Asset protection-when/how to do it, Inside vs Outside

It feels like it happens 2x/week that we get a phone call from somebody who's already embroiled in some trouble (lawsuit, etc.) & wants to start their asset protection planning. Every time we have to have a conversation about the right time to do asset protection planning. There are also some misconceptions with respect to LLCs and how they may/may not protect. Let's go over some basics this morning!

March 28, 2023

Transcript

 For May, March 28th, 2023. Okay. In case you were wondering whether I was human. Yes. We have not fast forwarded to May. It is still indeed March. Well, so an interesting, I like to think interesting topic today, which comes up, and this is a question that I think I probably get on a weekly basis. It's about asset protection.

When do you do out your asset protection? What is asset protection? And specifically what about LLCs and how do LLCs play in with asset protection? And I think specifically in the context of real estate, it comes up often. I got this rental property, or I'm thinking about selling something, or I've got a business, or I think about buying a new home.

And I'm gonna keep my old home. Do I keep that home in an L L C? So all these asset protection related conversations, and I thought, Hey, maybe today's a good opportunity, just explain a couple of different principles when it comes to asset protection planning. So I'm gonna use my handy dandy, iPad and do a little bit of screen share here.

So bear with me one second. Let's see how this actually plays out. Hopefully. Technology works with me today. Technology has not been my friend over the last couple of days. I like to think it's a spring thing, but here we go. All right, so first of all, what is asset? Actually, let's talk. First of all, when do you do your asset protection planning?

Because this I think, is a mistake that most folks have been making, and unfortunately we have to tell some clients that we just can't help them because of the timing, which relates to asset protection planning. So if you think of a timeline, all right, so on the left end of the time, Here's this basically thing that was done.

Now, what's the thing that was done? Well, if you're a physician, it might be you consulted with a patient. If you are an attorney or an accountant, maybe you gave some advice. If you're a driver, maybe you got in the car after taking some medication. So this thing happened, and then ultimately that thing that you did led to some bad stuff happen.

It might be the car accident that happened. It might be, somebody who got misdiagnosed. It might be some faulty advice that was given. It might be somebody slipped and fell on your property, and then what happens is that person consults the victim. The person who got hurt or the alleged victim consults with the lawyer.

Then they file a lawsuit, then they litigate the lawsuit, and then discovery happens. And then as the lawsuit starts, continuing and, and you basically have a trial, and then ultimately you get to the point where you have a verdict against you, and now somebody wants to collect money against you. So if you think of this whole asset protection timeline, or if you think of this timeline of events that happen here, when is the best time to do your asset protection planning It.

Further to the left of the spectrum. So you wanna do asset protection planning. If asset protection planning is a goal of yours as early as possible. So another way of putting it, you had to buy your flood insurance before it actually starts raining because it's going to be very difficult, and in fact, in some cases, impossible to do asset protection planning.

As you go further along from left to right on this timeline and in case. You know, you're consulting with the wrong kind of person and they say, well, hey, no worries. Why don't we take care of asset protection planning? Towards the very end, there are laws like fraudulent conveyance statutes, which basically stop people from doing asset protection planning or make it even a criminal offense to either do the planning or maybe even, give advice, that, that results in that sort of planning.

And, it stops you from trying to evade creditors. On the asset protection timeline, when do you do your asset protection planning? Ideally, you're gonna do it at this window. You're gonna do it before any liabilities even arise. Now, does that mean that you can't do anything as you get further and further along this timeline?

It doesn't mean you can't do anything in every instance, but, and you definitely want to get advice. You wanna get advice from a proper, from a professional, an ethical professional on this too. You wanna be realistic about your likelihood of success. But all that being said, your chances do go down and the number of options that you have in order to do asset protection planning go down significantly as you get further and further along that time.

Now one specific question that I get, and cuz we have clients who own real estate or let's, let's just stick with the real estate example, is, okay, Neel, I have an L L C, that means my assets are protected. Right? To understand this concept, we really need to understand the difference between inside creditors and outside creditors.

So really quickly, why are you hitting me up on this on a Tuesday morning? Well, I literally had clients call about this and we had an internal team meeting about this over the last couple of weeks. So I said, Hey, this is a good opportunity. So if you own an l l. And that L L C owns your real estate, could be your rental property, it could be your starter home that you decided to hold onto.

It might own several properties. Let's just say it owns real estate one, real estate two. Maybe it's a business interest. Well, and if let's just say I am the shareholder, or not the shareholder, the member in this L L C in a corporation, it's called a shareholder and an llc, it's called a member. Is this LLC Asset protection?

And the short answer is yes. And. Now, what is it asset protection for? If there is a liability which arises as a result of this property or as a result of this business? Let's just say somebody were to sue me as a result of one of those transactions or something that went wrong or somebody slipped and fell or there was a you know, faulty advice given or anything like that sort of happens.

So if there is a liability which arises out of this, L l C should provide a barrier against anybody who wants to sue me. So, lemme see if I could draw my angry face. This is the person who wants to sue me. They're, oh, they shouldn't be happy. They should actually be. I cannot draw the life of me. Here we go.

They're, they're angry. They're suing me. This LLC provides a barrier. And what that means is I might have other assets here, here, I might have my checking accounts, I might have my personal residence, I might have my, brokerage accounts and my savings accounts and all this other stuff up here. This L l C should provide a barrier here, so they can't go after my personal assets here.

So that's actually generally a good thing, right? And the answer is yes. Now. What they can do. This creditor can still basically go after the L L C and if they win the judgment against the llc, they might be able to go after my other assets here too, my other property. Or they might be able to go after my other businesses here too.

So all those eggs are in the same basket. So an L L C does provide this sort of inside creditor protection, meaning only things that are inside of the L L C are at. The stuff that's outside of the LLC is not at risk, so what's the big deal or what else do I need to know about this? Well, there's one other thing that you should know, which is, well, let's just say that I am in my car at the grocery store parking lot and I hit the wrong person with my car.

So now I've got an angry person out here, has nothing to do with my business. I think now I know how to draw an angry person and they want to sue me as a individual. And what they wanna say is, Hey, Neel, you did wrong to me. I now get a judgment against you and I want to collect against you. And let's just say they're successful in litigating that claim.

Well, they have started a lawsuit against me individually, and if they win that judgment against me, they could conceivably collect against the brokerage accounts, the savings accounts, my personal residence, my, checking and savings or my, my other assets itself. So if that were the case, They might even be able to go after my interest in the L L C and therefore all my other assets.

This is an outside creditor because it was outside of the L L C. It happened in the parking lot at the grocery store. So that outside creditor is not necessarily protected against by this L L C itself because it's not arising as a result of that L L C itself. So inside creditors versus outside creditors.

Now there are strategies that you can, I. There are things like trust. There are things like, the way you title your assets. Sometimes certain types of assets have like, life insurance or maybe even 401ks if they're protected by erisa. There are certain assets which have embedded asset protection planning as well too.

But I thought this morning might be a good example to show you the difference between inside creditors and outside creditors. Now, don't wanna live your life scared. And here's the other thing about this asset protection planning, convers. Happen, I believe in the same conversation as financial planning conversations.

They happen in the same vein as estate planning conversations. They can happen in the same vein as tax planning conversations, because a lot of times the strategies that we use for one, are also the strategies that we use for others. So I hope you don't mind me dropping a bit of knowledge on you this morning, and, I hope it wasn't too heavy for you and I hope the, the, the art, the artwork wasn.

Too intolerable for you. I'm looking forward to seeing you next week on Shah Plan-it. Until then, stay safe. Stay well. Bye everybody.

Hello and welcome to Shah Plan-it for May, March 28th, 2023. Okay. In case you were wondering whether I was human.  Yes. We have not fast forwarded to May. It is still indeed March. Well, so an interesting, I like to think interesting topic today, which comes up, and this is a question that I think I probably get on a weekly basis.

It's about asset protection. Do you do your asset protection? What is asset protection? And specifically what about LLCs and how do LLCs play in with asset protection? And I think specifically in the context of real estate, it comes up often. I got this rental property, or I'm thinking about selling something, or I've got a business, or I'm thinking about buying a new home.

And I'm gonna keep my old home. Do I keep that home in an L L C? So all these asset protection related conversations, and I thought, hey, maybe today's a good opportunity to just explain a couple of different principles when it comes to asset protection planning. So I'm gonna use my handy dandy, iPad and do a little bit of screen share here.

So bear with me one second. Let's see how this actually plays out. Hopefully. Technology works with me today. Technology has not been my friend over the last couple of days. I like to think it's a spring thing, but here we go. All right, so first of all, what is asset? Actually, let's talk. First of all, when do you do your asset protection planning?

Because this I think, is a mistake that most folks have been making, and unfortunately we have to tell some clients that we just can't help them because of the timing, which relates to asset protection planning. So if you think of a timeline, all right, so on the left end of the time, Here's this basically thing that was done.

Now, what's the thing that was done? Well, if you're a physician, it might be you consulted with a patient. If you are an attorney or an accountant, maybe you gave some advice. If you're a driver, maybe you got in the car after taking some medication. So this thing happened, and then ultimately that thing that you did led to some bad stuff happen.

It might be the car accident that happened. It might be, somebody who got misdiagnosed. It might be some faulty advice that was given. It might be somebody slipped and fell on your property, and then what happens is that person consults the victim. The person who got hurt or the alleged victim consults with a lawyer.

Then they file a lawsuit, then they litigate the lawsuit, and then discovery happens. And then as the lawsuit starts, continuing and, and you basically have a trial, and then ultimately you get to the point where you have a verdict against you, and now somebody wants to collect money against you. So if you think of this whole asset protection timeline, or if you think of this timeline of events that happen here, when is the best time to do your asset protection planning It.

Further to the left of the spectrum. So you wanna do asset protection planning. If asset protection planning is a goal of yours as early as possible. So another way of putting it, you had to buy your flood insurance before it actually starts raining because it's going to be very difficult, and in fact, in some cases, impossible to do asset protection planning.

As you go further along from left to right on this timeline and in case. You know, you're consulting with the wrong kind of person and they say, well, hey, no worries. Why don't we take care of asset protection planning? Towards the very end, there are laws like fraudulent conveyance statutes, which basically stop people from doing asset protection planning or make it even a criminal offense to either do the planning or maybe even give advice that, that results in that sort of planning.

And it stops you from trying to evade creditors. On the asset protection timeline, when do you do your asset protection planning? Ideally, you're gonna do it at this window. You're gonna do it before any liabilities even arise. Now, does that mean that you can't do anything as you get further and further along this timeline?

It doesn't mean you can't do anything in every instance, but, and you definitely want to get advice. You wanna get advice from a proper, from a professional, an ethical professional on this too. You wanna be realistic about your likelihood of success. But all that being said, your chances do go down and the number of options that you have in order to do asset protection planning go down significantly as you get further and further along that time.

Now one specific question that I get, and cuz we have clients who own real estate or let's, let's just stick with the real estate example, is, okay, Neel, I have an L L C, that means my assets are protected. Right? To understand this concept, we really need to understand the difference between inside creditors and outside creditors.

So really quickly, why are you hitting me up on this on a Tuesday morning? Well, I literally had clients call about this and we had an internal team meeting about this over the last couple of weeks. So I said, Hey, this is a good opportunity. So if you own an l l. And that L L C owns your real estate, could be your rental property, it could be your starter home that you decided to hold onto.

It might own several properties. Let's just say it owns real estate one, real estate two. Maybe it's a business interest. Well, and if let's just say I am the shareholder, or not the shareholder, the member in this L L C in a corporation, it's called a shareholder and an llc, it's called a member. Is this LLC Asset protection?

And the short answer is yes. And. Now, what is it asset protection for? If there is a liability which arises as a result of this property or as a result of this business? Let's just say somebody were to sue me as a result of one of those transactions or something that went wrong or somebody slipped and fell or there was a you know, faulty advice given or anything like that sort of happens.

So if there is a liability which arises out of this, L l C should provide a barrier against anybody who wants to sue me. So, lemme see if I could draw my angry face. This is the person who wants to sue me. They're, no, they shouldn't be happy. They should actually be. I cannot draw the life of me. Here we go.

They're, they're angry. They're suing me. This LLC provides a barrier. And what that means is I might have other assets here, here, I might have my checking accounts, I might have my personal residence, I might have my, brokerage accounts and my savings accounts and all this other stuff up here. This L l C should provide a barrier here, so they can't go after my personal assets here.

So that's actually generally a good thing, right? And the answer is yes. Now. What they can do. This creditor can still basically go after the L L C and if they win the judgment against the L L C, they might be able to go after my other assets here too, my other property. Or they might be able to go after my other businesses here too.

So all those eggs are in the same basket. So an L L C does provide this sort of inside creditor protection, meaning only things that are inside of the L L C are at. The stuff that's outside of the LLC is not at risk, so what's the big deal or what else do I need to know about this? Well, there's one other thing that you should know, which is, well, let's just say that I am in my car at the grocery store parking lot and I hit the wrong person with my car.

So now I've got an angry person out here, has nothing to do with my business. I think now I know how to draw an angry person and they want to sue me as a individual. And what they wanna say is, Hey, Neel, you did wrong to me. I now get a judgment against you and I want to collect against you. And let's just say they're successful in litigating that claim.

Well, they have started a lawsuit against me individually, and if they win that judgment against me, they could conceivably collect against the brokerage accounts, the savings accounts, my personal residence, my checking and savings or my, my other assets itself. So if that were the case, They might even be able to go after my interest in the L L C and therefore all my other assets.

This is an outside creditor because it was outside of the L L C. It happened in the parking lot at the grocery store. So that outside creditor is not necessarily protected against by this L L C itself because it's not arising as a result of that L L C itself. So inside creditors versus outside creditors.

Now there are strategies that you can, I. There are things like trust. There are things like, the way you title your assets. Sometimes certain types of assets have like life insurance or maybe even 401ks if they're protected by erisa. There are certain assets which have embedded asset protection planning as well too.

But I thought this morning might be a good example to show you the difference between inside creditors and outside creditors. Now, don't wanna live your life scared. And here's the other thing about this asset protection planning, convers. Happen, I believe in the same conversation as financial planning conversations.

They happen in the same vein as estate planning conversations. They can happen in the same vein as tax planning conversations, because a lot of times the strategies that we use for one, are also the strategies that we use for others. So I hope you don't mind me dropping a bit of knowledge on you this morning, and I hope it wasn't too heavy for you and I hope the, the, the art, the artwork wasnt.

Too intolerable for you. I'm looking forward to seeing you next week on Shah Plan-it. Until then, stay safe. Stay well. Bye.