal structure.
And then when it’s done correctly, it’s all going to be tax neutral and IRS transparent. Now, the two rules to determine whether a plan works or fails is timing and control. And if you don’t mind, I can explain it through a caseload.
Michelle Kesil (04:34)
Yeah, sure, go ahead.Brian Bradley, Esq. (04:36)
Okay, so there’s this 2010 case SEC versus Solo. Here, Mr. Solo got nailed by the SEC for a fraudulent trading scheme. So just think like bad man doing bad things, right? After they hit him with a massive judgment, he moved his assets into his wife’s offshore trust thinking that that would protect them. That’s just a classic post judgment after the fact lawsuit transfer and the court saw right through it. So he was held in civil contempt of court and he should have been.But here’s the twist, here’s where most people miss. The offshore trust that he set up, that was set up, still worked. The SEC couldn’t touch the assets. So two big lessons come from the Solo case. One is that offshore trusts are incredibly powerful when they’re structured correctly. And two is that timing is everything. You see, Mr. Solo didn’t get in trouble because of the trust. He got in trouble because he acted after the judgment.
So that’s like trying to buy car insurance after the car accident to cover the car accident. So the takeaway isn’t don’t protect. The real lesson is you have to plan before the lawsuit hits. So the takeaway is protect early and be honest.
Michelle Kesil (06:36)
Yeah, absolutely, that makes sense. Where do you kind of see investors maybe having some misconceptions around these concepts?Brian Bradley, Esq. (06:48)
Yeah, I think one is a big one is just the use of LLCs and before I even I think we break down like the misconception of LLCs, I think if we Take a step back and open up the spectrum a little bit of like what are the different layers that are used and tools that are used in asset protection then people can understand how they all come together and soAsset protection works best in layers, like dressing to go outside on a cold winter day, right? These tools are LLCs, limited liability companies, management companies like limited partnerships, and then asset protection trust. Where you land in these just depends on the individual’s risk profile, their day job, their exposed net worth, like what you own, where you own it at, and each person’s gonna have their own profile. And just to quickly break down each layer,
The first entry layer is your base layer. So think of it like that thin shirt that sits on your skin. This is an LLC. This is when you’re just starting out investing. You have nothing, maybe one rental property, green horn to investing. And then as you grow and add more assets and you hit that four unit mark where you’re investing in multiple states and might have multiple LLCs and you have around 500,000, 700,000 net exposed assets,
That’s when you’re going to want a mid layer, which is usually a little bit thicker, generally made out of like Moreno wool or a carnigan. This is a management company or a limited partnership. It adds another layer of protection and it cleans you up from a tax perspective. So then you can just maintain one tax filing. And then when you hit around that 1 million net worth mark, you have, you know, a high risk job, maybe like a doctor, real estate investor. ⁓ You want an outer shell waterproof layer. This is
It’s gonna keep you nice and dry and warm when the weather’s really bad. This is your break glass in case of emergency layer. This is your doomsday lawsuit firewall protection layer. Those are what we call asset protection trust, which we’ll talk about later on. But by layering, you’re now more flexible. You can adjust to make yourself more comfortable, and each state has different strengths and weaknesses. And at that base level, entry level, that’s where LLCs come in at that foundational layer.
And that’s where I think it’s really important, you know, if you want to jump into that, like how to, like what are some of the misconceptions with LLCs?
Yeah, so because there’s this myth out there that LLCs are a magic bullet, they’re not. People act like it’s the be-all end-all of protecting assets, but they’re limited. They tell us this straight up in the name. Now, don’t get me wrong, I’m not anti-LLC. I use them every single day in my structures. The problem isn’t the LLC itself, it’s how people use them.
So think of an LLC like your base layer of clothing on a
Freezing stormy winter day, that thin shirt that’s sitting on your skin, right? It’s not your body armor that you’re using. Is it necessary? Absolutely. Is it sufficient? No, it’s not even close. So if you think one LLC is gonna stop a million dollar lawsuit, you’re walking into a blizzard in a t-shirt. So courts pierce sloppy LLCs every day. So we need to talk about the reality of LLCs, and I really wanna focus on the Wyoming LLC because it’s kind of the bell of the ball right now.
It’s the state that everybody loves to name drop, no income tax, and anonymous ownership, strong exclusive charge and order laws. And so it all sounds good, and it is great, but it’s only good for privacy. But privacy is not the same thing as protection. And I want to say that a different way. Privacy does not equal protection. Privacy is just camouflage. It hides you from public records and nuisance lawsuits. But once you’re in a courtroom,
Privacy completely disappears courts can subpoena your bank accounts your title companies your property management They can find out exactly what you own in minutes and people think that they can hide behind a registered agent or hide behind a service company or hide behind a nominee And that they just can’t be reached that they can just ghost a lawsuit and that’s just completely wrong Those are just forwarding mailboxes. They exist to receive service of process not block it
So when someone files a lawsuit, that agent is legally required to accept service on behalf of you and forward it to you. The lawsuit will still find you. And here’s where it gets even more real. Promoters are going to tell you, just form in Wyoming and you’re protected everywhere in every state. No, you’re not. Once you’re in court in California, New York, Florida, Texas, Illinois, like the big states, Guess what? That court applies its own laws, not Wyoming’s law.
And this was hammered in the Mallory versus Norfolk case. So if your company is registered to do business in a state, that state can assert jurisdiction over you, period. You can’t buy better laws from another state that you have no legal connection to and bring them to that state. It doesn’t work that way. So what you’re doing is mixing up business law and tort law. So if someone trips on your property, this is a great example, and cracks their skull open,
That’s tort law. That’s damage law, not a business dispute. So that’s not a contract dispute. So if you have like a mold or lead poisoning issue in your rental property and a family member gets sick and they sue you, that’s a personal damage tort claim, not an internal business affair dispute. So state law controls personal entry lawsuits. So no Wyoming LLC operating agreement is going to save you from negligence. And the receipts are clear. The case law is very clear on that.
Michelle Kesil (13:09)
Yeah, that’s super interesting. So when you say a lot of people are wanting to make their LLC in Wyoming, is that applicable to those that live outside of the state?Brian Bradley, Esq. (13:22)
It just depends on what the LLC is being used for, right? So if you and I were to say, hey, let’s go create widgets and sell widgets nationally, right? Then yeah, we can go and use Wyoming. We can use Nevada and Delaware because that’s going to give us more credence to the operating agreements for internal affairs and disputes of the business. Like business is winding down. The business isn’t working very well. Or we’re going to sue each other, right? That’s when you’re going to use Wyoming, Delaware, and Nevada. But let’s just say most peoplethat are investing in lot of real estate rental properties, When someone slips off your roof or you’re getting sued from a rental property, you’re generally not, you and I aren’t suing each other. It’s generally someone getting injured and hurt, that’s a tort liability, right? So tort law is specific negligence law. So that’s a different area of law. So in that situation, you’re not using the Wyoming LLC as a business, you’re using it just as a holding entity like a… ⁓
holding an egg, like a basket holding an egg, right? So there’s no business disputes there. So now we’re using a completely different area of law. So in that situation, the rule is just use the LLC in the state where the asset is located. So if that property is in Tennessee, Tennessee LLC. If it’s in Florida, Florida LLC. If we’re going to create a business to sell widgets nationally, yeah, we can use Wyoming or Delaware. But it’s more for what happens when the business winds down or you and I need to sue each other and there’s an internal dispute.
business.
Michelle Kesil (14:53)
Got it. That makes sense. Thank you for that clarification.Brian Bradley, Esq. (14:57)
Absolutely.Michelle Kesil (15:00)
Yeah, so I guess kind of like circling back to some like misconceptions and beliefs. Is there like anything else that you think investors might be doing or believing that isn’t steering them in the most optimal direction?Brian Bradley, Esq. (15:57)
Yeah, think one is just another big one is just misconstruing and understanding asset protection trust. And so like as we build these foundations, right, like LLCs, management companies, we get to the ballistic shield, which is creating an asset protection trust. But I think a lot of people think a trust is a trust, is a trust. I have an estate plan. I’m covered, right? And you get this misconception even with the estate planning attorneys.And the problem is that people tend to lump all of these things together. And it’s like saying, well, I have a car, so it must be an F1 race car. Or they create two mental shortcut categories, right? Like a revocable living trust, or they hear self-settled offshore and immediately the brain defaults to bad because they just don’t know any better. But trusts are like the ice cream store Baskin Robbins. There’s lots of different flavors. And so most are not built for asset protection.
And so each state has its own laws and then we also have to do with federal laws to consider. So a few common types of trust are like the estate plan, the revocable living trust. Great for probate avoidance, naming beneficiaries, but zero lawsuit protection. They’re not designed for it. They’re only designed for after death planning. Then you hear about land trust for real estate investors. Good for privacy in real estate, but they have no liability shield.
So if the LLC that it’s connected to gets pierced, the land trust completely collapses. Then you hear about like tax trust, right? Like Delaware generational skipping trust, spousal trust. Great for tax planning, completely useless for lawsuits and asset protection planning. So that’s where asset protection trusts come in. And that’s when you start talking about power, right? A proper asset protection trust is self-settled, it’s irrevocable and has spendthrift provisions. And so as you can see,
You know, gotta use the right tool. use the hammer for what a hammer is for, right? We got hammers, wrenches, screwdrivers, nails. So if you’re grabbing, you know, like a screwdriver to try to like hammer in a nail, you’re using the wrong tool at the wrong time. So that’s where a big misconception that I hear talking to people is, I have an estate plan, so I’m covered, right?
Michelle Kesil (18:12)
Right? That makes sense. Thank you.Brian Bradley, Esq. (18:15)
Well, I’ll say another big one is just not understanding your state’s limitations is a really big one, especially when it comes to asset protection trust. Because in the US, every state has its own policies, right? So for example, you have to have self-settled Spencer-Riff legislation for asset protection trust to work. Not every state has them. So like if you’re in the big states, California, New York, Florida, Texas, Illinois, they don’t have self-settled Spencer-Riff legislation. And so when you’re talking to an estate planning attorney who doesn’tpractice asset protection and they say, just create this revocable living trust. You’re good to go. Or you’re a California resident, go create a Nevada trust. California doesn’t recognize asset protection trust. They have no self-settled spent-thrift legislation. And so you’re just buying a false sense of security. And so you really have to talk to a specialist and realize, in my state, where my assets are located at and whatever is going on, what is the applicable law that applies to me?
and just realize you don’t want to buy a false sense of security for a trust that’s not going to work for you because your state doesn’t even recognize them.
Michelle Kesil (19:21)
Yeah, absolutely. There’s so many things that I’m sure people don’t know these little details of.Brian Bradley, Esq. (19:30)
No, no, absolutely. And the biggest common one I have right now, I’m not sure where we are on time, is just like, get this common question lately of, you know, can a judge just freeze assets before an asset protection trust, you know, can actually be utilized?Michelle Kesil (19:37)
Yeah, we’re good.Brian Bradley, Esq. (19:46)
Yeah, so this is the big misconception that I’m getting lately. And it makes the most sense when I talk about it through fraudulent transfers. And I’ll explain it through two cases. And these cases are both from Indiana, but it’s not an Indiana-specific law. It applies everywhere. So at times, you hear some people say this, and it’s a valid question.A hybrid trust doesn’t work that even though they have been around for over 30 years and never been pierced that the courts can just stop them that judges can just freeze the assets before you can trigger anything offshore. And then they cite both of these two Indiana investor cases. Now these cases are real, but the way they’re being used and explained is very misleading. And here’s what actually happened in the cases. So in Indiana investors versus Hammond and also in Indiana investors versus Victor Fink,
Both the trusts were fully U.S. domestic asset protection trusts when the defendants were sued. So completely U.S. based trusts. So that’s already strike number one. They were fully domestic. So you see you had a U.S. trustee subject to U.S. courts and judges. You had U.S. banks and you had U.S. control of assets by the trustee meaning you. And the offshore piece of the trust, well,
That portion didn’t even exist yet. They didn’t create it beforehand. So the offshore component was just like a future idea, future possibility that will do something that would happen later on down the line if things went bad. Then later on after they got sued after the lawsuit, things went bad, right? Their plan was just then triggered and the trust ⁓ then transferred, literally moved the assets out of the domestic trust and into a separate offshore trust. And that trust wasn’t created beforehand.
So it was meant, it just sounds really bad, right? Like a US trust funded, the offshore component wasn’t created yet. We’re getting sued. Now let’s move assets out of this trust into some other trust. So what did the courts do? They didn’t pierce the trust. They didn’t reach offshore assets. They didn’t even invalidate foreign trust law. The courts just issued restraining orders to US people and to the US banks because those are the entities at the time that still had control over the assets.
So that’s the key principle here. Those cases don’t say like hybrid or offshore trust bad. They fail. What they said is this. If you wait until a threat exists, and once that threat exists, if control of the asset is still in the US, and it’s still in your name at that time, and if it’s still in your control and in your name at that time, then the US courts can freeze those assets that you still have jurisdictional control over. And that just makes complete sense.
So that’s not a geography problem, that’s a timing and control problem. So they set the trust up improperly from the beginning. So why are hybrid trusts structured differently? What’s different about them? A properly designed hybrid bridge trust solves that problem at inception, from the very first day that it’s created, because it is like a Cook Islands trust. First, a bridge trust or hybrid trust.
is not a trigger trust. Assets are transferred into the trust when it’s created on day one, not later, not after the lawsuit. So we need to get the funding done right from the beginning, just like we talked about in the solo case. The foreign trustees also appointed from day one, actually named in the trust, not in a panic after a lawsuit. Courts wanna see continuous relationships every year. They wanna see you doing the due diligence on the client every year. And if duress or a lawsuit ever occurs,
and everything is set up properly. Nothing is ever transferred. The trust is just one offshore trust from inception, and all the assets are already owned and titled under that offshore trust. So there’s no retitling. There’s no conveyance. There’s no last minute move that a court can enjoin. So duress in a hybrid trust causes a change of administration, not a change of ownership. And so all that’s happening is that
The offshore trustee who’s on standby and pre-named in a trust is no longer on standby. And that’s the distinction that matters for these trusts. That’s the legal distinction that’s being left out. see, fraudulent transfer laws target conveyances after a claim is foreseeable. They target retitling, things like that. Changing who administers assets already owned in a trust who are already named in the trust beforehand is not a conveyance. So the real lesson of both those Indiana investor cases are,
that they don’t defeat hybrid trust or like bridge trust. In fact, they literally don’t even talk about them. They defeat delayed execution and they defeat trust that say like, don’t worry, we’ll move things later or create it later if something happens down the
Michelle Kesil (24:47)
Yeah, absolutely. Thank you for shedding light on something that I’m sure people should be more aware of.Brian Bradley, Esq. (24:55)
Absolutely.Michelle Kesil (24:57)
Awesome. So before we wrap up here, if somebody wants to reach out, connect, learn more, where can people find you and connect with you?Brian Bradley, Esq. (25:08)
Yeah, you can jump on my website www.btblegal.com. I’ve got tons of free educational information there, resources, videos over 90 plus published legal articles, over 70 frequently asked questions on there. It’s a great legal resource for people just to get through, look at the case law, see what’s up with your specific state as well. Feel free to reach out to me via email, [email protected].⁓ I offer a one hour legal strategy consultation so if you’re on the phone with me, this is going to be an actual legal advice and then you have the option to decide how you wish to proceed afterwards from just a solid legal consultation.
Michelle Kesil (25:52)
Perfect, well, appreciate your time and your perspective. Thank you for being here. Of course, and for those that are tuning in, if you got value, make sure that you have subscribed. We’ve got more conversations with operators like Brian who are building real businesses and we’ll see you on our next episode.Brian Bradley, Esq. (25:58)
Absolutely, thanks for having me.
