Don’t Make the Same Asset Protection Mistake

asset protection

I have secrets. Do you?

Of course, you do; we all do. But some people try to keep the existence of their secrets a secret. That’s because secrets have a negative connotation. If you have something to hide, it must be because there’s something wrong with you, right?

Wrong. In this day and age, the most important reasons to keep secrets aren’t because we’re bad people … it’s because there are so many other bad people in the world who would try to hurt us if they knew our secrets.

For example, do you have a real estate portfolio, perhaps as part of a self-directed IRA? If you do — even if you just have a couple of rental properties — keeping the existence of those properties secret may be the single most important asset protection strategy you can do.

Short Odds

As my dad Bob Bauman points out in his book, Lawyer-Proof Your Life, 70% of the world’s attorneys are located in the United States. The numbers are staggering: a lawsuit hits 41,095 of us every day — over 1,700 every hour, of every day.  You have a 10% chance of someone suing you in any given year.

One year it was Lou’s turn. He’d inherited some property, acquired some during his military career and bought more when he retired. He was in the habit of buying a house when stationed in places like Hawaii, Southern California or Norfolk, then renting them to fellow officers when he was reassigned. It augmented his service income and built a nest egg for his family’s future.

As a landlord, Lou was legally obliged to take reasonable care to ensure that his properties were safe from foreseeable threats to tenants and their guests. That wasn’t always easy, especially when he was on active duty and out of contact. Sure enough, during a deployment, a guest of one of his tenants was injured when wooden basement stairs collapsed, resulting in damage to her knee.

The guest sued. A fancy lawyer convinced the jury that the incident was “foreseeable.” The court held Lou personally liable for the plaintiff’s medical costs and compensatory damages — an award that significantly exceeded the value of the house in question. Because of that, the court ordered that several of Lou’s other properties and some of his pension funds be liquidated as well.

The lawsuit wiped Lou out … all because of some rotting wood in a faraway basement.

The Asset Protection Two-Step

It didn’t have to be that way.

First, Lou should have vested ownership of his properties in a limited liability company (LLC). That way, he would face no personal liability — and the maximum the plaintiff could collect would have been the value of the LLC’s assets.

Second, if Lou had used a little-known vehicle called a “series LLC,” each of his other properties would have been insulated from the lawsuit filed against the property with the bad stairs … at little cost or hassle to Lou.

That’s because a series LLC has the unique feature of being a single corporate entity, requiring only one set of registration paperwork, one tax return and one annual report — but one which can have multiple “cells” (series) that are legally segregated from one another. The assets and liabilities of each cell are legally disconnected from those in the other cells, so that a lawsuit against one has no impact on the others.

But Wait, There’s More…

Low-cost, hassle-free asset segregation and protection from lawsuits is a great benefit of a series LLC. But if you like, it can also offer secrecy, which is the first line of defense against lawsuits.

The key to any asset-protection strategy is to make ownership of specific assets hard to discover without prohibitive expense and effort. Complete anonymity is impossible, but the harder it is to find you, the more money a lawyer will require upfront from a litigant looking to sue you. That alone will ward off most frivolous suits.

Series LLCs registered in Delaware, Nevada, Wyoming, Alaska or New Mexico don’t require the identity of the LLC’s members and managers to be listed on the public register of companies. If Lou had set up a serial LLC, the “cell” holding the rental property would have been registered in the state where the property was located, but there would be no obvious indication that it was linked to other “cells” holding other properties.

In other words, Lou’s property empire would have been a perfectly legal secret … one that was cheap and easy to execute.

Who You Gonna Call?

Only three states — Delaware, Nevada and Montana — allow the formation of separate LLC series without the expense and hassle of filing new paperwork for each one. Although the process of setting up series LLCs in these jurisdictions isn’t terribly complex, it is something that falls into the category of “don’t try this at home.”

So who can help you take advantage of the opportunity presented by the series LLC? I know just the person. Start by clicking here.

Kind regards,

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Ted Bauman

Offshore and Asset Protection Editor