In today’s lawsuit-happy society, making it isn’t enough. You need to protect yourself that is why asset protection is so important. As a real estate investor, you need to learn how to protect yourself. All the gurus are saying, “Put your real estate properties in a separate LLC.” It gives you a corporate shield and charging order protection. Protected your property in case the insurance doesn’t cover it all. Protected your property also from yourself like if you get sick or get into an accident. Join Julie Houston and Gem Rinehart as they talk to Attorney Lee Phillips about how to protect your wealth so no one takes it away from you. Lee is a counselor to the Supreme Court of the United States and an engaging speaker with over 10,000 hours on public stages. Learn how to not lose everything in real estate to your tenants, the IRS, or some greedy lawyer. Protect yourself today!
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Asset Protection With Lee Phillips
We’re super excited with the guest we have. We are so honored to be here with Lee Phillips. Lee, welcome to the show.
How are you?
I’m good. How are you?
I’m great.
We’re excited to have you here. Lee is a bit of an expert in a lot of the real estate and business side of the legalities. Lee, why don’t you tell us a little bit about yourself and your background for our audience?
At any rate, I am a lawyer. I’m a US Supreme Court Counselor, a Federal Tax Court Attorney and all of that garbage. I’ve done asset protection for most of my life. I started as a patent attorney and 3 or 4 weeks into that, I got sick and lost everything I had. When we say asset protection, your immediate thought is, “A lawsuit,” but asset protection goes way beyond lawsuits. Fifty-six percent of all bankruptcies are a result of somebody in the family getting sick.
The question is, “Are you going to lose your little business,” and yes, I lost my little business. Are you going to lose your little business when you get sick or somebody in the family gets sick? Are you going to lose your investment in real estate when so many of the family get sick? You could get divorced, you could have the accident and the lawsuit. There are all kinds of reasons why we do asset protection.
In fact, we’re not going to talk about it now much, I don’t think, but your biggest asset protection threat is the IRS. They’re taking half of what you make and if they’re taking half of my property, isn’t that an asset protection threat to me? Asset protection is a lot of facets, but when somebody says asset protection, the immediate thought is a lawsuit, but it goes way beyond that.
Your biggest asset protection threat is the IRS. Click To Tweet
I’m still waiting to hear back from my CPA in 2021. I’m on it with them. I’m doing everything I can, but I hired a professional CPA firm that I pay a monthly fee to now that certain businesses have grown. I’m getting everything done through them.
We like the monthly fee. The fee sounds good to hear.
I know, but I want it done the right way. I don’t know how to do it. If I do it, I’ll probably end up doing everything wrong.
No, I don’t do my own taxes either. I sit and shake when I see a tax form. I do fight the IRS and tax court, but no, I hate to do my own taxes.
It’s a joy, but you got to do the right thing and you got to have the right people in any business. If it wasn’t for our conversation about asset protection, I would’ve never even known to even look into it.
It’s something that any business person like yourself needs to think about. I dealt with a California from a while back. They were a big advertising firm. We’re talking 200 or 300 employees and they had always been a partnership. They got to thinking and saying, “We understand that a partnership isn’t good asset protection,” which it isn’t. They went to legal doom and they got their asset protection and their LLC set up. Five or six months later, they did get sued, actually.
The argument in court was, “Your honor, I don’t have to honor this LLC. All I have to do is sue them personally. I don’t have to worry about the LLC.” It took about 15 minutes in court for the judge to say, “Yeah, you’re right. You don’t have to worry about the LLC. Sue him personally.” This advertising firm gets me on the phone and they say, “Lee, we’ve got to do it right this time.” There’s a lot more to it than having a document, an LLC, a corporation, a trust or whatever it is.
You have to use these documents. You have to think, “I’m an LLC now. I’m not a partnership.” They’ve been a partnership for 40 years. The problem was they kept conducting business as if they were a partnership. The people suing them had been their clients for years. They never notified them that they weren’t dealing with a partnership anymore and that they were dealing with an LLC. As a result, these people had the right to continue to deal with them just like they’d always been dealing with them.
Putting the piece of paper into place, you’ve got to have that, but then you’ve also got to do all of these other things. The problem is the attorneys and the internet sites, they don’t care. They don’t teach you how to do the other things. The attorneys don’t teach you how to do the other things because the attorneys, frankly, don’t care. They make their money setting it up, but then they make more money cleaning up the mess after.
It’s a conflict of interest almost. It’s been interesting and I’ve always said I will not take a client. I educate people on this asset protection stuff. I don’t set people up to be my client and I’ve done well-educating people and I don’t worry about it. Asset protection is a big deal. You’ve got to go through all the hoops, though and there are lots of hoops.
We can talk about it from a mom-and-pop standpoint. Mom and pop, do you need asset protection? Probably not. You’ve got a house and you’ve got a car and you’re retired. The only way you’re going to get in trouble is that the car, you’re going to hit somebody, but you carry a big automobile liability policy. The house, you’re going to carry the umbrella policy and it’s going to protect you. You don’t need to go into all of this legal crap, but the little business guy or the real estate investor needs to go another step forward and run with it. You’re going to get eaten, I can tell.
Let’s do the real estate path for investors.
I’m a real estate investor. I’m not big, but I have a number of rental properties. How do you protect when you’re a real estate investor and what are you protecting from? While you’re protecting from the client, the client’s going to sue you because something goes wrong and you can certainly get sued by the client. There are no questions there, but you’re also protecting yourself from the economic downturn.
In 2008, 2009 and 2010 big real estate bubble boom, I saw a lot of people and they’d lose one piece of property. It’d go bad and they’d go to the bank. The bank could take it back. They’d sell it. There was a deficiency. They’d come to the next piece of property, take it, sell it and deficiency. They go to the next one. I saw people lose 30 pieces of property.
If you're an LLC, you're not in a partnership. So stop conducting business as if you were in a partnership. Click To Tweet
I call it the domino effect and they dominoed all the way down. You need to hold and own your real estate so that this piece is isolated from this piece. If this piece goes down in a lawsuit, an economic turmoil, the neighborhood goes bad or whatever it is, I lose this piece, but that doesn’t mean I lose this piece. Most attorneys never think about that one.
You’re told asset protection to protect yourself and the primary way that you protect yourself is with the corporate shield. The corporate shield protects me from what happens out here in front of the shield, but the question is, if something happens to me, what happens to this piece of property and this piece of property? What happens to my company assets? What happens to the assets I own?
What we need to do is think two ways. One, how am I going to protect me and my family, my personal house and my stuff from what happens in the rental units you also have to think about what happens to the rental units if somebody in the family gets sick or the economic turndown comes. We could have another economic disaster. The news loves to say we’re going to go have a disaster, but it is possible. We can have another economic disaster as good as 2010.
What you need to do is set your rental units up so that they are individually owned or they are owned in clusters. The gurus will tell you, “Have a separate LLC, corporation or family limited partnership for each one of your pieces of property.” I had two doctors that called me up from Long Beach, California. These two doctors get me on the phone. One of the big real estate asset protection gurus has gotten ahold of them and he’s set them up. The keyword there is set up.
He set them up. They had 53 properties and he said, “You need a separate limited partnership for each one of these 53 properties.” Each of them owned a piece. They were partners, but he said, “You need a limited partnership,” and he used that tool. An attorney has lots of tools, limited partnerships, corporations, LLCs, trusts and all kinds of tools. These tools have certain uses.
You’ve got a carpenter. He’s only got so many tools like a hammer, saw and that sort of stuff and yet the carpenters can make very different physical structures and houses using these same tools. An attorney only has so many tools. The corporation, the LLC, the limited partnership and the trust, these are our tools and depending upon how you use them, you get different results. Does a hammer drive nails in and pull nails out? What about a ball-peen hammer, Gem?
I don’t even know what that is.
A ball-peen hammer is the one with the little round knob on the bottom instead of the claw where you pull the nails out. It’s used in metal. We got to get somebody who knows what they’re doing here with the tools, at any rate. This guy set up 53 limited partnerships and he only charged him $5,000 per 53 partnerships. You can write it down on the back of the napkin and then he said, “You guys are in California. It’s really expensive in California. You want your limited partnerships to be in Utah. In fact, I’m in Utah. I’ll be the registered agent,” he says.
“I’ll set it up. These will be Utah Limited Partnerships. If you go out of state to have your corporation, limited partnership, or whatever it is, you’ve got to have a registered agent.” He said, “I’ll be the registered agent.” By the way, he says, “I’m not only a lawyer. I’m an accountant too. You doctors, you’re busy. I’ll tell you what. I’ll do the accounting and I’ll issue you guys your K-1s. You won’t have to do a thing.”
He only charged him $1,500 per year. $1,500 times 53 limited partnerships, these two docs get me on the phone and they say, “Lee, we’re not worried about asset protection. Our attorney has all of our money. How do we get out of this?” Don’t let the gurus shove you over the edge, Julie. They’re going to give you as many limited partnerships or as many LLCs as they can because they get paid for every one of them. I happen to have three properties in each one of my LLCs. I’ve decided that’s my risk tolerance. I can’t manage twenty dozen LLCs. I can manage 2, 3, 4 or 5. You can’t manage any more than that either, I got news for you.
I don’t even know how to manage the ones I have legally.
Remember, I said just a piece of paper isn’t enough. The guru will set you up with a piece of paper and then kiss you goodbye and say, “Go for it,” but there are a lot of other things that you’ve got to do in order to maintain your limited partnership, LLC, corporation or whatever it is. The whole argument when I get you in court is, “Your Honor, this isn’t a real company. This is what we call the alter ego of Julie. A regular ego is this big. Her alter ego is this big. She didn’t treat this like a real company. She co-mingled the money. She took money out of the company pot to do her barbecue over the weekend. She didn’t have meetings. She didn’t do all of these things that you’re supposed to be doing.”
I argued to the judge, “Judge, this isn’t a real company. This is her created in another form, her alter ego, so I don’t have to honor the asset protection possibilities of this corporation.” I don’t have to honor the corporate shield. I can sue her personally and the judge will say, “Yeah, you’re right. Sue her personally.” That’s the way 85% or 90% of the little LLCs or corporations end up. The judge sets it aside and the people get sued personally.
If you’re going to play this game, you’ve got to think about it. How do I make sure that this is an arms-length deal? If I’m working for IBM and I go down and buy something at the office supply that I need in my job, I’m certainly going to bill IBM for it. I’m going to put that on my expense account this month. I worked for a company called Phillips Petroleum for a long time. Everything I bought, I wanted to be reimbursed. Are you reimbursing yourself out of your company? Did you give them the receipt? Phillips Petroleum had to have the receipt.
Taxation and asset protection are two totally different things. They have nothing to do with each other. Click To Tweet
Do I treat this company like I real company? Does it treat me like a real employee person or are we compatible? That’s what the argument’s going to be when I get you into court. Is this a real company? Did you treat it as a real company? If you treated it as a real company, I have to treat it as a real company. I have to respect this corporate shield. I can’t come and get you personally. That’s the whole game that we’re playing here.
The gurus tell you to put each one of your pieces of real estate in a separate LLC. Let me explain to you why they want an LLC. I’m going to lay it on the table. You are not going to use a corporation. You are not going to use a limited partnership. You are going to use an LLC. The LLC is relatively recent on the legal scene. It was created in 1977 in Wyoming. It was a slow year. It was the winter of the jackrabbits were running.
That was the recent one?
Yeah. The Wyoming l legislature had nothing else to do but create a new company called a limited liability company. It’s not a limited liability corporation. It’s a limited liability company and we didn’t use it until 2006. The first question that was asked was, “Mr. IRS, how are you going to tax our new company?” We had Chapter C for the big corporations and we had subchapter S for the baby corporations. We thought that the IRS would create a subchapter T or something.
It took the IRS twenty years to do anything. “We’ll have to have another discussion on using your IRA to invest in your real estate. It’s been twenty years guys,” and the IRS is coming down on it, watch. At any rate, it took twenty years for the IRS to say, “We don’t care how you tax your LLC. You choose. Do you want it taxed as if it were a partnership? Do you want it taxed as if it were a C corporation? Do you want it taxed under the rules for subchapter S? Do you want it to be taxed just as you do? If there’s only one guy in your LLC or a husband and wife, I can have it taxed as a disregarded entity. You don’t even get a tax ID number for it. You only use your Social Security Number.”
“If I haven’t taxed as a partnership, then that means I don’t get the asset protection, right?” No. Taxation and asset protection are two totally different things. They have nothing to do with each other and that’s hard for people to understand. I can have my LLC get all the asset protection out of my LLC and yet I can have it taxed as a partnership. As a real estate investor, your real estate is your most important tax shelter. It’s neat guys. It’s cool.
Your accountant has no idea how to maximize that. I will guarantee you that. Accounts are very conservative people. They don’t invest in real estate. As a result, they don’t understand real estate as a tax shelter. They know how to report your rants and take your depreciation, but they have no clue what bonus depreciation, cost segregation and all these things you can do with your real estate.
You’ve got your real estate. It’s in the LLC. You’re going to have it taxed as a partnership or a sole proprietorship. I would probably prefer to see it taxed as a partnership. That means you got to have a partner. Now, you guys are in Texas. Texas is what we call a community property state. Husband and wife for one legal entity. You can’t have it. You own half of it and the husband or wife owns half of it. I got to get another partner. That could be a kid. You can give them 1% or 5%. I don’t care. The question in court is going to be, “Did you treat them as a real partner? Did you give them their share of the profit loss? Did you invite them to the meetings? Did you do all of this stuff?”
If you treated them as a real partner, then fine. They are a partner. You can have your operation, your LLC taxed as a partnership. You want it taxed as a partnership if you own real estate because estate income and rents are passive income. You don’t pay Social Security, FICA, FUTA and all that crap. They pass through the partnership and then you have the partnership taxation structure. That’s preferable for real estate owners.
I find real estate folks that have their LLCs in subchapter S corporations or even in LLCs taxed as if they were a subchapter S corporation. You don’t want that because, in a subchapter S, I have to pay out a reasonable salary. I have to convert some of my passive income to ordinary-earned non-passive income or whatever you want to call it. It means on that wage that I have to pay myself. I have to calculate all of the social security FICA, FUTA and all of that crap. I don’t want to do that. That’s not what I want to do.
You’re going to have an LLC. You’re going to have it taxed as a partnership. Now, why use an LLC over a corporation? You have to go back and understand what Wyoming did and no other lawyer is going to explain this to you. Wyoming took a corporation and married it with a partnership. The LLC got half of its genetic material from the daddy corporation. It got half of the genetic material from the mommy partnership.
The LLC has the exact same corporate shield as a corporation. That piece of genetic material came from the daddy corporation, but it got another piece from the mommy partnership. Partnerships don’t have asset protection, do they? Isn’t that what you’ve always been told? They do have asset protection. They have different types of asset protection. It’s called charging order protection.
To explain it, I’ve got to give you a history lesson. Four hundred years ago in England, the only type of company there was a partnership. Me, Julie and Gem go into a business. I don’t know what we did 400 years ago in England. We were wheelwrights, horseshoes or blacksmiths. We did something. We had a good business going. We had been 30 years building this business. One of us gets in trouble. Julie screwed up. Four hundred years ago in England, you didn’t pay the king. You hit somebody with your horse. You got divorced, but Julie screws up.
Her creditor, the guy that sued her or is coming after her for money or taxes or whatever, her creditor comes in and takes her partnership interest. By definition, a partner can sell a company. They don’t need Gem and me to talk about it. We can’t do anything about it. They can sell a whole company. They can contract. They can do whatever they want. Any partner can do whatever they want and Gem and me have nothing to say about it.
There are states now that say that you have to have two owners of the LLC in order to get the charging order protection. Click To Tweet
“We didn’t screw up. You screwed up, Julie. We lost 30 years’ worth of work. That’s not fair.” The Brits said, “Yeah, that’s not fair.” They passed a law that said that Julie’s creditor had to get a judgment against her and then go back to court and ask for an order which charges her debt against the LLC. By definition, though, her creditor cannot come in and be a partner. Gem and I can continue to operate this whole thing. The creditor can’t tell us what to do. They can’t sell our LLC.
In fact, we still love Julie. She still works with us. We’re still going to pay her and everything else. There’s nothing that her creditor can do about that because they can’t manage this LLC in any way. Gem and I still get to manage it. They go back to court and they get an order which charges your debt against our LLC. Now, whenever the LLC makes a profit payment, you don’t get it anymore, Julie. Your creditor gets it.
Ultimately, the debt could be paid of and it goes away. We say that your creditor has an economic lien against the LLC but look at what that does for you. That gives you a pretty good bargaining position. You can go back to the creditor and say, “Lee and Gem still love me.” They’re never going to make any profit in this company. They’re not going to declare a profit and pay it out. I tell you what. Why don’t we settle? A dime on the dollar. How does that sound? Your creditor doesn’t have much choice because the charging order isn’t worth much.
I’ve got the corporate shield, which protects me from what happens in the company and I’ve got this charging order thing that protects the assets of the company from what happens to the owners, the members. We call them members of an LLC. We’ve now protected the assets of the company from what happens to the owner, but look at what that did for you. Do you remember the domino effect? What we have is one piece of real estate that goes bad and I’ve got three other pieces of real estate. They’re in LLCs or they’re all in one LLC.
This piece of property goes bad. There’s a deficiency. Now, I’m personally liable for the deficiency. Why? Because I signed the loan. They are always going to get you on that loan boys. They got you. I have my assets that are available to pay that off, but in order to put a lien against this LLC that owns the other real estate, they have to get a charging order against me to file the economic lien against the LLC. They can’t come and take this property. They can’t sell this property. They can’t tell me what to do with this property.
Can you see how I’ve prevented the domino effect? It might not be an economic problem. My four pieces of real estate could be just fine. I get sick. I have to declare personal bankruptcy. Those LLCs are not affected by my personal bankruptcy. I still own those LLCs. There is an economic lien against the LLCs, but I can do whatever I want with the LLCs. That’s very different than having them come and take the property and sell it. Can you see it? That’s pretty cool and your lawyer never sat you down and told you why you were using an LLC.
You’re using the LLC because it gives you the corporate shield, the exact same corporate shield that a corporation has, which protects me and my property from what happens to the rental units. It also has this other aspect. It’s called double asset protection and they’ve never termed it that way. It uses this charging order to protect the property from what happens to me, the owner. That’s a whole other realm. I’ve seen more people lose their properties because of something that happens to them. I have people lose their properties because something happened on the property. The tenant slipped, fell or whatever and they got sued.
The problem’s going to come with you, the owner, not the rental units. Your chance of getting sued in the rental unit is small and you’re going to carry an insurance policy. That’s going to cover 95% plus of the issues that come up with the rental property. I’ve taken the extra little step. I’ve protected myself from the rental property in case the insurance doesn’t cover it all, but I’ve protected the rental property from me. That’s a big deal, guys. Does that help explain why the gurus have told you to use an LLC?
Yes, and you brought in so much great information.
Now, there is one caveat and you’ve got to understand these things more than just put a piece of paper in place. There are fifteen-ish type states that say that we have to have two members, two owners of the LLC in order to get the charging order protection. The reason is the charging order protection wasn’t to protect Julie. It was to protect Gem and Lee.
There was a case in Denver, Albright, that was screwed up but then the real case is in Florida. It’s called Olmsted. Now, Mr. Olmsted’s a dirty dude. He embezzles tens of millions of dollars from Floridians. The SEC, the government gets him, puts him in jail, and says, “Mr. Olmsted, the tens of millions of dollars are sitting over there in your LLC, give them back. We want the money back. We’re going to give it back to your victims.”
Mr. Olmsted knows about charging orders. He told the justices in Florida to go pound sand. There’s one problem with that. There’s a lot of sand in Florida. The Supreme Court justices in Florida were interested and pounded sand. They sat there and scratched the little noodles and said, “The purpose of the LLC is not to protect you, Mr. Olmsted. It is to protect your partners. You don’t have any partners, Mr. Olmstead. Screw you.” From here forth, friends and forever in Florida, you’ve got to have at least two owners in order to get the charging order protection. Texas is still one, I believe, but the trend is definitely to move towards these two or more owners’ situations. If you understand the history, you can see why. The whole charging order concept wasn’t to protect Julie. It was to protect Lee and Gem. Does that help explain asset protection in real estate a little bit more?
It does.
Absolutely. You provided so much good information.
You have so much valuable information.
I have a whole write-up that’s called How to Double Your Asset Protection. I’d be happy to give that to your folks for free if they want it.
That would be awesome.
We can get a Double Your Asset Protection to them. That is a write-up on what we’ve been talking about.
This has been incredible, Lee. It’s always such a pleasure getting to talk to you. You have probably one of the most knowledgeable backgrounds in this area than anyone I’ve ever met.
I’ve learned too much of it in the school of hard knocks. I was a lawyer when I lost everything just because I got sick. The six months in intensive care didn’t help any. We lost everything. Three little kids and have been married for years. Frankly, if it had not been for our parents, we would have been out on the street living in a car. I understand that bad things can happen through no fault of your own. You don’t have to be shady, screwing up or doing anything else in order to suffer some of these problems and these financial disasters.
This has been mind-opening for sure.
I will have to come back and talk about how to asset protect little business people. That’s a little different. We can do that. We can do all sorts of things. I’d love to spend a minute with you.
We’ll definitely have you back. We love having you. Thank you again for being on our show. It’s been such an honor to have you.
No problem. I love being here.
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About Lee Phillips
Attorney, Lee R. Phillips, will teach you how to reposition yourself in the law so that you can go out and make more money than you have ever thought possible. You will be amazed at how a good knowledge of the law will actually let you make more money. In today’s lawsuit-happy society, making it isn’t enough. You also have to know how to protect your wealth, or someone will take it away from you. Protecting your wealth is easy when Lee shows you what to do. It might be your tenants, the IRS, the government regulations (like lead paint) or some greedy lawyer. Unless you are shielded, everything you have can be lost.
Lee is a counselor to the Supreme Court of the United States and an engaging speaker with over 10,000 hours on public stages. He is also a Federal Tax Court attorney and fights the IRS in their own court. He will walk you through how to make it and how to keep it using the tools of wealth. Nobody ever gets rich without an understanding of the tools that create wealth and protect it.
