Asset Protection in Your Syndicate: How it Works & Why it Matters, with Clint Coons

In this episode, Kim Lisa Taylor interviewed Clint Coons, a founding partner of Anderson Law Group and current manager of Anderson’s Tacoma office, who discussed how asset protection works within a syndication framework and why it’s important to consider asset protection as you start to participate in multiple equity deals.

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Edited Transcript from the Webinar ‘Asset Protection in Your Syndicate: How it Works & Why it Matters’

With Special Guest Clint Coons

Kim Lisa Taylor:

Hey everybody, thank you for joining us today on our free monthly webinar. We do these every single month, except for, of course when it's in conflict with a holiday or travel, or something like that, but the purpose is to talk about topics of interest to real estate syndicators. We do give the opportunity for live questions and answers at the end of the call. 

I'm attorney Kim Lisa Taylor. Before we get started, please note that all of our calls are recorded and may be used for future promotion, posted on our website or broadcast in a podcast available to the public. If you don't wish to have your voice recorded, please schedule a one-on-one consultation instead of asking questions during the live call. Information discussed during this free webinar is of a general educational nature and should not be construed as legal advice.

This is an audio-only conference today. Our guest speaker is Clint Coons, and I'm going to let Clint tell you a little bit about himself, but I've known Clint for a number of years and he's very well-respected in the asset protection industry. He travels in a lot of the same circles that we do back when we used to be able to do live events. I know he's written a number of books, so he's a pretty accomplished practitioner in his field. Clint, tell us a little bit about yourself and your practice.

Clint Coons:

Wow, with that opening, are you an attorney?

Kim Lisa Taylor:

Of course, I am.

Clint Coons:

All right. Just a little bit about my practice and what I do. I also am an attorney and I have a firm that works primarily with real estate investors all over the country and our focus is helping them create the appropriate structures for their investors. Now, we don't work on the syndication side, but we work primarily with investors who hold properties that are the great legacy wealth, they're single-family homes, multifamily, mobile home parks, things that they're not going to be syndicating on. We show them strategies that will not only protect those assets in the event of lawsuit, but also how to reduce taxes and how to build a business around it. Where we differ from a lot of other firms that do the same thing that we do, or attorneys that structure investors, is that myself and my partners we're avid real estate investors.

I was just in North Carolina this past weekend, and I flew home from Florida on Tuesday, looking at a 140-unit that we have under contract, and we're working on a closing within the next 30 days and in many of our other properties back there. It gives you a sense of what we do. I have a couple of mobile home park that — a couple mobile home parks actually — that we've closed on and we're now putting trailers on. We operate in different asset classes as well … self-storage. It's something that I've done over the last 10 years, built up a decent portfolio, I would say, and I just have a bug for investing. We take that knowledge of investing and we apply it to the end of the strategy side. That's what makes us unique in this space.

Kim Lisa Taylor:

I didn't know that you were also a real estate investor, so I've learned something new about you today.

Clint Coons:

Yeah, the reason I invest, and I think a lot of people, it may be different for them, income is great. But right now, we just take all the income and we just plow it right back into buying more deals. Eventually, I want to get to the point where I've completely replaced all of my income that I earned from punching the clock, but also, I want to create generational wealth, and you can do that through real estate. My parents, my dad, avid real estate investor, he taught me about investing and he retired at the age of 50. He's happy with his 20-some properties. My goals are much higher than that. Now that we have the 140-unit that we're going to be closing on, that'll put us over 300-and-some doors. I want to get to 500-to-1,000 doors, and all paid off, and then you just sit back and you create great cashflow for yourself. That's what I love to do.

Kim Lisa Taylor:

I think in your intro, you talked a little bit about what asset protection means, but is there anything else you want to say about that?

Clint Coons:

Well, yeah, when it comes to asset protection there's ... People understand that they need protection and you hear individuals talk about limited liability companies, corporations, trusts, land trusts, Delaware statutory trusts, limited partnerships on occasion, but what they miss many times is how do these entities either help or hurt them with their investing? It's not evident to most investors. They think, “Well, I need to follow the herd, set up the LLC, put the properties into it,” but there's more nuances that you need to consider because real estate investing for me is a business.

I'm not an “investor.” I know we call it that, but I'm truly, I treat it as a business and I create my structures with that in mind, because I've seen many situations, because we have so many clients across the country, that they screw it up. They go to a local professional who doesn't understand what they're doing, and so they make recommendations that are not going to help them grow their business.

Kim Lisa Taylor:

Okay. How is this different, say, than setting up a trust in estate?

Clint Coons:

Well, so the trust in estate is actually a key component to it. Think of it this way. You can spend all your life, or a good portion of it, investing. You get to age 67, you say, “All right, I've got my portfolio where I want it, it's thrown off great cashflow and pulling in $60,000 a month, I'm ready to retire, and I'm going to vacation and travel the world.” Then you find out that two individuals are out washing windows on your property, and one of them ends up electrocuting themselves while they're on an aluminum ladder. Another guy grabs onto him and he electrocutes himself, and so you now have a wrongful death suit against you, and it bankrupts you, which actually happened to one of our clients.

At 67 starting over, people have said before, “Oh, it's easier the second time around.” That's a bunch of garbage. If you've done it the first time, you know how much work that goes into that, and you don't want to have to try to re-create that. Asset protection is about ensuring that, if an unfortunate circumstance came up in your life that it wouldn't destroy everything you built. Now, the estate planning side is equally important because you spend all the time building this up, what is your motivation? Is it to create generational wealth so you can pass it on? Like our estate plan — when I say our, my wife and I — our estate plan for our children is centered on the basic premise that our children are going to benefit from our efforts. They'll benefit, but they're going to benefit in a way which encourages them to be productive members of society.

You'll never see my son or daughter sitting around PlayStation, protesting out on the street, not working, because if they want to take that life, good for them. They can do whatever the hell they want. I can't control them, but they're not going to get any money out of the trust because it's holding all of these assets, and the way we set it up is I said, "Listen, if you work, you will receive income commensurate with the amount of money you generate on an annual basis from your efforts. If you only want to go out there and work part-time and make $15,000 a year, that's the max you'll ever receive." Because I'm creating generational wealth that will be passed on to multiple generations and foster and encourage them to go out and do things with their life, to be productive, to give back to society.

You encourage things such as charitable work, you can put into there, military service, stay-at-home mom. Our daughter once said that's important to her. So, all those things can be incorporated in there so that your values, what you think is important can be passed on. All of that that you've built up will pass through that, and so you don't have the rogue child who will come in and say, "Hey, you know what would be great? I'm going to own a Mercedes." And they go out and they buy the $500,000 Mercedes G Wagon that can jump up and down on its tires, and they think, “This is so cool,” and it's worth $200,000 the next day when they drive it off the lot. There goes five homes that you built up. That's how the estate planning fits in, and it is one of the most important pieces.

Kim Lisa Taylor:

It sounds like there's multi components to this. You've got to think about your trust in estate plan, and then you also have to think about some asset protection entity that's going to protect specific assets as your wealth grows. Was that accurate?

Clint Coons:

That's exactly right. Most people put the asset protection before the estate planning and I get it. The initial concerns are my tax rate, somebody's suing me, I'm concerned that if I'm involved in a personal lawsuit, they're going to take my real estate or my investments or vice versa. The focus is placed on protection, but the estate planning is actually, in my opinion, more important than the protection, because you're guaranteed that you're going to pass on at some point. There's no guarantee you're going to be involved in a lawsuit. We do all this planning, and I hope no one's ever involved in a lawsuit. I think of it as just sound planning advice. It's just like insurance. How often do you make an insurance claim, but when you have to, you're sure glad you have it.

When you're setting up entities, it's with that in mind. You may never be involved in a lawsuit, but if it does come, you're going to be darn happy you put that structure in place when you did, because that's going to be the difference between losing a lot or everything. It gives you position to, as I say, to negotiate a settlement with a plaintiff that maybe has a judgment against you. They're both really important. The estate planning though, I would say, is the most important if you want to preserve what you've built up to make sure it's not destroyed in a probate, kids don't take the assets and they have a different mindset … maybe your child goes through a divorce, and now their ex-spouse ends up with part of the assets. So, you really need to lock that down.

Kim Lisa Taylor:

Just to clarify, and I know we're deviating a little from our previous list of questions, but I think these are important things that I'm interested in learning and I hope our audience is, too. It sounds to me like you've got an entity structure that's going to protect you from lawsuit liability, and then you have your trust and estate plan that's going to help take whatever wealth you generate and pass it on to your future generations. Is that a correct assessment?

Clint Coons:

That'd be right. Yeah.

Kim Lisa Taylor:

Okay. I think that helps frame the rest of the call. I know one time I went to an asset protection seminar and said, “Oh yeah, I should do that and I need to go set up a trust for our assets.” I decided to go to a local attorney who just set up a trust in our name, and there were all these assets out there for everybody in the world to see, so it didn't really work out the way I had planned it because I didn't go to the right expert. 

That's why your business is so important, because of the fact that you are also an investor, you have a much more acute understanding of what could happen, and you've seen it happen in the context of real estate syndicators or investors. I think that's great. 

All right, so we talked a little about what could happen if a real estate investor doesn't have an asset protection strategy. 

If you don't have anything and you don't have any assets at all, then maybe this isn't something you need to be concerned about, but you should be keeping it in the back of your mind so, as you start to acquire assets, now you start thinking about, “All right, this is where I need to start managing my risk.” Maybe for you, that happens with the first investment that you make, probably that's prudent, but maybe it happens a little further down the line, but you should be conscious of that. 

All right, okay, so what's involved in setting up an asset protection strategy? I think we've talked about, you've got to have, like, an LLC. Is that what you're using for your entities primarily?

Clint Coons:

Well, “it depends,” I think is the perfect attorney answer. Let me tell you a story. This story I think is representative of what happens with people when they set up their structures, because LLCs are great entities. Don't get me wrong. We use that. They're the workhorse for the real estate investor, but it's understanding that an LLC is a multi-faceted tool that has different components to it, meaning that there's the asset protection side, there's also the, who's going to own it side, the membership side, the management side, and more importantly, the taxation side. You want to make sure that you're getting all of these right, so that when the business is set up, it's going to be set up in such a way that's going to help you accomplish your goals.

The individual that I'm referring to, didn't actually set up their structure with that in mind because the person they worked with did not understand what their motivations are. What I mean by that is, when you buy a property, is this going to be a flip, is it going to be something you're going to hold long-term, is it going to become part of your portfolio? And we're creating legacy wealth here. Those are questions you need to ask of the client.

Why is that important? Because this individual went to a CPA, and he was going to buy a multi-family unit. Let's say it's a 70-unit building. His whole purpose here, for most people who invest this way, is you're going to stabilize the property, bump up the rents, get it performing, get the occupancy rate up there. Then a lot of people have a plan where they intend to liquidate and sell, and this capitalization event that comes out at a certain point in time. Well, the CPA didn't ask, what are you intending to do with this asset?

All they assumed is that he's buying the asset for an investment. He made this recommendation, and a lot of people do this. They set up a limited liability company, and then they realize, “Hey, you know what? I've heard that I can set up an LLC so I don't have to file a tax return. That's going to save me a thousand bucks a year.” They trip over pennies on their way to dollars by thinking, “If I'm not filing a tax return, wow, it's an extra thousand dollars in my pocket, I'm saving this money.” But what you're really doing is you're short-changing yourself because you're not anticipating what the ramifications are by making say, just a tax election on an LLC that's not in your benefit. Where this came home to roost for this individual's that, after you've done everything, stabilized everything, the property is running the way it should, he decides to sell.

I'll remind you, the properties in the name of this, what is called a “disregarded LLC,” meaning that it does not have to file a tax return. Everything flows down right onto the members, 1040 Schedule E. He collects all this income on this 1040, and he lists the property for sale. Buyer comes up, tries to close on him. If you've ever been through an underwriting process before, you're well aware of how that works out, the information they ask for. One of the things they asked for in this scenario is that they wanted a tax return associated with the LLC, because underwriters assume that all LLCs file tax returns. They struggle with the concept of a disregarded entity, number one. Number two, they just need that to verify the income and the expenses associated with the property, just much cleaner for them. 

They want a balance sheet, profit and loss. Well, he couldn't provide that. So, first buyer falls out of financing. Second buyer comes along, he pulls out of financing, third buyer he's working with, it's not going anywhere. He calls me up and goes, "Clint, I saw you on YouTube. What the heck is going on here? Can you give me any advice?" I asked him these questions about his LLC, how it was set up, and he told me that it's a disregarded LLC. I said, "There's your problem." You see, you set up a structure that works great if you're going to hold this as a legacy investment, you're going to keep it as part of your portfolio. Well, it works great. You don't need to worry about the issue of selling, but when you're trying to sell, if that's your stated intention, you want that LLC filed in a tax return. It should have been set up in your case as an S-Corp, because you don't have another partner or partnership.

I said, “Now you've got everything the underwriter needs to satisfy their underwriting requirements so somebody can buy your building. But you put yourself in a situation now where unfortunately, you're going to have to carry it, and you better hope that the buyer knows how to run one of these properties.” In my experience, you've got operators that come in and they have no experience operating a property. They run it in the ground and then you have to start over from scratch. Your entity created the situation because a person who set it up didn't know the right questions to ask, and then the question becomes, would they even know the right solution to apply? That's what I mean by when you're setting up an LLC, there's many things to consider.

Another thing is, by creating it or setting it up as a S-Corp or a partnership — ideally partnerships are the best way to go — is that it also removes you from audit risk, because Kim, you know this, you've seen this before. When somebody has a multi-family property, they want to get tax deduction … and they'll go in and depreciate as much as the property up front as possible to offset their income. That's great, but that's also subject, potentially, to an audit. Because now you're wiping out all your income. Well, when you do that stuff on your 1040, you just made it really easy to get audited, because most people don't understand the way audits work, is that there are, assume, a thousand correspondence auditors, and these guys just audit 1040s and they send the easy stuff in the mail.

Maybe you've received information or a letter before from the IRS. You look at it and go, “Oh my gosh, am I getting audited? What the hell is going on here?” Your blood pressure goes up 30 points before you open it. They want you to provide them information. That's always cryptic what they're asking you. You have to go to somebody to help you figure it out. There's a thousand of these guys, let's say, out there. Then there's another subset of people that can audit you, which is an in-office audit essentially. There's about a hundred of them per a thousand of correspondence guys. They'll have you come into the office. I've been through one of these before. They'll bring you in, they'll go through your 1040 asking you to bring information supporting any deductions, anything that you're taking.

Now, both those two groups of auditors, which comprise 99% of all auditors, can only audit 1040s. Real estate investors that like to carry all their real estate on their 1040, and then also consider being aggressive with their deductions and expenses, repairs versus improvements, you run the risk that you're going to get audited because you got so many guys out there, sharks swirling around looking at the returns, but when you run them through an entity that's treated as a partnership or an S-Corp, or you have a C-Corporation you're running your business out of, that's a different auditor. For every thousand, hundred of the other auditors, there's one of those guys. In that situation, you've dramatically decreased the risk that your return is going to get flagged because there's just not enough of them that are qualified to go out and audit these types of returns.

That's the other reason why I like to do this, because there's a lot of benefit to having real estate, if you know how to treat it from a tax standpoint to reduce your income.

Kim Lisa Taylor:

Well, that's interesting. That's the best argument I've ever heard for having an entity or a corporation versus doing a single member disregarded entity. You and I are going to have to have a conversation.

Clint Coons:

Yeah. Who wants a field audit? I've also been through a field audit before, where they come out to your business. They just sit their butts down and they go through everything for a week.

Kim Lisa Taylor:

All right, so are there some jurisdictions that are better for setting up asset protection entities than others?

Clint Coons:

Well, absolutely. I think, part of any plan, not only do we look at asset protection, but I'm a very strong proponent of anonymity. I don't want people to know what I have, and where that benefits you is that if there's a potential creditor that's sniffing around trying to figure out, do you have any assets, if you set things up the right way, they're not going to know what you have, and they're going to run into brick walls. The benefit of that is that many lawsuits are shakedown lawsuits, and the attorneys want to get paid on what they collect, of course, because they take them on a contingency fee basis. If you don't appear to own anything, then if they do bring the case, they're probably more apt to settle for your policy limits than push for something more.

When I create structures or we create structures at Anderson for our clients, we often recommend that you use a jurisdiction such as Wyoming or Delaware, as what we call a holding LLC. This LLC is your base company, it's the one that would make the tax election as a partnership to carry all the real estate on your 1040. Then you would create special purpose entities LLCs in the states where the actual real estate is located and it all flows back down to, say this Wyoming company that you own. Now, by setting it up in the way I just described, you're able to then create an anonymity shield around all of your state-specific entities. For example, if you wanted to set up an LLC in Florida right now, and you went on the sunbiz.org, and you started creating the company online, you're going to get to a point where they're going to ask you, who is the manager or who is the member of the LLC?

Kim Lisa Taylor:

That's right.

Clint Coons:

It's going to be you, Kim. You're going to put your name down there. Now you're out there and I know you have this company. The other way to do it is you set up a Wyoming LLC or Delaware, and you indicate, it's owned by the Delaware or Wyoming, LLC. They don't even know what state it's filed in. You just list the LLC name. Now what happens, if a creditor looks, they don't see your name any longer. They see this LLC, and then they have to figure out who owns the LLC. Unfortunately, number one, it doesn't tell them where the LLC is located. I do this little example on my presentations, where I show people that I take one of our clients and they have their Wyoming LLC owning all their other LLCs. I show them how many different states has an LLC with that exact same name.

I think there's maybe 12 or 13 states. I said, try to figure out who owns it. You can't. That's why when you're creating structures, I like to start with that base entity. But the mistake I think some people fall into is they go on the internet, they Google this information and there are entity mills out there that tell you, you need to set up in Nevada, Wyoming, Delaware, for everything you own. That's a mistake because it's not going to benefit you. Actually, it's going to hurt you. An individual again, contacted me because he couldn't evict a tenant. He had a Nevada LLC owning Illinois property. Is that a problem? No, you can do it. But when you try to bring your unlawful detainer action, because you're operating illegally, essentially by not registering there, you cannot bring a cause of action.

So, you get bounced out of court, and they said, “Hey, you're not registered to do business in this state. You're conducting business here. You have no standing.” Even worse, your contractor screws you on a job for $50,000. Now you want to bring a lawsuit. You can't. The people that fall into this trap, unfortunately don't realize it until it's too late. That's why I tell individuals, “Hey, if you're going to own property in Florida, set up a Florida, LLC. If you're going to property in Ohio, make it Ohio, LLC, just have it owned by your Delaware or Wyoming company.”

Kim Lisa Taylor:

Yeah, we do the same. 

Clint Coons:

Yeah, and even with syndications, do you see that a lot of the individuals you're working with and you're creating syndications, those investors, do they come in with LLCs?

Kim Lisa Taylor:

Yeah. Well, a lot of the investors, and then also there's always a question about how to structure the management entity, because you know, there's going to be multiple members of management and they may be coming in with their own LLCs. Then also, there's the question of, how are they going to take title to their Class B interests? I usually actually advocate that they have two different entities for one to represent them in management and one to take title of their Class B interests with the one that earns the profit share, the Class B interests being that legacy entity, the one where they're going to be accumulating their wealth, because there's little liability associated with that, but there's a lot of liability associated with the management level, so I usually suggest that they don't put their legacy entity into the management structure at all.

Clint Coons:

Exactly. What you're doing in that planning is no different than the planning if you're buying an asset, real estate asset, it's just different type of ... we're minimizing liability, is what we're doing here, by creating that. The other thing you just mentioned about holding that Class B interest in an LLC, for people who invest in real estate, that is one of the recommendations we also make. We typically prefer to have that LLC again, set up Wyoming or Delaware holding that interest. The rationale I tell people is that, “Listen, when that syndication makes a distribution, if you were involved in a lawsuit, that distribution may get sucked up by the court, maybe they're going to get a prejudgment writ of attachment against you. But if it's going to an LLC and not you individually, then that is diminished, if not eliminated altogether, that potential line of attack for a plaintiff.”

Kim Lisa Taylor:

Okay. Yeah, I think that's consistent with what we talk about. Then when you were talking about maybe using an S-Corp before, and I think you were speaking more about doing that if you were buying your own real estate with your own money, versus the way that you're going to set it up if you're going to be bringing in private investors.

Clint Coons:

Oh, absolutely. Typically, I mean, S-Corp is last resort that I ever used for an individual who's owning real estate on their own; it's for those circumstances where they can't elect partnership status, because they don't have a partner in their life. They don't have a spouse or someone else they want to bring in. Many times, I'll try to convince someone, we'll just set up a different entity, maybe have a corp that manages this and we'll give it a peppercorn interest of 1%. Now, you've got your partnership because ideally that's what we want. S-Corp is the last resort.

Kim Lisa Taylor:

Okay, good. Let's see what other things we need to cover here. Passive investors they usually come in with their own entities, too. Would you make the same type of recommendation, they should all be setting up their own trust in estate and then have that tied into their own entity?

Clint Coons:

Yeah, absolutely. We always separate them out. You have a passive investor or an active investor, and the distinction is often the asset itself. What is your intention with this asset you're acquiring? Do you intend to hold it or you intend to flip it? If you're going to flip it, then you fit into the active category. Then we're going to use a different structure. We're typically going to work with C-Corporations and that structure, because we don't want you to be tagged as a dealer. If you get tagged as a dealer, then you're going to give up many of the tax benefits associated with being an investor. We separate the two activities into different types of entities. From the investor side, like we've been talking about holding LLC, owning multiple single-member LLCs back to the holding company, that's a passive investor. Active investor, we're going to use typically a C-Corp.

I know there's probably some people listening here thinking, well, C-Corp, why the heck would you do that? I've heard negative things about C-Corporations that they have double taxation. It's really interesting how many CPAs just follow and throw out that same dogma. It's like a dog whistle not to use it and go with the S-Corporation. I was talking to a client about a couple of months, maybe a month or so ago. I restructured them using a C-corporation. He makes about a million bucks a year, a million and a half actually this year, flipping real estate. He'd been running it through an S-Corp.

I said, "Now, we've got to get you into a C-Corp. You'll have more money in your pocket afterwards." This guy lives in Florida. His CPA got on the line, and the CP immediately attacked me on the premise that there's double taxation for the income he's earning. I said, okay, tell you what, let's crunch the numbers together right now. Okay? I want you to take the amount of money he's paying in taxes right now the way you have them set up, tell me what his tax bracket is. She said, it's 37%. I said, "All right, take the income, multiply it by 37%. Calculate it out as his tax liability." I said, "Great, so now you know what that is. Now, here's what I want you to do. Run it through the C-Corp, take no deductions. Let's just tax it at the flat 21%. Figure out what that is. Take the rest of the money, pay it out as a dividend, tax it 20%, and tell me what number we have."

You know what? It was less than running it through his own name. I said, "So, where do you get the double taxation here? It looks to me like we're saving money." It was just silence on the other end of the line. “Well, I never really thought about it this way with the Tax and Jobs Cut Act how that would impact someone's tax return because I've been so accustomed to just recommending S-Corporations under the old C-Corporation tax brackets.” I said, “I know.” But the other thing about this is that what sometimes people also don't realize, and I was talking to another CPA about these recommendations, why I like C-corporations, I said, "I leverage my assets right now. I borrow money. The last thing that I need is some underwriter coming up into my business, hounding me for balance sheets, profit and losses and tax returns because they know I have my own business setup."

What people fail to realize, I think many times is that when you're working with underwriters, if you're in business for yourself, and the way they determine that is that your 1040 has a K-1 associated with an active business that you're involved with. Maybe it's flipping, maybe it's property management. Maybe you just produce gas cans, whatever your business is, it doesn't matter. If they see that, now the dynamic has changed versus the W-2 wage earner who comes in and says, “Hey, I just work for a company.” They're an easy person that they can then qualify. But now as a business owner, you make it more complicated for the underwriter to get that loan through, because now they have to be concerned about the liabilities associated with your business, whether or not that business is going to continue to be viable, how that would impact your ability to repay.

It hurts business owners when they're trying to borrow to see that income on their 1040 via a K-1. That's why most businesses that get structured as S-Corporations, one of the questions I ask them, I said, "Listen, if you want to go out and invest in real estate, do you want to borrow, are you going to be working with lenders?" If the answer to that is yes, then my recommendation is always, let's convert you to a C-Corp, pay yourself out, W-2 income, take a big fat salary. You're going to look so much better to those underwriters as a W-2 wage earner. I'm telling you from real-world experience. Because I'm an active investor, I've been through that ringer, and I've lost deals because my S-Corporation, which is the firm originally, we had it as an S-Corp until the Tax Cut and Jobs Act changed the C-Corporation tax bracket to a flat 21%.

I switched it immediately, not only for the tax savings. That's great, but the main reason we switched to the C-Corporation is because I'm tired of dealing with underwriters screwing up my loans because they're up into my business and they don't understand how businesses operate, how you take money out, how you expense things out so you lower your taxes. That works against you when you're trying to borrow.

Kim Lisa Taylor:

Yeah, I just went through that recently on a home loan.

Clint Coons:

Right? You get so frustrated.

Kim Lisa Taylor:

It was very crazy. It's like, “Okay, you're penalizing me for being self-employed yet all these other millions of people are one paycheck away from ruin.” I've been able to continue to operate this whole entire time, so there's something wrong here, but ...

Clint Coons:

Actually, when you talk to a broker, they will convey that, typically, they'll convey this information to you. They'll say, "Listen, if you're a W2 wage earner, you qualify 10 times over with your income, but since you're not, you're a business owner, we've got different tests we have to run against you."

Kim Lisa Taylor:

Yeah. That's a hard thing to do. All right, well, so what kind of programs do you offer for somebody who wanted to engage you to set up an asset protection program for them? What would that look like? How would that work?

Clint Coons:

Well, it starts with having a conversation. We first want to sit down with you and look at your situation to determine whether or not, what you're doing, like I said, we want to back into the planning. So, we set up the LLCs, we set up the corporations. We do all the stuff that I was talking about, living trusts are created for our clients, land trust, but at the end of the day, once we've had that conversation in what we call a strategy session, then we will come back and make a recommendation as to what types of structures you should be creating. We think more long-term as well. Here's where you need today, and as you grow your business, this is what it should look like into the future.

The approach we take is what I typically refer to as a three-legged stool approach. We look at asset protection, we look at tax planning, and we look at business planning. Meaning that we want to focus on all three and we want them to work in harmony, because as I've been telling you, there's more to investing than just protecting your assets. There's also reducing taxes, but then reducing taxes can also detrimentally affect your ability to grow your investing because it doesn't work well with the underwriter. So, you've got to get this right balance there, and that's what we strive for. So, part of our planning focuses on how the income hits your tax return. Does it look favorably for an underwriter or less favorably? Are they going to do a withholding for vacancies because of the way income hits your return? How do we eliminate that? This all goes into our strategy session, and then if the client feels comfortable with this, then we actually create the structures that we proposed for them.

Kim Lisa Taylor:

Great. Well, I'm learning a lot and realizing that I need to schedule an appointment. So, how would someone go about doing that?

Clint Coons:

They can go to reapbook.com (or andersonadvisors.com/reapbook) and you can then sign up there for a free strategy session. You can get a copy of my book as well, “Asset Protection For Real Estate Investors.” In order for you to get it for free, there's a promo code there. Just putting the word, Kim, K-I-M. Just put that in there. You'll get my book for free. You can find my book on Amazon as well. I've got a ton of great reviews on it. It's all about how to invest in real estate using entities, but I want to give it to you for free, and we'll also schedule you for a free strategy session. They typically run about 30 to 45 minutes, and we'll develop out this plan with you and figure out what you should be focusing on, and it's all looking at those three aspects of it. 

Kim Lisa Taylor:

That's fantastic. All right, so we are going to go to live Q&A, and we do have one question for the moment, but before we go there, just want to let anybody know if you want to go ahead and raise your hand or put a question into the Q&A, you can do that, and then we'll read these questions online, or if you want to speak live, I think there's a way for you to raise your hand and so we can select you and let you ask your question. 

If you want to reach us … so some of you maybe haven't been on another calls of ours before. We do these once a month. We always try to teach a subject related to syndication, and sometimes I'll teach a subject, but more often, we like to bring in guest speakers that can teach subjects to our audience, and then we record all of these. We do post them on our website and make them available for you to reference at a later time. 

We're happy that you've joined this call, but there's other ways that we can help you as well. We're a corporate securities law firm. We draft legal documents for syndications, for joint ventures, for your business structures. We also do your securities compliance, so we draft your private placement memorandum, subscription agreements, and we do the filings that are required with the state and federal securities agencies. We also have an offshoot company called investormarketingmaterials.com. You can reach that from our website at syndicationattorneys.com. Just click the tab that says Investor Materials, and you can check out some of that. If you're not syndicating yet, and you want to be a syndicator, this is a great time to start working on your marketing materials and setting yourself up with a website and some branding and getting a company brochure and things like that in place so you have something to show to investors and to make a lasting impression with them.

We have professional editors and graphic designers that can help you with that. We do also have a pre-syndication retainer for people who are not yet ready to syndicate. It's only a thousand dollars. It gives you up to three hours of legal advice. We'll give you an investor marketing plan template and investor relations blueprint, and you'll get invited to our syndication Masterminds that we're holding weekly right now, Fridays 9 a.m. Pacific Time, noon Eastern Time. These have been some really great calls. We've been doing it for a few months now, and we're able to dig deep, and we also are able to let our clients interact with each other on these calls, so we've gotten a lot of really positive feedback about that. We're going to try to help keep you on track with your syndication goals.

That's just for becoming a client. It's only available to clients of our firm. Then the last bonus with that pre-syndication retainer is that you'll get a discount off your first syndication with us equal to or greater than that retainer amount. So, it's really a no-risk offer for you, and we'd love to have you check that out. If you'd like some additional information about any of those things, you can go to our website at syndicationattorneys.com and schedule an appointment with me or my other attorneys and we'll get you set up with all of that stuff. While you're there, do check out our library, there's over 40 different articles there, a number of FAQs, previous podcasts that we've been on, and all of these previously recorded webinars, and we've been doing this now for over three years. Do check that out. There's a lot of free resources there.

And you can get a copy of my book. If you want to review that online, you can get it free at our website, and that is a No. 1 Amazon bestselling book called “How to Legally Raise Private Money.” Of course, if you'd rather have the hard copy, you can get it from Amazon. 

Let's go ahead and ask some questions here. Ari says, “I was reading an article about using an overseas entity like Cook Island for asset protection. Do you guys have opinions on such a thing?”

Clint Coons:

Well, I’ve got an opinion on everything. I'm an attorney, but we don't set them up. The reason why we elected not to go this route from the very inception is because of the fact that they draw scrutiny from the IRS. I'm not saying that it doesn't work. I've heard of a lot of individuals who choose to go with the offshore jurisdictional route. It's just not an area that we want to go into because of the risk of drawing the IRS scrutiny for our clients, the scrutiny that comes to the firm. Yeah, you can definitely do it but make sure that whoever you're working with is reputable. I'd probably get some referrals if they're willing to share that information so you know which way you're going.

It may provide greater protection for you. Think of a creditor. If you put the assets beyond their reach, especially if you put it on an island somewhere, that makes it really difficult for them. How much do they want to spend in fighting that case? That's my opinion.

Kim Lisa Taylor:

Well, and it's also not cheap to set up these offshore entities. I know if you want to set up a British Virgin Islands entity, it's going to cost you about $5,000 a year. The costs are high for setting things up initially. You also have to look at the stability of that region and make sure that it's not a country that's going to come in and take over the banking system and wipe out your assets. There's just a lot of questions there on how that's done, and there are some mandatory laws regarding those types of offshore entities where they actually have to report to the U.S. IRS holdings there. So, you're not really protecting yourself as much as you might think, and you might be adding on a huge layer of costs to what you're doing. You might want to explore with Clint what you can do onshore first before you start thinking of offshore.

Clint Coons:

I really think, to your point, that onshore is just as effective for most individuals. I've had a client staring down a $15 million lawsuit before and walked away with policy limits because of the structuring that I've been describing, what we'd done for them. The other defendant in the suit wasn't so lucky because they didn't have that type of structure in place, and they're both equally worth over $20 million. 

Kim Lisa Taylor:

Well, Burt asks, “Should each property have its own entity or can multiple properties be titled using the entity created for the state operated?”

Clint Coons:

Great question. This comes up a lot. People want to set up one LLC, put multiple properties into it and they look at it as follows: Well, why create multiple companies? Because there's a cost factor in that. Well, think of it from another standpoint. You're making an investment, all right? What can the entity do for you? Not what it's going to cost you. Because the cost, if you truly want to break it down, if you had seven properties in one LLC, and say one of your tenants, like what happened to one of our clients, he's making meth inside of the house, and he passes out and the house burns down. The smoke detectors, of course, didn't go off, because as his family alleges, you didn't have working smoke detectors in the house. When in reality, of course we know what the story is, the guy disabled the smoke detectors so he could cook the drugs.

Now, you're facing down a wrongful death lawsuit in the multi-millions of dollars because the guy’s livelihood was destroyed and his life and all this stuff when he was killed. Can't sell those drugs anymore. Now you've got seven properties at risk. What is the cost then to follow that type of structure? People will often say this, “Well, Clint, these properties only have $20,000 in equity, so I'm only risking $140,000.” That's again, the wrong way to look at it, because I don't invest for equity personally, with most of my deals; they're legacy investments. What I invest for is cash flow. If you have seven properties throwing off $800 a month, that's $5,600 a month that you're risking. It's over what? 65,000 something dollars a year. That is your retirement income, and you just wasted it by putting all seven properties into one LLC.

I'd rather lose one property in one LLC, because of the situation I described, which would affect me. It would be $9,600 a year, but it's a far cry from losing $65,000 a year in income coming in because I grouped all of my properties together in the same limited liability company. Unless you're dealing with a portfolio lender because you bought a package of properties and you're forced to keep them in the same entity, separate them, is the way I approach it. As you get bigger, there might be times that's going to change. One of the ways I often tell people to consider this is, you brought this up earlier, Kim, about when do you create asset protection, so let's assume that I have $200,000 in total assets, Kim, you have of $10 million, and we're sued and a judgment is entered against me.

We both do the same thing to someone, right? They get a judgment against each of us for $400,000. Who's that going to hurt more? The person worth $10 million or the person worth $200,000? Obviously it's going to wipe me out. I'm bankrupt now. You, you're like, “Yeah, all right. I lost 4%. It sucks, but I still have $9.6 million in wealth left over.” Whereas the person that has $200,000 is in the hole $200,000. I think it's important to also understand the concept that when you're building, you're in a phase where you don't necessarily know all the laws, you don't have that much experience. You're probably going to make mistakes, and you don't want those mistakes to make it so that you can no longer invest because now you have a judgment hanging over your head, that the only way you're going to get out of it is to bankrupt it, and to bankrupt it, it's not going to allow you then to work with lenders and it just becomes a snowball effect.

Kim Lisa Taylor:

Well, that sounds like some pretty good advice. I get asked that question all the time also, especially of a single-family syndicators, so people who are doing funds for single-families. They want to know, how should I take title to those individual properties? I usually advocate that, if you can, do it in an individual property, but if there's a reason that you can't, then try to limit the amount of equity.

Clint Coons:

Yeah. That's why they got to work with that portfolio lender that's doing that deal for them to see if they'll allow them to break them up. It's a blanket loan, and the lender, since it's an asset-based loan, it should not matter, but many times the reason they do this, and they're going to force you to keep all the properties in one specific entity, it's because, if you're not paying, they just foreclose on the bunch and they don't have to bring separate actions against each LLC. I get it, and so then you're going to be forced into that situation.

Kim Lisa Taylor:

Okay. Bill asks, “I've been hearing about South Dakota Dynasty Trust. What benefits do those provide that are different than the traditional Wyoming or Nevada setups?”

Clint Coons:

Okay. The South Dakota Dynasty Trust is an asset protection tool, for sure, and there are some strong benefits to using that to keep your assets protected from personal creditors. The Dynasty Trust would be used in a situation when you're concerned that you're going to be sued personally, and somebody's going to get a judgment against you. Now, the reason why it's an effective tool in this scenario is that your assets are held and controlled by a trustee in South Dakota. If you're willing to give up control of your assets to another trustee, and you have to have your assets, the cash that you put in there has to be held in a South Dakota account as well, managed by this trustee, then yeah, this could be beneficial for you to go that route. But for most of the people that I work with, they don't want to give up that control and put those assets there.

Now, the other benefit of course, in creating the Dynasty Trust is that there's some estate tax planning savings. Right now, with the estate tax where it is $24 million, you can pass on free of any federal estate tax, maybe this isn't such a big deal, but if whatever happens in Georgia in a couple months, that could change all this for us. Depending where the Senate goes, you may find that they lower the estate tax back down to $2 million, and then all of a sudden now Dynasty Trust become more popular because they then avoid subsequent taxation on those assets. So, you can use it. I just don't like to give up control personally, so I wouldn't give up my own investing.

Kim Lisa Taylor:

Okay. That sounds fair. Okay, so Ari asks another question: “Can you use a trust with an irrevocable trustee for asset protection instead of an LLC?”

Clint Coons:

Well, so Ari, this goes back in with that South Dakota Trust. To gain asset protection with a trust, you have to first set up your trust in a jurisdiction that recognizes what we call a self-settled APT (asset protection trust). Most states don't recognize that. They say you can't put your assets in trust and remove them beyond the reach of a personal creditor. So, you create your trust in a state that has set it up – Delaware, Nevada, Wyoming, South Dakota – so now it's irrevocable so it can't be changed. Then you have to turn over control, or depending on what the jurisdiction's laws are, you have to have an independent trustee there serving over distributions. They make sure that they control any money that's coming out to you. So, it's going to give you that protection, but when it comes to investing, the trust can still be sued.

Yes, you can use the irrevocable trust in place of that Wyoming, LLC, that I talked about as the holding company, that's fine. But then, when you own individual assets, let's say I own a portfolio of 30 properties. If I hold all 30 properties in the name of the trust, again, crack dealer burns himself up, they sue the trust. Now your trust is going to get cracked. It doesn't give you the protection you would think. You still need to use the separate LLCs to protect the corpus of that trust, the assets held inside of there. The other option you're probably you're going to run into when you use irrevocable trust for real estate investors is trying to obtain … let's say you want to refi properties in their residential homes, you're going to have to find a particular lender that's going to refi that property. They're comfortable refing it in an irrevocable trust.

If you're using Freddie-Fanny products, that's got to be in your own name. Very few of them will do that. Now you've limited your access to lenders because only ... community banks, those portfolio type loans are really the only thing you can qualify for.

Kim Lisa Taylor:

Okay. David asks, “If an entity is already set up and currently owns or manages property, can you change it to Wyoming or Delaware?” And yes, you can change jurisdictions of an entity, but if you have a loan in place on that entity, then you're going to have to get permission from your lender to do that. Would you agree with that, Clint?

Clint Coons:

Yeah. It's just one of those things you want to talk to them to make sure that it's acceptable to make that jurisdictional change. Most of them, my experience, don't even notice it because they have that loan on the underlying asset. You're just moving the structure of the company. If I was going to make the move in that scenario and there was a loan on it, I would move it to Delaware, not to Wyoming. In fact, in my own dealings with lenders where I've put together pools of single-family homes, they actually require that I set up my entity in Delaware to do the loan.

Kim Lisa Taylor:

Okay. Well, Ari has a followup question, and Ari, I'm just going to suggest that you probably need to go to Clint's website and go ahead and schedule an appointment with him if you want to ask some more detailed questions that are kind of beyond the scope of this call, and we're getting up to the end of the hour. Let's see. I think that's about as far as we can go right now. 

Clint, I want to thank you very much for joining our call today, and thank all of you who took time out of your busy schedules to join us, and thank you for your questions. We do appreciate your participation, and we hope to have all of you as clients soon, either for myself or for Clint or for both of us. So, thanks so much, and we look forward to seeing you again on another call in the future.

Clint Coons:

Thanks, Kim. Take care.

Kim Lisa Taylor:

Happy Thanksgiving.