Why LLCs Aren’t Enough for Real Estate Investors | Asset Protection, Trusts & Tax Strategy

Malcolm Jarrell (00:00)
Under normal circumstances, under mainstream ideology, yes. When you use any other kind of trust, the statutory type trust that we mentioned earlier, and the 1031 exchange, yes, there is taxation at receipt. So with the 1031 exchange, the whole reason for the 1031 exchange is to avoid the capital gains taxation because with the LLCs and with you personally, at receipt by definition, according to the Internal Revenue Code, you are taxable, right?

Dylan Silver (01:58)
Hey folks, welcome back to the show. Today we’re joined by returning guest, Malcolm Jarrell, an Austin-based wealth strategist, licensed life insurance agent, who helps real estate investors protect assets, reduce tax exposure, and build long-term wealth through advanced trust structures and private wealth strategies. Great to have you back, Malcolm.

Malcolm Jarrell (02:19)
Thank Great to be back, man. Thank you for having me. And I can’t wait to help the investors on Investor Fuel. This is fantastic.

Dylan Silver (02:27)
Now on the previous episode, you mentioned that an LLC is in many ways training wheels for investors. What does a investor usually have to experience before they realize they need stronger protection?

Malcolm Jarrell (02:37)
Great.

Sure. A lot of the investors that we work with, they typically have found that when they’re working with a 1031 exchange and they’ve experienced the limitations, whether it’s time and asset, or they’ve had the lawsuits above and beyond what liability insurance can handle, or they’ve had the heavy taxation that a 1031 exchange can’t deal with. Those are typically the issues that we work with, that we run into where we find that

the investors need something better than what an LLC can provide. And honestly, an LLC is just one pierceable veil to take the liability and some of the issues away from them personally while still enabling them to run their business. But ultimately an LLC isn’t optimal. It’s just one step closer to where they should be. So once they start receiving that taxation or experiencing that heavy taxation, then obviously they’re not optimal and we need to fix that.

Dylan Silver (03:31)
Now.

Now I’ve heard a lot about LLC and S-Corp, but there’s a difference between LLC, S-Corp and a trust. So on a thousand foot view, what are the main differences?

Malcolm Jarrell (03:51)
man. So the main differences between an LLC, well, let’s talk about LLC and a trust. So the difference is one is statutory that your LLC and most trusts, you know, people are used to living trusts or revocable trusts, maybe even a land trust, which is again, revocable. All those have in common that they are statutory, which means they report to the secretary of state in legal terms and tax terms that leaves you vulnerable. That liability is still out there in the open.

The entities that we use and that we provide for our clientele, they’re private entities, they’re non-grant or nature, which means they aren’t personally responsible liable. And because they’re irrevocable and spendthrift means those assets are protected beyond what an LLC can provide. An LLC provides some protection, but ultimately it still falls under the name of the person who runs and owns the LLC. With our trust, you’re just the manager. So it doesn’t fall on you personally.

even as a fiduciary responsibility, meaning you just make sure you’re doing things illegally and correctly, financially and legally, ⁓ to the best of your ability, you’re, technically not suable. Your assets stay intact while you continue to run the business, even if you fall into a litigious incident. So what we want to do from, from the thousand foot view is take you from your LLC, graduate you to a trust and make sure that you are financially and asset protected.

And the wall also

creating and preserving your legacy that you’re obviously wanting to build. Otherwise, why would you be in a real estate? know, real estate is not something fun to get into. It’s hard work. And if you’re going to, you know, endure that hard work, go through all the troubles that the problems, the blood, sweat and tears, you want that protected. Otherwise, what’s the point of doing it all? A trust can do that. LLC cannot. So it’s a difference between which is protected, which is not.

Dylan Silver (06:32)
Now, when investors are considering a trust versus an S-Corp, is this something that is dependent on the size or scale of the operation or is every S-Corp a good fit for a trust?

Malcolm Jarrell (06:38)
Mm-hmm.

I would say an S-Corp is again, it’s like training wheels. It’s like, you, if this is your first deal and you just need some protection, your LLC is probably the best way to go. S-Corps are typically something that a CPA will kind of graduate you to because your tax liability is getting a little bit higher. But if that’s something that we’re running into with our clients who have an LLC and they’re experiencing that heavy taxation.

we completely skip the S-Corp section and go straight into a trust because the S-Corp doesn’t offer more tax protection. As a matter of fact, it kind of clouds the situation. It adds a level of complexity that doesn’t need to be there. Whereas a trust adds the protection and simplifies the process and the tax filing. So in essence, you’re going from an LLC to an S-Corp, which makes things more difficult. And not to mention,

know, CPAs, they love S-Corps because they make more money on S-Corps than they do in LLC. That’s just my experience. Whereas if you go straight into a trust, now you’ve got the taxation completely gone because at the trust level, we aren’t taxed in the trust itself. We’re only taxed if you know, the person managing the trust takes a distribution or sends a distribution to a beneficiary and if that never happens, there’s no taxability. So big, difference with an S-Corp your tax with the trust a lot less.

Dylan Silver (08:06)
Now.

For someone who may have an LLC for each property that they have, I’ve heard this, would this be something where they would need a separate trust for each property or could they put multiple properties in one trust?

Malcolm Jarrell (08:15)
Right.

That’s a great question. So for multiple properties, they can all go into the same trust. They can go under different DBAs. If, the checks are being written to different entities, let’s say you’ve got, you know, ABC Corp over here to begin with, and you’ve got DEF Corp over here and you’ve got your clientele or your, your, ⁓ your tenants writing checks to one entity. And to keep things the same, you can have one trust owning all the assets.

but have separate DBAs where the checks are being written to for uniformity for your clientele. If you don’t care about that, then it’s all under one trust. You don’t need multiple entities. The whole reason for the multiple entities is for legal purposes, right? You don’t want to muddy or cloud the finances or the assets because if one asset is attacked, then they’re all attacked in an LLC, right? So that’s why you’ve got the, that’s why you have a series LLC or that’s why you have the multiple LLCs. Well, if you have a trust that really can’t be attacked,

then there’s no point in having all these multiple entities, which just clouds the situation. Use one entity, use the trust itself, and then run all your different finances through different bank accounts as you normally would just have it on by the trust itself. Much simpler.

Dylan Silver (09:22)
Thanks.

Now, pivoting here, one of the strategies that I’ve heard often is how to ⁓ effectively not have to pay capital gains when people go to sell a property through 1031 exchanges or other creative strategies. When folks go to sell their properties that are in a trust, are they paying capital gains at that moment?

Malcolm Jarrell (09:38)
course.

Under normal circumstances, under mainstream ideology, yes. When you use any other kind of trust, the statutory type trust that we mentioned earlier, and the 1031 exchange, yes, there is taxation at receipt. So with the 1031 exchange, the whole reason for the 1031 exchange is to avoid the capital gains taxation because with the LLCs and with you personally, at receipt by definition, according to the Internal Revenue Code, you are taxable, right?

So that’s why you have the 1031 exchange to defer those taxes. You’re essentially just kicking the candidate on the road with a non-grantor, with a non-statutory, ⁓ irrevocable, spendthrift type trust that’s not taxable at receipt. It’s not considered what they call distributable net income. Under fiduciary accounting principles, when you receive income into our trust, it’s not taxable yet.

Dylan Silver (11:05)
Right, right.

Malcolm Jarrell (11:25)
So when you take that distribution from the trust and pay to a beneficiary as income to the beneficiary, that’s when it’s taxable. So essentially that capital gains that’s received upon the sale of an asset, whether it’s crypto, whether it’s real estate, ⁓ well, any, any asset really, it’s not taxed yet. So the capital gains taxes that you typically would get in an LLC or an S-Corp, or you personally as a sole proprietor that goes away in the trust, the capital gains taxes is no longer an issue.

which is why when we’re working with investors, deal one, they’re like, this is an amazing tool. Why haven’t we been taught about this education? I mean, if your circles are not talking about it, you’re not going to be aware of it. And that’s why I try and inject myself into the different circles to try to educate people and show people this is how it’s actually supposed to be done. This is actually trust law. This is internal revenue code. This is how you should be doing it. This is optimal. Whereas an LLC might be ideal. What we do is optimal. Big, big difference.

So capital gains tax is no longer a thing. Rental income also not taxable. When you’re buying and selling anything inside the trust, it’s protected within the trust and it’s not taxed, which is great. I know that once I throw a lot of flags to people, they want to go start doing research, I would say, if you want to do research, get on a call with me. I’ll walk you through the process. Super, super simple.

Dylan Silver (12:46)
I was just going to say that, you know, what are some of the mistakes that you see people making when they’re either going about this themselves or, you know, other professionals in the industry making one setting up these trusts?

Malcolm Jarrell (13:01)
I would say one of the most common issues that I see is someone going to any attorney and getting any trust that they write up. All those trusts are what they call statutory trusts. They’re filed with the state, which ⁓ leaves you legally vulnerable because people know that you exist. Right. And they typically aren’t irrevocable. They definitely aren’t spendthrift. And so the issue is, I’ve got a land trust, I’m protected, or I’ve got a living trust. I don’t have to do probate. But that’s great.

And yes, you might be protected for a little bit in certain things. You’re highly limited in its functionality and what it can do for you, but you still have the taxation. So the issue is people go into trust thinking they’ve got a level of protection that they don’t actually have. That’s, that’s the common most, the most common biggest mistake is the overselling and the, the oversimplification and the complete misunderstanding of how trust actually work.

And that’s what we try and do is anybody we work with, educate them before they move forward, before they make any big decisions, because working in real estate, those are a lot of big decisions. Those are a lot of big financial and legal decisions, whether you know it or not. It’s like, I’m buying real estate. You’re not just buying a real estate. You’re putting yourself in the fire, whether it’s the IRS, whether it’s a tenant who wants to sue you, whether you make a bad deal go wrong on accident or make a good deal go wrong on accident. ⁓ If you have the right trust in the mix,

or the right entity, we’ll say entity, because like I said, some people can only afford to do LLC at first because it’s simple and easy to set up and cheap. But if you want to do it right and you want to do it to promote for longevity and you want to keep your legacy intact and preserve it, you need the right structure. And LLC is not it.

Dylan Silver (14:51)
When we talk about tax preparation, ⁓ once you have a proper trust set up, I’m imagining that even a skilled CPA, unless they have experience dealing with trust specifically, they might find this out of their wheelhouse.

Malcolm Jarrell (15:50)
It’s definitely outside of their wheelhouse. I’ll tell you just a quick stat. You got 99.7 % of CPAs who don’t know how to a trust or a state tax filing. So you’re left with 0.3 % of CPAs or EAs, enrolled agents, that know how to file that kind of a filing, which is just a 1041 filing. Most people are used to a 1040 or a 1040 easy. That’s what you would use for your 1099 or your personal tax filing.

or businesses, but when it comes to an estate filing or a trust filing, you’re right. Most CPAs, I mean most, obviously 99.7 % is a lot, don’t know how to do it correctly. Some might know how to do it they can do some simple filings, but when it comes to working with ours, we have hired and vetted our own CPAs and EAs to make sure they understand several different aspects of the law, trust law, tax law, and some other…

legal things that they need to know about how the trust works to be able to file it correctly. So if you go to just any old accountant, they’re not going to know how to handle this. They’re not even be able to answer the questions that you have about what we do and what we offer. That’s why we have a team of people who is willing to educate you time and time again, kind of like what we’re doing now. It’s like, want to educate people because I want them to have what works best.

Dylan Silver (17:08)
You know, when we talk about the process of establishing the trust, it’s of course imperative that you’re going to someone who’s got experience with it. But then once it’s established, it’s not like it’s hands off and you’re just done. Because at that point, you’re having to know, hey, how does tax preparation work? Hey, I have this question. So along the way, I’m imagining there’s a lot of communication and interfacing between yourself and your clients, even after the trust has been set up for some time.

Malcolm Jarrell (17:24)
Right.

Right. Well, one of the things that we offer is, is continued education and continued support. That that’s part of what we do with when they invest in the trust itself. So no, we don’t just hand the trust over and say, good luck. That would be a detrimental to anybody, whether, whether it’s just a simple trust or an LLC, just giving somebody an entity without any education is always damaging. So anytime we have a client begin onboarding with us, we give them a year to learn how to do it correctly. If they need an extra year, we’ll work with them.

But we try and keep the timeframe under a year. And it’s not like every day for a year. It’s within the first year, you’re going to have questions. You’re going to, you’re going to have, how do I, how do I sell real estate? How do I buy real estate? How, how do I put my guns and ammo in the trust? How do I my dog in the trust? What do I do? What do I do if I need to, you know, put repairs on my house? You know, how do I do that with trust? We walk them through every step of the process to make sure that they understand how to do it. And then

They start to see, this is how it works. And it’s the same process, usually over and over and over, just with different items, with different processes, with different assets. And that’s why I say within a year, they can kind of get their hands dirty enough to where they understand how it works. Obviously there’s, there’s going to be some, you know, educational outliers where the next year they’ll be like, yeah, by the way, how do I put my life insurance into this? How do I do family banking? How do I do infinite banking? Can you help me with that? And

The answer is yes. I mean, we, help everybody that we can with everything that they they’re working with because we’re not just setting up a trust. Like I mentioned earlier, we’re setting up and preserving generational wealth, legacy wealth, which includes, you know, investments, life insurance, annuities, like everything that you need to protect yourself now and protect your family later. We want to help you through that whole process. So it’s not just, I set up trust and just leave. It’s like,

You mentioned earlier, I’m a wealth strategist. That’s the, that’s a very broad term, but under the skin, I’m a business and estate planner. And that’s what I do. I work with businesses, investors in the States to help them to better their position, to keep what they’ve earned.

Dylan Silver (19:48)
We are coming up on time here, Malcolm, any new projects that you’re working on and then as well, anything you’d like to mention directly to our audience.

Malcolm Jarrell (19:50)
Of course.

I would, I would like to invite anyone who wants to learn more and who has found any value in this conversation, ⁓ to go ahead and reach out to me at [email protected], or you can just go to our website, automateyourlegacy.com and jump on our calendar and schedule a quick meeting with us. And we can figure out what we can do for you as far as ongoing projects. ⁓ nothing specific, but we are working with.

We’ve exploded now since our last conversation. have three to four conversations a day and about two, two to three new clients a week, which is massive considering what we’re able to do. And as, as small of a reach as we have right now, but I believe the last podcast helped out with who, ⁓ who we’re able to reach and who we’re able to serve. So thank you. It’s been awesome.

Dylan Silver (20:46)
That’s awesome.

Malcolm, thank you again for joining us today and thank you for your time.