RPF0182-Asset_Protection_Intro
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00:01:04.000 | Today, let's talk about asset protection planning.
00:01:12.000 | We'll dig into the sexier side of financial planning.
00:01:16.000 | And let's see if I can give you some useful ideas
00:01:19.000 | to make sense of this topic.
00:01:21.000 | [MUSIC PLAYING]
00:01:37.000 | Welcome to the Radical Personal Finance Podcast.
00:01:39.000 | My name is Joshua Sheets.
00:01:41.000 | And this is episode 182 of the show, where we dig into asset protection planning.
00:01:45.000 | Kind of an introduction, a basic primer for you today.
00:01:50.000 | Yesterday was pretty deep, pretty heavy, pretty difficult, pretty long.
00:01:55.000 | So today is going to be lighter, shorter, more technical, and no philosophy.
00:02:01.000 | So we'll go directly against yesterday's show.
00:02:04.000 | [MUSIC PLAYING]
00:02:09.000 | Not necessarily directly against, but just simply want to point out
00:02:13.000 | that we can sometimes just talk about some concepts
00:02:16.000 | that don't involve a disagreement over world views.
00:02:20.000 | But I will actually point out that even in today's show,
00:02:22.000 | you'll see that there are world view and ethics and morality is a big deal.
00:02:26.000 | Today, let's talk about asset protection.
00:02:29.000 | Now, this is one of the areas that I've always been interested in
00:02:31.000 | because it appeals to my love of the sexier side of financial planning.
00:02:37.000 | When you start your career selling life insurance,
00:02:40.000 | most people who sell life insurance, at least I did,
00:02:43.000 | and I think many people who do sell life insurance,
00:02:45.000 | you get this little complex about doing something
00:02:48.000 | that is not necessarily admired in modern society.
00:02:54.000 | You want to make somebody shut up when you're next to them on the plane.
00:02:57.000 | There are a few answers that you can use.
00:02:58.000 | But if you ever want to really make someone shut up quickly and they say,
00:03:01.000 | "Oh, what do you do for a living?" Just say, "Oh, I sell life insurance."
00:03:04.000 | And the mask comes down, the earphones go on, and the conversation ends.
00:03:10.000 | Now, what's interesting is that early in my career,
00:03:13.000 | I had that inferiority complex about it.
00:03:16.000 | I don't know why I did it. It's immaturity.
00:03:18.000 | But now actually, though, I see it very differently.
00:03:21.000 | Now I would be proud to say I sell life insurance,
00:03:23.000 | but that was due to a change in me.
00:03:26.000 | But when I had that inferiority complex and when I was dealing with those issues,
00:03:31.000 | then I would often like to jump over and study the things that at least for me
00:03:36.000 | were appealing and attractive and seductive and sexy,
00:03:40.000 | things like asset protection planning and complex investment management.
00:03:44.000 | I don't know. I needed to – I was still working out my self-esteem issues
00:03:47.000 | and my self-worth and all of that.
00:03:49.000 | So I needed some help with these things and thankfully,
00:03:52.000 | I'm in a much better place now as a little bit more of a mature adult.
00:03:57.000 | But I've still always been interested in this area of asset protection planning.
00:04:00.000 | It's one of those things that can just pique the interest where you can start
00:04:05.000 | to look at it and say, "Oh, wow. How could I pile up assets so that no matter
00:04:10.000 | what happened, I was still rich?"
00:04:14.000 | So I have an interest in this and I'm going to share with you some ideas
00:04:18.000 | in hopes to save you some time because I bumbled down a lot of wrong alleys
00:04:23.000 | in my interest in this area.
00:04:26.000 | Frankly, it's a very difficult area of planning to actually work in
00:04:30.000 | because you have to balance two seemingly opposing things, paranoia and reality.
00:04:38.000 | Frankly, you need both.
00:04:41.000 | You need a healthy sense of paranoia to think in advance about things
00:04:45.000 | that might happen and how do I plan for them.
00:04:48.000 | But you also need to have a firm grasp on reality to properly think about
00:04:52.000 | what would be the costs involved of doing something or what –
00:04:56.000 | is it even worth it or is this thing that I am considering planning for even likely
00:05:03.000 | or is it worth the money?
00:05:05.000 | It's so easy to get lured into the more esoteric and exotic aspects of planning.
00:05:13.000 | You can talk about offshore private placement, universal life insurance policies
00:05:18.000 | and man, I could sit there and have you just panting and drooling if I started
00:05:23.000 | giving you a sales pitch on how to set up an offshore private placement,
00:05:27.000 | universal life insurance policy to protect all of your wealth and have all of your money tax-free
00:05:31.000 | and completely protected from the claims of creditors and outside the domain of US tax law.
00:05:36.000 | We could talk about the Illinois Land Trust or setting up a Nevada LLC or setting up
00:05:42.000 | a Delaware Corporation and putting all your assets in there or inter vivos trusts.
00:05:48.000 | You can make all of these things sound incredibly alluring is the only idea that I have,
00:05:58.000 | somehow secret or you can look at them and recognize them for what they are,
00:06:03.000 | just some marketing and salesmanship put on top of some simple ideas.
00:06:08.000 | Those are frankly just products and every single one of the ideas or the plans
00:06:15.000 | has advantages and disadvantages.
00:06:17.000 | Because there's so much salesmanship in this area, it's hard to sort through and figure out,
00:06:21.000 | wait a second, what's actually reality here?
00:06:24.000 | What's actually true?
00:06:26.000 | And most importantly, what is actually practical?
00:06:31.000 | What's useful for me in my situation?
00:06:37.000 | So let's start with a simple definition and let's talk about what is asset protection planning.
00:06:44.000 | Well, for me, the definition I like to think of is simply protecting my assets from likely risks that they face.
00:06:55.000 | And I like to think of that in a comprehensive way, protecting my assets from likely risks that they face.
00:07:02.000 | Now, you'll immediately notice that's extremely broad and open-ended.
00:07:06.000 | And for me, it's helpful to think about that because my assets are manifold.
00:07:12.000 | For me, this goes everything from how do I make sure that I protect the cash that's sitting in my checking account
00:07:18.000 | from the fraudulent use of a debit card or a credit card by a criminal?
00:07:24.000 | Or how do I protect the cash that's sitting in a checking or savings account from a bank closure?
00:07:31.000 | So that would involve – the first one would simply involve keeping a PIN number private.
00:07:39.000 | Something as simple as covering over my hand any time I'm using an ATM.
00:07:45.000 | Simple thing to do, part of asset protection planning for me.
00:07:48.000 | Or understanding the FDIC rules and the limitations.
00:07:52.000 | It would also involve saying, well, do I have appropriate insurances on my house in case my house burns down because my house is a valuable asset for me?
00:08:00.000 | It also involves saying, am I going to the gym to work out?
00:08:04.000 | Am I eating well to take care of my physical health?
00:08:08.000 | It involves saying, am I taking care of my children to make sure that they're not kidnapped?
00:08:15.000 | Some places in the world, that's a very real thing that you have to be aware of.
00:08:19.000 | Thankfully, where I live, it's less so but it's still important.
00:08:24.000 | It can happen in some parts of the world.
00:08:27.000 | I just had a friend of mine who came back from some work that he was doing, some missions work in Colombia.
00:08:32.000 | He was describing to me the situation of the people that he was working there with.
00:08:39.000 | He was primarily working with an Indian tribe there in Colombia.
00:08:43.000 | He described how one of the challenges that that Indian tribe is facing is that Spanish Colombians, criminals, are coming into that Indian tribe.
00:08:55.000 | They're stealing their children and taking them away and killing the children and selling the children's organs on the black market as organ donors.
00:09:03.000 | It's to the point where he – one of the people on his ministry team was walking through the hills and this person was a Colombian national speaking Spanish.
00:09:14.000 | For a moment in time, this person didn't have one of the local Indian translators traveling with them.
00:09:21.000 | The person was held up at gunpoint by the local Indians who thought that the person on his ministry team was one of these Colombian criminals who was there scoping things out and trying to steal and murder and sell the organs of the child.
00:09:37.000 | Thankfully, there was another member of the ministry team that was an Indian translator and that person was able to explain the situation and defuse the situation.
00:09:46.000 | But talk about something that – talk about something that I don't have to face generally on a daily basis.
00:09:56.000 | But what about the concept of my children being taken from me by child protective services?
00:10:04.000 | Look at the news article that emerged in the United States last week of the couple in Maryland that let their two kids play at a park.
00:10:11.000 | The police come by and they practically kidnap the children and don't inform the parents of their location.
00:10:17.000 | They coerce the children into the police car and take them over and then they have to deal with child protective services.
00:10:23.000 | The child protective services won't release the children back to the parents who are responsible for them until they sign all these papers.
00:10:32.000 | So that's an important part of asset protection planning.
00:10:36.000 | Thinking about and protecting your children from the state walking in and stealing them from you.
00:10:42.000 | Got to be careful.
00:10:44.000 | A little different than a criminal stealing their child and killing them for their organs, but still something you need to be wise.
00:10:51.000 | You need to be careful.
00:10:54.000 | But it's also the more traditional aspects of how do I protect my – the money that's in my accounts.
00:11:03.000 | Now, what actually comes under asset protection planning when we talk about it in terms of an area of financial planning is actually primarily better known as what I would say litigation planning.
00:11:17.000 | Or probably even better than that, pre-litigation planning.
00:11:21.000 | Because generally, at least when you talk to an attorney, you're thinking to yourself, "Well, what if I'm sued?
00:11:29.000 | What if I'm found liable for a certain act?
00:11:33.000 | And then I'm sued.
00:11:35.000 | How do I make sure and protect my assets from losing a legal court case against me?"
00:11:42.000 | That's the primary area of thought that most people are thinking of when they're referring to this area of financial planning.
00:11:48.000 | And there could be many reasons why you could be sued and have litigation come against you in a court of law.
00:11:55.000 | You could owe money to creditors on business loans or personal loans or for a real estate development project that you were involved in.
00:12:02.000 | You might have made a personal guarantee on a debt.
00:12:05.000 | You may have cosigned a debt with a child or for a friend.
00:12:08.000 | You might be subject to alimony payments or child support payments in your arrears.
00:12:13.000 | You might have medical bills that have come into your situation because of a medical accident.
00:12:20.000 | You might have legal bills that you can't afford to pay or owe taxes.
00:12:23.000 | There might have been some kind of accident.
00:12:25.000 | You may be subject to a professional malpractice suit.
00:12:29.000 | There may have been a simple auto accident or somebody slipped and fell on your front porch and sues you for their medical liability.
00:12:39.000 | Maybe you own some rental property and one of your tenants is injured.
00:12:44.000 | I had a client of mine that I worked with one time that it was a horrible story, but one of his tenants burned down the house.
00:12:50.000 | And evidently – I can't remember if it was a man or a woman, but his tenant was smoking in bed and lit the house on fire and the tenant died.
00:12:57.000 | Not only is that terrible from a perspective of just caring for a person and the death of a person, but it also comes with legal liability.
00:13:12.000 | What if there's some kind of sporting accident?
00:13:16.000 | You're out – this happened sometime here in South Florida.
00:13:19.000 | You have a boating accident.
00:13:20.000 | You're out driving a boat and there's a skier down on the water or a diver, a scuba diver that's poorly flagged and from time to time, we'll find an accident of a boating accident.
00:13:31.000 | Some – I was going to say negligent, but that would be saying liability.
00:13:37.000 | It could just be a simple accident.
00:13:39.000 | A driver of a boat drives over somebody and kills them.
00:13:43.000 | There could also be – you could also go in contradiction of some environmental regulation or you might face some civil rights violation or some labor law violation or you might be found guilty of a criminal act.
00:13:57.000 | You might have found guilty of sexual harassment or slander or libel or something like that and it comes with a monetary judgment against you.
00:14:06.000 | And then even worse, you might be liable for the actions of somebody else, a business partner.
00:14:10.000 | This is one of the reasons why when we're talking about business law and entity law, there's such a major challenge with business entity types such as just a simple partnership.
00:14:21.000 | Because if I go into business with you and we're just – have a simple partnership, you can go out and borrow a million dollars and sign the name of our partnership to that agreement.
00:14:34.000 | And I'm legally liable for that debt even though I may not have known anything about it.
00:14:41.000 | You might go out and commit some horrible thing for which you're liable.
00:14:47.000 | You may go in – go on a mass murder spree with company equipment and now the company is held liable and I'm held liable for your acts.
00:14:55.000 | So it's a real challenge.
00:14:59.000 | It's a real challenge.
00:15:01.000 | Your business might release some kind of toxic chemical and now you're found liable for it.
00:15:07.000 | Now, that's the – those are the types of things that most people think about.
00:15:13.000 | And that's primarily what you're discussing when it comes to asset protection planning.
00:15:18.000 | You're thinking about what happens in case of litigation.
00:15:21.000 | But for today, I want you to always remember that this is a bigger subject than just that.
00:15:26.000 | There is no perfect asset protection strategy because assets face many, many risks.
00:15:36.000 | Some of these risks can be protected from and some of them can't.
00:15:41.000 | Here would be some examples.
00:15:43.000 | One of the simplest asset protection strategies that you can use is to keep your money within the context of a pension account.
00:15:52.000 | Something like a 401(k) can be a defined contribution pension.
00:15:56.000 | It can be a defined benefit pension.
00:15:58.000 | It can be IRA, Roth IRA depending on your state.
00:16:00.000 | In the state of Florida, individually owned retirement accounts have the same protection as corporate employer retirement and pension plans.
00:16:11.000 | But that's not the same in necessarily every state.
00:16:13.000 | So I might have about the best – I might have a million dollars in an IRA or a million dollars in a 401(k).
00:16:20.000 | And from the perspective of bankruptcy law or from the perspective of having an asset that's subject to the claims of creditors, that asset might be very well protected.
00:16:32.000 | But what about the risk of fluctuation of the investments?
00:16:36.000 | I've got it. That's part of asset protection planning.
00:16:40.000 | So you say, well, I'll just move it all to cash.
00:16:42.000 | What about the risk of the debasement and devaluation of a currency?
00:16:46.000 | Our monetary system in the United States is set up such that there is a continual inflation rate.
00:16:54.000 | That's the target.
00:16:55.000 | So that means that you're continually using – excuse me.
00:16:59.000 | You're continually losing the value of your money due to inflation.
00:17:03.000 | So how do you protect your assets from the Federal Reserve and their continual devaluation of the currency?
00:17:13.000 | Or let's say that you work it out and you say, OK, I've found a magical investment that protects me perfectly from litigation risk because I'm using a pension account.
00:17:26.000 | It also protects me perfectly from market risk because I'm using a type of asset that's not going to be subject to the ups and downs of a general investment market.
00:17:35.000 | And I've figured out an asset that magically protects me from the devaluation of the currency.
00:17:41.000 | But then the US legislature changes the law.
00:17:47.000 | And now all of a sudden the rules change on pension accounts and you are now subject to having your account nationalized, which has happened in some countries.
00:17:59.000 | Thankfully, not so much in the United States, at least not yet.
00:18:02.000 | And I think the risk at the moment is not flashing a red light, but it's happened.
00:18:09.000 | So that's all part of the asset protection strategy.
00:18:14.000 | So obviously if you give in to that level of paranoia, then you almost can't do anything.
00:18:22.000 | But then if you can't do anything, then what do you do with the assets?
00:18:26.000 | That's always the challenge, and that's why you have to keep paranoia and reality firmly – almost like twin rails on a railroad track.
00:18:35.000 | You need them both.
00:18:38.000 | What about another example?
00:18:39.000 | Let's say – so one of the nice things about the state of Florida is we have generous exemption for our homesteaded properties from the claims of creditors.
00:18:49.000 | This is one of the ways that Florida competes with other states to attract wealthy residents.
00:18:55.000 | We don't have any state income tax, and we have an unlimited protection – homestead protection exemption from the claims of creditors.
00:19:03.000 | So if you come to Florida and you buy a $100 million property to live in, right here on Palm Beach, and you pay $100 million for one of these beautiful Palm Beach mansions, and then you lose everything else, the state of Florida says you're not going to lose that mansion.
00:19:17.000 | But as is known free and clear, can't be claimed.
00:19:22.000 | But what if the environmentalists are right?
00:19:28.000 | And you face a – I don't like the word environmentalists because I'm an environmentalist.
00:19:33.000 | I prefer to think of myself more as a conservationist than an environmentalist.
00:19:38.000 | But let's say what if the global warming people are right, and so seawaters rise in the state of Florida by four feet?
00:19:46.000 | What value does your property that was on the Florida coastline have?
00:19:52.000 | Not much.
00:19:54.000 | It's underwater.
00:19:56.000 | So the rising seawaters doom the value of your real estate even though you own it free and clear.
00:20:01.000 | Well, what about this?
00:20:03.000 | Social security is generally an exempt income source.
00:20:07.000 | If you are receiving social security payments, social security payments with proper account management are protected from the claims of creditors no matter what.
00:20:16.000 | So you know that your income from the social security administration is protected.
00:20:21.000 | But the value of that money is not necessarily guaranteed.
00:20:26.000 | What does it buy you?
00:20:27.000 | Nor is there an ironclad guarantee that future generations of taxpayers will continue to be willing to fund you.
00:20:37.000 | Now, that's certainly not an event that's on the next decade.
00:20:41.000 | But is it 50 years out?
00:20:45.000 | I don't know.
00:20:47.000 | Or back to my Florida house example, owning a house in Florida free and clear doesn't necessarily protect you from a violent mob.
00:20:55.000 | Look at what happened – was it last year or this year in Ferguson, Missouri?
00:21:00.000 | You have violent mobs wandering around and torching businesses.
00:21:05.000 | What if that's your business?
00:21:07.000 | How do you protect from that?
00:21:09.000 | And you're never protected from criminal activities.
00:21:12.000 | You can't go and rob a bank in Georgia and then wander across the state line and buy a house in Florida real quick on Palm Beach and just do that and think, "OK, I'm good to go."
00:21:22.000 | It doesn't happen.
00:21:23.000 | You can't just take the money from robbing a bank in Georgia and dump it into an annuity, which has useful protection features, and think you're good to go.
00:21:34.000 | You're not.
00:21:35.000 | Frankly, one of the areas of law that really concerns me is the whole topic of asset forfeiture.
00:21:41.000 | There's been such a – I don't know.
00:21:45.000 | This is one of those areas – yesterday we were talking about worldview.
00:21:48.000 | This is one of those areas that's very confusing to me to think through, and I haven't committed the – I haven't fully thought this area through.
00:21:55.000 | It's just – it's not a high priority for me, and that's why I haven't – I mean I've got so many things to do that I haven't thought it through.
00:22:00.000 | But I've realized like I'm not sure how I feel about the approach of the idea of local police departments simply being able to steal the assets of criminals.
00:22:13.000 | The idea is, well, if these assets are stolen in the first place, the police should steal them back.
00:22:17.000 | But I tell you, I sure don't feel good sometimes seeing some of the police boats that the Palm Beach County Sheriff's Office has when they are stolen from a criminal.
00:22:28.000 | And there are enough stories out there, and I haven't been able to search through all the stories to know all the facts.
00:22:35.000 | It's very difficult for me to trust just a story.
00:22:37.000 | But there are enough stories of some questionable transfers that really bother me.
00:22:43.000 | So again, we'll leave that for another day.
00:22:46.000 | But the point is that – and by the way, one of the things that's concerning to me about it is that you can be subject to asset forfeiture to both criminal activities and civil activities.
00:22:58.000 | And it seems from my cursory observations – and feel free if you know of a good source or a good perspective on this.
00:23:07.000 | I'd be happy to read it if you send it to me.
00:23:09.000 | But it just seems like the wall between civil liability and criminal liability has largely been eroded.
00:23:16.000 | Again, I'm not an expert, so I'll quit with that.
00:23:19.000 | But it concerns me.
00:23:21.000 | I think criminals should be given an opportunity and mandate to make restitution for their crimes.
00:23:27.000 | But how does that happen?
00:23:30.000 | You should get the idea.
00:23:32.000 | And let me get off of that subject and just continue on.
00:23:34.000 | The idea is that – I guess the last example I'll give is that you might have your assets held completely privately, completely anonymously.
00:23:42.000 | So this might – we'll talk about it in the future.
00:23:46.000 | This privacy might allow you to not report it and you can just simply lie on the statements when the court is saying, "What assets do you have? This happens."
00:23:57.000 | Believe it or not, people lie.
00:23:59.000 | So you might have all your assets held completely privately and anonymously and then all of a sudden lose them due to theft or fire.
00:24:05.000 | Well, then how do you prove that you own them?
00:24:07.000 | How do you make an insurance claim if the assets are held completely privately and anonymously?
00:24:12.000 | So you need to think through what risks you're actually concerned with and then we'll focus on those risks.
00:24:20.000 | When you look at asset protection planning – and now that I've given you that introduction, let's talk about it in the concept of liability planning.
00:24:29.000 | Asset protection planning and the concept of liability planning is essentially all about creating a plausible story that's backed up by the facts that you can tell a judge or a jury which will ultimately end in the fact that your assets are protected by law.
00:24:49.000 | Having that solid story is the basis of planning.
00:24:55.000 | In essence, you're writing a script and in order for your asset planning protection strategy to be strong, that script has to be written hopefully years and years and years in advance of the actual event that causes you to be in litigation.
00:25:12.000 | Let me give an example.
00:25:15.000 | The most famous example that's often tossed around here is the idea of OJ Simpson.
00:25:19.000 | Now, this one is tough for me because I'll show my age with you.
00:25:23.000 | I have zero connection to the OJ Simpson case.
00:25:26.000 | This is one of those that people often want to talk about.
00:25:29.000 | "How about OJ Simpson?"
00:25:30.000 | Everyone has their opinion like, "I don't want to think about it."
00:25:33.000 | I wasn't there.
00:25:34.000 | I didn't pay any attention to this.
00:25:36.000 | This is before my time.
00:25:39.000 | But people are all – this is one of those things that for the vast majority of people, they have very strong knowledge and opinion of it.
00:25:47.000 | As far as I'm concerned, maybe it's just one of those things that I haven't researched but the court says he's innocent.
00:25:53.000 | He must be innocent.
00:25:54.000 | I have no other choice to do that until maybe someday I'll get sucked into researching the case and get exposed.
00:26:02.000 | I'm aware of a little bit of the controversy.
00:26:04.000 | But my point is I don't have much of a connection but a lot of people do.
00:26:08.000 | One of the things that's so amazing to people is that OJ Simpson came through that and he continued to receive his NFL pension to the tune of – I went and double-checked the numbers just before mentioning it.
00:26:20.000 | To the tune of about $25,000 a month.
00:26:22.000 | That was what some of the USA Today said on one of the news stories that I read.
00:26:28.000 | So here he is.
00:26:30.000 | He goes through.
00:26:31.000 | He's found in civil court.
00:26:33.000 | He's found completely liable.
00:26:34.000 | And he's ordered to pay $33.5 million to the Goldman and Brown families that sued him in civil court after he was declared to be innocent in criminal court.
00:26:49.000 | They sued him in civil court.
00:26:51.000 | He's ordered to pay $33.5 million.
00:26:53.000 | But prior to the lawsuit, supposedly he's worth a lot of money and then all the money is gone.
00:27:04.000 | And it's fought over for years and years and years.
00:27:07.000 | But he continues to receive the pension.
00:27:09.000 | And that is probably one of the more well-known ideas.
00:27:13.000 | And it's true because if you have a pension, if in his case he was the recipient of a pension from the NFL,
00:27:20.000 | then that money is protected from the claims of creditors.
00:27:24.000 | All of his other assets are not protected necessarily, which is why other stories.
00:27:32.000 | He immediately moved to Florida and realized the error of his ways of owning a house in another state, moved to Florida and tried to buy a Florida house.
00:27:38.000 | And I'm not knowledgeable enough to get into all the details.
00:27:41.000 | But the point is that in order for him to continue receiving that pension income, he had to earn that pension income years before he winds up in litigation.
00:27:49.000 | So good asset protection planning has to be done far in advance of the actual need.
00:27:55.000 | So it's one of those continual optimization things that we need to apply to good financial planning.
00:28:01.000 | You're writing a script and that script needs to be based upon true facts.
00:28:06.000 | And it needs to be a script that can be publicly exposed, every financial transaction publicly exposed to a judge and a jury and stand up.
00:28:14.000 | The field of asset protection planning is interesting because as one author, an author named Jay Atkinson, an attorney who wrote an excellent book called Asset Protection.
00:28:27.000 | He wrote in this book – he said asset protection planning is a constant race between debtors and creditors.
00:28:34.000 | And it's a constant race between debtors trying to use certain techniques and come up with new techniques to shelter their assets from the claims of their creditors.
00:28:43.000 | And creditors being able to peer through those techniques and find them.
00:28:47.000 | He actually lays out three interesting classifications for asset protection plans and schemes.
00:28:55.000 | He talks about it in terms of three levels.
00:28:58.000 | The first level is where the efficacy is known.
00:29:01.000 | These are basic strategies, basic schemes that are well litigated and we know whether they're effective or not.
00:29:07.000 | They're proven that, okay, this is going to be a pretty good plan or they're not.
00:29:11.000 | The second layer he calls efficacy challenged, which is perhaps a newer strategy that's going through challenges and hasn't been proven yet one way or the other.
00:29:24.000 | It's been developed and it hasn't been tested in court in a contentious situation.
00:29:29.000 | And then he talks about the final one, which is the innovative frontier, which is in essence the development of a new plan.
00:29:35.000 | And because it's such a new plan, the creditors might have a difficult time coming up with the – having the background knowledge to be able to find the debtor and be able to find the – and figure out the plan and the strategy.
00:29:49.000 | So it's kind of just an interesting way to think about plans and strategies and over the coming years, I will from time to time talk about these and I'll usually characterize them.
00:29:58.000 | This is a very safe. This is a very proven scenario or this is a little bit on the edgier side.
00:30:05.000 | Now, one thing that's important for you to know, I am not a – I'm not a – I'm not an asset protection planner.
00:30:14.000 | I'm just a financial planner with a mild interest in this area.
00:30:17.000 | And so I will be primarily just wanting to share with you some places to start.
00:30:22.000 | But you will definitely want – if you're interested in pursuing this or you need to pursue this, you definitely need to work with a specialist.
00:30:29.000 | This is not an area – I am not competent to practice in this area.
00:30:33.000 | You'll want to find some attorneys.
00:30:34.000 | And the challenge is that this is actually not a legal specialty.
00:30:37.000 | In the past, it wasn't.
00:30:39.000 | I'm going to read to you two pages from Jay Atkinson's book that I think do an excellent job of laying out the challenges of this area.
00:30:48.000 | Because asset protection is – well, it brings a lot of areas together.
00:30:56.000 | It's a subset of risk management.
00:30:59.000 | So we always talk constantly about risk management.
00:31:02.000 | Avoid catastrophe.
00:31:03.000 | That's the fourth of my five-part financial plan.
00:31:06.000 | Risk management, risk management.
00:31:07.000 | And this is basically planning for your legal risk management.
00:31:10.000 | Let me go ahead and read you just these two pages here from Atkinson's book.
00:31:14.000 | It's called Asset Protection and Legal Risk Management.
00:31:16.000 | Page 21 of his book, Asset Protection, Concepts and Strategies for Protecting Your Wealth, there's a section entitled "What is Asset Protection?"
00:31:25.000 | We previously noted that asset protection is a subset of risk management.
00:31:29.000 | Asset protection is first a method of managing legal risks.
00:31:34.000 | Second, asset protection provides a backup in case risk management fails to prevent the risk from materializing and there is a resulting money judgment.
00:31:43.000 | This is why asset protection is considered hard planning.
00:31:47.000 | It is the last line of defense when everything else has gone wrong.
00:31:50.000 | It is not meant to protect the client in easy cases where she is likely to win or where her insurance company will handle it.
00:31:57.000 | Asset protection planning is meant for the worst-case scenario.
00:32:00.000 | Most clients will never have this worst-case scenario where the asset protection plan is challenged.
00:32:07.000 | However, if no plan is in place, the worst-case scenario can be disastrously worse than if proper planning had occurred.
00:32:14.000 | Among legitimate practitioners, asset protection requires expertise in several areas of law and practice.
00:32:22.000 | Good asset protection plans are multidisciplined.
00:32:25.000 | Rarely does any one person have all the necessary skills to provide the most comprehensive asset protection planning.
00:32:31.000 | Nor is it likely that one person could keep up with important changes in all of the areas of law that require competence for good asset protection planning.
00:32:40.000 | The most comprehensive and well-structured plans are created by teams of multidisciplined planners.
00:32:45.000 | In the order of importance, the areas of law important in good asset protection planning are civil procedure, commercial law, business entity law, bankruptcy law, tax law, and trust and estate law.
00:32:58.000 | Civil procedure comprises pretrial procedure, conflicts of law between jurisdictions, evidence, privileges, trial practice, judgments, and remedies.
00:33:08.000 | The essence of asset protection is predicting what judges and juries will do when faced with a particular set of circumstances.
00:33:15.000 | No one can make these predictions unless he has been in a few trials, sat through some debtors' exams, thwarted prejudgment attachment of assets, and the like.
00:33:24.000 | Unfortunately, too many asset protection planners have little training and little or no practical experience in litigation.
00:33:31.000 | The creation of asset protection plans without consultations with a planner with some litigation background is foolhardy.
00:33:38.000 | If someone has no firm idea what sort of questions a creditor or hostile judge may ask, how can they engage in planning in anticipation of giving the correct answers?
00:33:48.000 | The field of commercial law includes debtor-creditor law, contracts, and the uniform commercial code.
00:33:54.000 | Good asset protection plans are created using transactions that make economic sense and that can be rationally explained to a judge or jury.
00:34:02.000 | It makes for a good story.
00:34:04.000 | The uniform commercial code and commercial law will almost always govern business transactions between entities as well as the security interests created in those transactions.
00:34:14.000 | A planner needs to understand the various types of obligations and remedies that may arise from specific commercial transactions.
00:34:21.000 | An understanding of debtor-creditor law, particularly fraudulent transfer law, is critical.
00:34:26.000 | A planner who purports to put together asset protection plans who has anything less than a thorough knowledge of the fraudulent transfer law is a fraud.
00:34:34.000 | A comprehensive knowledge of business entity law, including the formation, operation, governance, and defense of corporations, partnerships, limited liability companies, and other business entities is crucial.
00:34:45.000 | Boilerplate documents will not suffice for a good asset protection plan.
00:34:49.000 | Solid planning requires well-crafted entity documentation.
00:34:53.000 | Bankruptcy will usually not be an issue if an asset protection plan works well because the debtor will not have to resort to bankruptcy and the creditor will realize the futility of forcing the debtor into involuntary bankruptcy.
00:35:06.000 | Nonetheless, bankruptcy is always a possibility and the planner must be aware of the interplay between the asset protection plan and bankruptcy law.
00:35:14.000 | Some planners, however, actually send their clients rushing headlong into bankruptcy, foreign trusts in hand, assuring them that their debts will be wiped out.
00:35:23.000 | These planners forget that bankruptcy judges have tremendous powers and the threat of bankruptcy fraud is very real.
00:35:30.000 | As we have mentioned, asset protection as a marketing term originally surfaced when tax evasion plans involving offshore tax havens needed a less sinister moniker.
00:35:40.000 | Eventually, however, the offshore tax havens saw the value of adding debtor-friendly asset protection laws to their statute books.
00:35:47.000 | Many asset protection plans have at least some offshore component and planners should be knowledgeable about certain offshore laws as well as international banking and the transfer of funds internationally.
00:35:58.000 | Asset protection plans should be created in coordination with or should be reviewed by a competent tax professional.
00:36:05.000 | As a simple economic matter, negative tax consequences need to be avoided to the fullest extent possible.
00:36:11.000 | Conversely, if legitimate tax planning opportunities arise in the asset protection planning process, they should be explored and exploited.
00:36:20.000 | Many asset protection plans are income tax neutral, meaning that they have no net effect on the amount of income tax the client will pay.
00:36:27.000 | However, although such a plan ultimately has no effect on the client's tax situation, it often requires a significant level of tax skill to achieve that neutrality and to avoid creating a tax problem.
00:36:39.000 | Too often, asset protection plans are created without regard for tax consequences.
00:36:43.000 | The result can be that the client pays more in taxes, penalties, and interest than he saved in court from the asset protection plan.
00:36:51.000 | Plans based on secrecy, bearer shares, nominees, and the like are particularly susceptible to this problem.
00:36:58.000 | If possible, asset protection planning should be integrated with estate planning, which also fundamentally involves the protection of wealth over time.
00:37:06.000 | So long as the client remains sufficiently solvent and if there are no foreseeable problems on the horizon, an integrated estate and asset protection plan can work well.
00:37:15.000 | However, contrary to the claims of the vast majority of asset protection plans marketed, trusts and family and charitable giving are often the worst possible asset protection tools.
00:37:26.000 | Gifting may be the boon of estate planners because of the tax laws, but it is the bane of asset protection planners because of the fraudulent transfer laws.
00:37:34.000 | Gifts are set aside rather easily under the fraudulent transfer laws for a number of years after they are made.
00:37:41.000 | So hopefully that just gives you an idea in modified attorney speak.
00:37:46.000 | That's not quite normal attorney speak.
00:37:48.000 | That's slightly modified for the general public that this is a very challenging area of planning.
00:37:54.000 | And so my goal in bringing it to you today is just simply to give you a bit of an intro and then share with you here what I'm going to be focusing on as I do shows in the future on this topic.
00:38:06.000 | Simple things. Simple things.
00:38:09.000 | I'm not competent to practice in those areas.
00:38:12.000 | And I think that if you have the amount of assets in which you need to be thinking about some of the more complicated and complex skills, you need to be – this is why you need professionals.
00:38:27.000 | And incidentally, this is why as a professional, you need to specialize.
00:38:32.000 | It's going to take a lot of years of study and practice, but you can be worth a massive amount of money to someone who's very wealthy if you want to practice in that area.
00:38:42.000 | But there are some things that we can do in a normal – so-called normal, middle-class situation that will be helpful.
00:38:51.000 | As we wrap up here, here is one thing I want to emphasize.
00:38:57.000 | Asset protection planning is one area where you need to firmly hold on to the concept of appropriate scale.
00:39:04.000 | If you're not familiar with that term, go and listen to episode 131 of this show where I talk about filtering everything through the lens of scale.
00:39:14.000 | Where am I in my life?
00:39:16.000 | Where are you in your life?
00:39:19.000 | There's a cost to everything.
00:39:22.000 | Privacy costs.
00:39:24.000 | Insurance costs.
00:39:26.000 | Legal work costs.
00:39:29.000 | You need to look at your situation and ask yourself, "Is this area of planning worth the cost?"
00:39:37.000 | What are your most likely risks that you face?
00:39:40.000 | And then what are the most reasonable, inexpensive solutions to those risks?
00:39:44.000 | And think simple.
00:39:47.000 | I guess an example that comes to mind, let's say that you're thinking of asset protection planning.
00:39:59.000 | What's the simplest place to start?
00:40:01.000 | Start with theft.
00:40:02.000 | The example that came to mind, I don't know what percentage of the audience enjoys shooting guns.
00:40:10.000 | I enjoy shooting guns.
00:40:12.000 | And I was thinking of the example.
00:40:13.000 | What if you have one of these beautiful – if you're a gun enthusiast, what if you have one of these beautiful 50 caliber Barrett – what are they?
00:40:21.000 | The Barrett M82, I think, 50 caliber rifles.
00:40:26.000 | I mean those things are just huge.
00:40:29.000 | They're awesome.
00:40:31.000 | And they cost what?
00:40:32.000 | 5,000 bucks, 10,000 bucks depending on what they're worth.
00:40:36.000 | Sometimes they're worth far more.
00:40:38.000 | You're going to take a little bit more care of that thing.
00:40:41.000 | And you're going to go ahead and spend a little bit more money on that gun safe to protect it than you are if you just picked up an old used break action $100 shotgun at the pawn shop.
00:40:55.000 | If I'm dealing with a $100 break action single shot shotgun, I probably wouldn't worry too much about spending $1,000 on a gun safe.
00:41:02.000 | But if you're protecting a 10 or 15 or 20 or $25,000 rifle, you're going to spend some money on the gun safe.
00:41:13.000 | You might at that point even time, you might go ahead and have the ownership of that rifle held within a different entity depending on what your situation were.
00:41:24.000 | Apply that simple concept to your own life in terms of scalability.
00:41:30.000 | You got to actually think through what are the most likely risks and what are the reasonable solutions to those risks.
00:41:37.000 | If the most likely risk for your assets are theft, spending money on a security system and putting a fence up around your house and putting out some motion activated lights and getting a guard dog might be a better move than drawing up some kind of a plan.
00:41:59.000 | Than drawing up some kind of legal documents.
00:42:02.000 | But on the flip side, if you're getting into a complex, risky, real estate speculative development opportunity and you're not exactly sure what you're going to find after you buy this land but you know that it's at least a possibility that you're going to be subject to an environmental claim.
00:42:22.000 | I wouldn't worry too much about the motion detector lights on my house. I'd be worried about making sure that I had thought through all of the variations of that.
00:42:30.000 | What would happen if I'm found subject near the EPA comes knocking and I got to deal with an environmental claim.
00:42:36.000 | Use that as a simple model and apply the lens of scale in this area.
00:42:42.000 | That's it.
00:42:44.000 | That's all I got to talk about as far as asset protection.
00:42:47.000 | I hope this is kind of a fun introduction.
00:42:49.000 | I hope that I can help to kind of pull down the curtain.
00:42:53.000 | Oftentimes legal people and attorneys are awesome but they're also the worst.
00:42:58.000 | I have a tendency in this direction but it's funny.
00:43:04.000 | All my buddies who are attorneys, they hedge everything.
00:43:07.000 | Some people get annoyed at me, "Joshua, you hedge everything."
00:43:10.000 | But attorneys are even worse.
00:43:12.000 | So I try to interpret the attorney speak and put it into practical language that you might actually find useful.
00:43:17.000 | So that's my goal with the show.
00:43:20.000 | So think about it.
00:43:21.000 | Look at your situation.
00:43:22.000 | Figure out what are the risks that you're most likely to face and then what is the simplest, easiest solutions for you to deal with those risks.
00:43:29.000 | And then you'll get started on asset protection planning.
00:43:32.000 | Think comprehensive in scope and recognize that different things are going to be more appropriate at different times.
00:43:38.000 | I'm not worried too much today in 2015 about the US government all of a sudden going rogue and stealing all the money out of my investment accounts.
00:43:52.000 | There might come a time for that and I'm certainly aware of the risk but it's not the number one risk that I face.
00:43:59.000 | But man, if I were living in Venezuela, that's been done.
00:44:04.000 | If you're living in Argentina, that's been done.
00:44:07.000 | So try to make sure that you keep paranoia and reality firmly together.
00:44:16.000 | It's good to be paranoid.
00:44:17.000 | It's good to be realistic.
00:44:20.000 | Agree with me, disagree with me.
00:44:22.000 | Happy to have your comments on today's show.
00:44:23.000 | Come up with the show notes and let me know if you agree or disagree.
00:44:25.000 | If you found this concept useful or this information useful or if you find the show useful and valuable in your life, I'd be thrilled if you would become a patron and directly support the show.
00:44:33.000 | Details of that can be found at RadicalPersonalFinance.com/patron.
00:44:37.000 | We don't have any corporate advertisers on the show and that is my funding model.
00:44:41.000 | So if this is beneficial for you every day, I'd be thrilled if you would become a supporter of the show.
00:44:46.000 | You too can be a patron of the arts and support me, this Michelangelo – I'm just kidding.
00:44:53.000 | I'm not Michelangelo.
00:44:55.000 | But you can support me in doing the show and I appreciate each and every one of you who do.
00:44:58.000 | RadicalPersonalFinance.com/patron.
00:45:04.000 | Thank you for listening to today's show.
00:45:06.000 | If you'd like to contact me personally, my email address is Joshua@RadicalPersonalFinance.com.
00:45:13.000 | You can also connect with the show on Twitter @RadicalPF and at Facebook.com/RadicalPersonalFinance.
00:45:20.000 | This show is intended to provide entertainment, education, and financial enlightenment.
00:45:27.000 | But your situation is unique and I cannot deliver any actionable advice without knowing anything about you.
00:45:35.000 | Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy.
00:45:44.000 | And consult them because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions.
00:45:56.000 | I've done my absolute best to be clear and accurate in today's show, but I'm one person and I make mistakes.
00:46:03.000 | If you spot a mistake in something I've said, please help me by coming to the show page and commenting so we can all learn together.
00:46:11.000 | Until tomorrow, thanks for being here.
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