by Dave Horwedel, CEO of Torchlight Tax

Reportedly, 40 million lawsuits are filed in America every year.

This makes asset protection a high priority for Americans who wants to live well and keep and expand their assets.

This is Dave Horwedel, CEO of Torchlight Tax and Financial Solutions.  Our team of EAs, CPAs and Tax Attorneys work together to save your tax dollars and protect your assets so you can create, protect, and increase wealth.

We set up entities such as LLCs, corporations, and trusts to maximize your after tax profits and protect your assets.

There are a lot of know-best “authorities” who pooh-pooh ideas of large tax savings and using entities to protect your assets.

Many EAs and CPAs, for example, minimize the benefits of cost segregation and accelerated depreciation.  These are key strategies in real estate investment. They do not do this by ill intent.

They are not real estate investors, and cost segregation was not on their college curriculums.   They do not understand these strategies fully, so their off-the-cuff answer is to dismiss them.

After all, they have been running their tax practice for 30 years, are busy, and no one has complained yet.

Investors who learn and use these strategies well significantly and rapidly increase their real estate portfolios. Just ask Grant Cardone!  (Grant Cardone, if you do not know already, is a prominent internet influencer, entrepreneur, and real estate investor.)

Similarly, many CPAs, EAs, and Attorneys recommend an LLC taxed as an S Corporation for your business.  This is generally a good strategy for many small businesses.

But they sometimes do not recommend just plain LLCs, C-Corporations, or setting up a Holding LLC in a state like Wyoming to further protect your assets.

Sometimes these other strategies save tax dollars and are necessary to protect assets. Also, in some cases, they may improve your ability to get a loan for a home or for an investment.

The point is there are many tax saving and asset protection strategies that are not used by all EAs, CPAs, and Attorneys.

In the tax and asset protection fields, I have met many knowledgeable professionals. I have not met any who knew it all.

I have observed smart, hard-working people who do good work.  Not all of them are open to new ways to save money on taxes or protect your assets.

Now, I am a pretty conservative tax guy.  I am an Enrolled Agent, the highest federal tax credential.  I have a team composed of EA-Accountants and CPAs, Lawyers, and support staff.

The EA-Accountants and CPAs have four and five year accounting degrees and average over 25 year of tax experience.  The Lawyer has a JD in law and 25 years of practice in his own firm, and served as an attorney in the District Attorney’s Office in LA.

We are not the kind of people who go jumping after the latest tax evasion scam.  However, we have found that specialized   knowledge is sometimes correct.

Suppose someone comes to you and says you can use “ABZ” strategy to reduce your taxable income to Zero.  He says he can reduce your $400,000 income to Zero!!!!

Is he on crack cocaine???!!! This sounds like some guy who believes that if he never pays his taxes, he is safe.  The IRS cannot touch him as he never opted in.  There are lots of people who are in jail with these beliefs.

But sometimes “ABZ” strategy may be legitimate and reduce your income dramatically and even to zero.

Indeed, I have found some strategies, properly applied in a specific circumstance, that can do this as promised. They are not applicable to every tax return or situation.

If someone has a new tax saving or asset protection idea for a certain client type that we have not used before, we review it.

This applies to both asset protection and taxes.  We are willing to learn.

None of us countenance tax cheating.  But we have found some tax and asset protection strategies that are very beneficial in certain situations. Sometimes these situations can be created by proper planning.

Some things are too incredible to be believed.  Usually, these things are false. Occasionally, one of these turns out to be true.

At Torchlight Tax, we try to keep our eyes, ears, and minds open to workable and ethical tax and asset protection strategies.

 Asset Protection

There are four categories that we will divide your assets into to maximize your asset protection and explain it to you.

  1. Your personal assets.
  2. Your business
  3. Your safe investments
  4. Your risky investments

 Your Personal Assets

This includes your home, your cars, your personal possessions, and your personal savings and checking accounts.

One does not simply pay these expenses out of an LLC or corporation to write them off.   Paying personal expenses out of a business account is called commingling and is an example the IRS gives of tax fraud. It can also ruin your LLC or corporation asset protection.

We would put all these personal assets into your living trust.  This protects these assets from having to go through Probate Court.

You want to avoid Probate as it takes away control of your assets and gives it to the court system.  It can cost a lot of money to your estate and thus your heirs.

When your assets go to Probate Court, it becomes part of the public record.  This has disadvantages.

Maybe your son’s ex-wife sees it and her lawyer now wants more alimony.

Maybe one of the children got less than they felt they deserved.  Once again, this could trigger a lawsuit.

By going through Probate, you are setting your heirs up for lawsuits.

Now, in a living trust, someone you trust can be put on as the trustee when you pass.  There is no public announcement, and the courts are not involved.

If finding someone you can trust is a problem, and you are interested in a living trust, contact us.

A properly drafted trust agreement makes sure your interests are adhered to. Also, the trust agreement is a PRIVATE DOCUMENT.  You have given your instructions to the trustee, and he simply sits down and carries out your instructions.

Not everybody gets to see it.

It is not easy to file a lawsuit against a trust. First, the potential plaintiff may not know about it. Second, the plaintiff wannabee does not know what is in the trust and thus cannot easily hire an attorney on contingency.

Third, by the time he is ready to sue, the assets of the trust may have been distributed and the trust may even have ceased to exist.

The trust can also have provisions in it to protect the interests of your chosen heirs.

In Probate, an attorney is hired by the court and paid out of your estate.  This can get expensive, especially if the will is contested.

The longer Probate goes the more the attorney is paid.

The idea of a living trust is to allow the trustee to handle your instructions with minimum fuss.  It can keep your estate out of court, and there is no delay handling your assets.  The trustee can pay the house rent and handle the banking and see to the needed repairs on a rental property you own.

If you have an active business, he can make sure the business is kept going and ensure that the successor is on the job and handling matters.

Your Business

Now, in this category, we are talking about an active business that you own (partially or wholly) and work in. This can be a legal practice, a janitorial service, a restaurant, an Uber driver, or any other business.

Generally, stock ownership is in the “no risk” category.   However, if you own stock in a business which you own and work in, you are not in the no-risk investment category. You are in the active business category.

Now, your business, if it is an LLC or corporation, largely shields you personally from judgements against your business.

It does not generally work in reverse.  It does not prevent a lawyer or creditor from coming after your business for your personal debts or judgments.

However, it can be set up to do this.  You can set up a Wyoming LLC to be the owner of your business.

You no longer own it. You own the LLC.  (This can also be partial ownership, but for the purpose of simplicity we will assume 100%).

Your Wyoming LLC can be set up anonymously, meaning your name is not in the public record.  Indeed, your name need not be furnished to the Secretary of State of Wyoming when the LLC is formed.

This needs to be done correctly. If you set up the LLC yourself, your name will wind up on the Secretary of State website as the organizer of the LLC, and anyone looking at this website will figure out you set up the LLC and you probably own it. If an attorney sets it up properly, then ownership will be anonymous.

Also, the Wyoming LLC operating agreement must be carefully crafted.  Specific clauses must be in the operating agreement, and specific clauses must not be.

Done properly, it can prevent someone who wins a court judgment against you personally from taking your Wyoming Holding LLC. This is because a Wyoming LLC is eligible for Charging Order protection.  This means that anyone with a judgment against you cannot take your ownership and assets in the LLC.  Suppose the LLC has a hundred thousand dollars in its bank account and owns a business or properties worth a million dollars.

If your operating agreement specifies that the only remedy for collecting a judgment against the LLC is through a Charging Order, then they cannot take the LLC or its assets.  The Charging Order requires that if you take a distribution from the LLC, then it goes to the plaintiff to satisfy the judgment.  So, if you do not take a distribution, they cannot take your LLC.

In most other states, they would just take the LLC and the assets to satisfy the judgment.

Now, you can still borrow money from the LLC.  That is not a distribution. You can be an officer in the LLC and pay yourself a salary as a manager. This is not a distribution.

This is not an absolute guarantee.  Commingling assets or transferring money out of your company because you expect a lawsuit or one has been filed, could result in a judgement being enforceable.  This last is known as a fraudulent transfer.

This would not work if your Holding LLC was not in Wyoming. Most other states do not offer this protection.  We call it a Holding LLC because it holds your assets.

The Wyoming LLC and its assets cannot be taken to satisfy the judgement because it has Charging Order Protection.

Now, if you have more than one business, you should probably have more than one LLC/Corporation. If you lump businesses in one LLC/corporation, then an attack on one is an attack on all.

If you have one business that is doing well and another that is being sued or failing spectacularly, and they are in separate LLCs/corporations, you can keep the good business and close the bad one. Your loss in the bad one is limited to whatever you had put into the bad one.

If both businesses are in the same LLC, the good one will be liable for the debts of the bad one.

If you have rental real estate, this is covered under the risky investment category below.  This is not because the investment is bad. It is because there is a definite risk of lawsuit. Tenants sue. Banks sue. Contractors sue.

Rental real estate has its own rules.  This is covered under risky investments below.

Safe Investments

Safe investments in this context does not mean they cannot lose money. It just means they are not going to damage your other assets.  Simple ownership does not make you legally culpable because you own these.

Bank accounts, money market accounts, stocks, bonds, gold, crypto are in this category. Your trading account is in this category.  They are “safe” because the worst thing that can happen to you is you lose them.

You can lose millions in stock or crypto, for example, but if all you did was buy the stock or buy the crypto, you need not worry about being sued for ownership.

It is different if you were promoting or selling stocks or crypto. They could become definite risks for lawsuit in that case.

These safe investments can be held by a Wyoming LLC. There is no reason to have all these assets tied to your name.

Suppose a lawyer smells “blood in the water “and has a great potential lawsuit against you.  He checks your name and discovers you are without assets.   The blood scent disappears, and he looks for other prey.

A Wyoming LLC bank account is a good hiding place for excess cash.  It is also easy to get back when needed. You just transfer the money.

Risky Investments

Risky investments are risky because they can generate lawsuits.  You usually set them up as an LLC in the state they are operating in.

In some specific cases, it might not be an LLC. This mainly has to do with state law.

For example: In Florida real estate can be held in a Land Trust. Florida Land trusts have asset protection features like an LLC.  They are less expensive to set up and have other financial advantages as well.

Another example: In Texas you can have investments in cells in what is called a series LLC.  Maybe you have Texas SuperBig Real Estate LLC as the parent company and separate cells named by the address of the property, e.g. 1445 Dry Gulch Way, 2555 Tumbleweed Lane, and 1603 Rio Grande Boulevard.   Each of these cells has asset protection as if it were a separate LLC, and this saves you money and hassle.

We will use the term LLC in this article to mean LLC or some similar entity due to state law or specific circumstances.

A good procedure is to set up a Wyoming Holding LLC first.  Call it something anonymous, e.g. XYZ LLC.   Have XYZ LLC be the owner and manager of the state LLCs.  Use a virtual address.  Make sure NOTHING points back to you.

The Wyoming Holding LLC then sets up the state LLC.

You can have multiple state LLCs owned by a Wyoming Holding LLC.  One LLC failing or being hit by a lawsuit does not hurt the Wyoming  LLC or the other LLCs.  The failed LLC is isolated and any debts or judgements against it are not transferable to other entities.

Many people have heard of using a Wyoming LLC.  What is so special about the Wyoming LLC?  Frankly, the laws are most favorable to the LLC owners.

Wyoming has the best anonymity and asset protection features of all the states in America.  Delaware is close. Wyoming is also cheaper.

There is a fascinating sidenote here.  The laws and nomenclature of LLCs, trusts, and corporation are very similar in most parts of the world.  The terminology is international.  Trust documents look similar.  A few different clauses in trust laws can dramatically shift the net effect.

For example, a “fraudulent transfer” is understood around the world. It is when, expecting or having been served with a lawsuit, you transfer assets (money, property, etc.) somewhere where you hope the opposing lawyer won’t find them or cannot get to it.

One trust-haven foreign country puts a two year limit on “fraudulent transfers” when assets are transferred into one of their trusts.

So, expecting a lawsuit, you transfer $10,000,000 into this foreign trust. This clearly is a fraudulent transfer.

Two years later it is no longer a fraudulent transfer.   Moreover, as the trust is in a foreign country, US Courts have no jurisdiction.

These foreign trusts are very interesting but are not practical for most Americans.

If you are worth several million dollars, one of these foreign trusts for $30-100k+ may be worth it.

Now, these asset protection strategies may not protect your assets 100% of the time.  There is no absolute guarantee. If you are drunk and drive over your next door neighbor, this is likely to (and should) be expensive.

This is a numbers game too.  You do not have to be 100% impervious.  You must be impervious enough that the lawyer desirous of suing you reviews your on-line data and decides to look for easier targets.

How can you do this?

Well, the first step is do not flaunt your assets.

Maybe you should not be driving a Ferrari.   That could be flaunting your wealth.

If you MUST HAVE that Ferrari, LEGALLY GET IT OUT OF YOUR OWN NAME.  How can this be done?  Well, renting or leasing is one way.

Your Wyoming holding LLC could buy it and lease it to you.  (If you put it into the LLC, you should have a legitimate business purpose.)

So, give it a legitimate business purpose:

The LLC could rent the Ferrari out via Turo at exorbitant rates when you are out of the country.

Maybe you can make a profit off your Ferrari!

Clients who buy your services could get pictures of themselves in a red Ferrari for their marketing campaigns.

You could use it in your business as an example of what people who use your services can buy.

You could keep it in your own name but make sure the amount owed is greater than the fair market value of the vehicle.

You could even get a line of credit from your Wyoming LLC and they could, with your OK, put a UCC-1 financing statement on your Ferrari, and record it, so the Ferrari has no observable equity.  This acts as a lien and shows you owe more than it is worth so a ravenous attorney may turn aside and look elsewhere.

Now you can release the lien anytime you wish.  You control  the LLC and the LLC can release the lien.

If you want to get a loan and show your assets, release the lien. Show your assets to the bank.   Get the loan. Put the lien back on again.

It is not difficult.

Real Estate Investments

Do you have rental properties?  These are ripe for litigation.

Put each rental property in a separate LLC.   Now if one is sued and goes down, the others are unaffected. If you had them all in your name, along with your un-homesteaded home and your sole proprietorship business, one lawsuit could take everything.  (A homestead is a way in some states of protecting your home from creditor or judgements)

So put the rentals in LLCs.  Put as many assets as feasible into your Wyoming LLC.  Do not just put your personal-use assets in the LLC.   You can put them into an LLC but must do so correctly and cannot use this to hide your income from the IRS.

If you have an expensive personal vehicle or equity in a home to shield, you could have the LLC own the vehicle or home and rent it out to you.

These strategies are good but must be correctly done. They can get complex.

I mentioned Grant Cardone before. He has a lot of videos about investing in real estate correctly.  I am sure there are many other real estate investment “gurus” as well. I recommend if you are interested in investing to watch their YouTube videos and attend webinars. You then make your own decision.

Grant has some seemingly ridiculous tax strategies for real estate investors and entrepreneurs.

They work.  Now, disclaimer here: Grant Cardone is not a tax professional.  I am not saying they all work, or that the people who use them do them right.

I am not vouching for everything he says.  I have not watched but a fraction of his videos.  (He does a LOT.)

But his tax strategies are not wrong.

Also, real estate is a field where asset protection is vital.

There are some amazing strategies in this field to save taxes and protect your assets.  They are legal if properly done.

A word of warning:  Not all the strategies touted in the real estate world are legal.  Before you embark on them get help from a trusted professional in tax, legal, and asset protection fields.  Of course, we at Torchlight and GuardDog Tax would like to help you.

I have seen many real estate tax returns that were bonkers.  This does not mean there are not good strategies available. But the returns were bonkers.  Some were self-prepared, and some were badly done by tax preparers.

Final note on real estate investing. Real estate has some of the best tax breaks available.  There are tax breaks in real estate that are not available in other investments.

I am a member of several Grant Cardone groups.  I attended some of his events BEFORE he heavily shifted into real estate and BEFORE he wrote the 10X rule.

I understand that some people do not like Grant Cardone and speak ill of him.  It is a free country.  We have the first amendment.

I have not watched all Grant Cardone videos. I cannot say everything he has said is correct on taxes.  But I have not found anything objectionable tax-wise in what I have seen.

His real estate advice makes sense to me.  If you are interested in real estate investing, his material is worth studying.  If you  do not like him or his  data, look for another “guru”.

At my firm we are always ready to give you a free consultation.  We can advise you on tax and asset protection matters on your real estate.

Summary of Steps for Asset Protection

Set up a living trust to ensure all your assets are transferred to your heirs without going through Probate.

To do this the assets have to be properly transferred to the living trust.

If you have active businesses, set up each in its own separate LLC. LLCs should be in the state where the business or property is located.

If you have rental properties, set up each in its own separate LLC.

Where feasible, have these LLCs owned and managed by an anonymous Wyoming LLC that your living trust owns.

Make sure all trust documents are correctly done and that all your assets are there.

Make sure all LLC or corporation operating agreements are correctly done and coordinated.   There are many, many ways this can be messed up.  Online templates and document preparation services are not the way to go.

There are so many ways this can be messed up.  Your operating agreement can refer to you by the wrong entity type.

The operating agreement can require you to do certain things like all distributions must be done based on percentage of ownership.

The operating agreement can require mandatory distributions. Sounds good, who would not want a distribution? But wait a minute, you control this LLC. You can distribute when you want to.

You do not need it in your operating agreement.  These last two clauses could break the Charging Order protection of your Wyoming Holding LLC!

Dang! There goes those LLC bank accounts and properties.

My firms (Torchlight and GuardDog Tax) do tax preparation, IRS Representation and Asset Protection.  Our Asset Protection Division is headed up by Attorney Jim Daloisio.

Would you like to maximize your tax savings?

Would you like to minimize asset risk?

Would you like to do pro-actively do tax-savings and asset protection planning?

Then contact us for a free consultation. Call Torchlight Tax at 877-758-7797 or fill out a contact form here.

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