JF1275: How To Protect Your Investments & Hide Ownership Of Assets with Scott Smith
Scott and his colleagues realized that there is a massive amount of bad information on the internet when it comes to asset protection. He set out to find and teach others a better way. Today Scott is here to tell us about setting up a series LLC to protect your assets, hide ownership, and not cause you a headache with your taxes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
Scott Smith Background:
-Owner of Royal Legal Solutions, provides business, tax, and legal solutions exclusively for real estate investors
–Spent 8-years deconstructing real estate investing, developed strategies to protect your assets from devastating lawsuits, maximize tax savings, and more
-Prior to RLS he was an aggressive litigator who brought suit against major insurance companies
-Say hi to him at https://royallegalsolutions.com
-Based in Austin, Texas
-Best Ever Book: Four Hour Work Week by Tim Ferris
Made Possible Because of Our Best Ever Sponsors:
Are you looking for a way to increase your overall profits by reducing your loan payments to the bank?
Patch of Land offers a fix-and-flip loan program that ONLY charges interest on the funds that have been disbursed, which can result in thousands of dollars in savings.
Before securing financing for your next fix-and-flip project, Best Ever Listeners you must download your free white paper at patchofland.com/joefairless to find out how Patch of Land’s fix and flip program can positively impact your investment strategy and save you money.
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Scott Smith. How are you doing, Scott?
Scott Smith: I’m doing great today, Joe. Great to be with you.
Joe Fairless: Well, nice to have you on the show, my friend. A little bit about Scott – he is the owner of Royal Legal Solutions. They provide business, tax and legal solutions exclusively for real estate investors; estate planning, asset protection – all that good stuff. Based in Austin, Texas. You can say hi to him and his company at their website, which is in the show notes. With that being said, Scott, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Scott Smith: I’m a real estate investor myself, and 100% of my clients are real estate investors. And what we started doing was we realized that there’s a lot of really bad information all over the web, that really conflicts on different types of legal strategies and what not, so my company was founded to really just help people that are real estate investors, because there’s just enough there to tackle, instead of going super broad.
So the one niche thing that we really reined into is how do you protect your assets using company structures, and hide your ownership of the assets and of the company, and do that in a way where it’s not gonna cause you a headache with your tax preparation, accounting and what not.
The idea is to say that as investors we make the most amount of money finding really good deals, so let’s have a system for our taxes and our company structure that we can do almost like a set it and forget it type piece. Because you don’t make any money by being really good at law as an investor, right?
Joe Fairless: So how do we protect our investments, hide the ownership and not cause headaches with taxes?
Scott Smith: The number one way to do that is gonna be using a series LLC, which you can establish in a couple of different states. I like to establish them through Texas, not just because I live here, but because Texas is the cheapest and has the best protections. A great thing that a lot of people don’t know is that you can establish a company structure in one state and use it in any state.
I commonly hear “Well, I can’t use an LLC in my state, because I live in Alaska”, but the truth is what you can do is establish something here in Texas, and use it anywhere. That’s really gonna buy the best protection for you, because a series LLC is really awesome in that it allows you to scale infinitely with the best protections at no additional cost. How awesome is that?
Joe Fairless: No additional cost meaning you don’t have to create new LLCs…?
Scott Smith: That’s right. And it doesn’t complicate your taxes at all, because everything streams up through one tax ID number. So if you have 15 properties, you’re not having to look at 15 different EIN numbers and bank accounts and whatnot, that you would if you had individual LLCs.
Joe Fairless: And then I’m sure the common question you get is “That doesn’t trigger a domino effect if one property gets foreclosed on, or someone sues it…? Is it not a domino effect for the others?”
Scott Smith: That’s really the biggest benefit of the series LLC, is that each individual child series that it creates is treated like an individual LLC. So every property is compartmentalized. A lawsuit against one property doesn’t affect any of the others.
Joe Fairless: What are some of the other advantages of it?
Scott Smith: The biggest advantage is the scalability and the cost savings and the ease of being able to scale with it. When you combine that with the anonymity trust… And that works on two levels. There’s two levels of anonymity that every investor should be using. There’s a really expensive way to do this, and there’s a cheap way to do it.
The really expensive way to do it is to have the company owned ultimately by a Nevada or Wyoming LLC, because they don’t have public disclosures on who the ultimate owner is, which is the client’s name we’re trying to protect… But that means you’re gonna have to start paying for all these additional LLCs and yearly costs associated with each one of them.
The cheap way to do it that’s just as effective is using a trust. You can have the trust that will own the LLC, and that allows you to be able to accomplish all of the anonymity with none of the ongoing costs associated otherwise.
The second important piece of the ownership for the assets is gonna be what happens at the property level. So each individual property would also need its own anonymous land trust associated with it. What that does is that prevents anybody from being able to search the property records and find out that that property is connected to you, or to your company… Which is really the first piece of stopping litigation. Because if people can’t find out that you own stuff, they don’t think to sue you.
Joe Fairless: If there was someone who was on this call, and they weren’t a fan of a series LLC, what would they be saying?
Scott Smith: The number one critique is that the series LLC is “untested” inside of courts. There’s not a lot of court cases that treat it, and people erroneously think that because there isn’t a lot of court cases that we don’t know whether they’re a good and viable entity. This information is flat wrong, and it’s what everybody is saying.
The reality is the law is what the legislator passed, and we call those statutes. And the statues are very, very clear on exactly what they mean. You can pull them up online, read it yourself. Any layperson can even understand what the legislator is writing in terms of the series LLC statute. The reason that you don’t have court cases is because courts can only interpret the law. If the law is very clear, then it’s not worth the $50,000 or $60,000 it’s gonna take to take a case up through appeal, to argue it… So you’re not gonna find court cases there.
So it’s actually the reverse – people say “We don’t know whether it will be held up because we don’t have court cases”, I say “The law is very clear.” What you should really be focusing on in effect is nobody has even tried to challenge it, because the law is so clear. It bolsters the strength, it doesn’t weaken it.
Joe Fairless: How much does it cost to put together a series LLC?
Scott Smith: The typical points that we’ve looked towards for asset protection – they say you should never be spending more than 3% for an asset protection structure to protect how much equity you have. So if you have $100,000 in equity, don’t spend more than 3k to set up everything that you’re gonna need there. When we look to say “What does every individual need?”, it’s really particular… I would say you could go as low as $1,000 to $1,500, depending on your state, to upwards – more of the series LLC with all the anonymity structures, you might be looking at more to the $4,000 to $5,000 range in the marketplace of attorneys that are like me.
Joe Fairless: So you’re an attorney…
Scott Smith: That’s right, I’m an attorney and this is what we do as part of an offering that we do.
Joe Fairless: From an estate planning standpoint – so we talked about asset protection, and a bit about estate planning… What other suggestions do you have from an estate planning standpoint?
Scott Smith: So estate planning – a lot of people do it where it actually requires a lot of maintenance every year, Joe… Because what they’re doing, Joe, is that they take all of their assets and they’re gonna deed them directly into the name of their living trust. Because every estate plan, you’re typically using a living trust, and a second piece called a pour-over will. The living trust is the piece that actually controls all of the assets. So people will deed all the properties to the living trust, but throughout your life, you’re changing around what assets go where, what’s the bank account numbers, buying and selling properties etc. So this is actually a really poor strategy to just have the living trust in place, because it’s a constantly changing scope of what assets are actually being held by the trust, versus being held in your personal name… And there’s no protection associated with the living trust itself for your estate plan.
The better solution is to establish an LLC or a series LLC to be your asset holding company, then all of the assets are going in and out of your asset holding company during your life, just like you’re normally gonna do to run your business and manage your affairs while you’re alive, and then what you use is your estate planning piece of the living trust to say “My son is gonna get 25% of everything that’s part of my living trust. My daughter is gonna get 50%, because I love her just a little bit more.” That way, you never have to modify anything more than you would have to do anyway during your life, because you’re gonna be managing the assets of your asset holding perfectly, so you don’t ever have to think about “Oh, I need to update these estate planning documents every six months because we’ve done all these changes.”
Joe Fairless: Got it. You might update the ownership of the series LLC, but you won’t have to update the items within it.
Scott Smith: Yeah, so the estate plan piece, the living trust – you don’t have to update anything with that, because that’s kind of like a set it and forget it, unless all of a sudden your son decides that he wants to marry that floozy that you never liked and you wanna disinherit them, then that’s where you would nail him on that one.
Joe, let’s say you had ten properties that were going in and out of your LLC that you used to hold all of your assets. You would be managing the buying and selling of those properties out of your LLC anyway during your life, because that’s how you’re gonna conduct your business. Your estate plan is just gonna say that your son gets the 25% of that LLC, and your daughter is gonna get 50% of the LLC, so there’s no change of ownership documents that are happening. All of this extra work that would have to be done on updating documents doesn’t happen because everything is accomplished on moving the properties in and out of an LLC, they’re not done by changing ownership of the LLC itself.
Joe Fairless: Got it. You’re staying higher-level on what you’re updating, and that’s only in circumstances where you give someone more or less equity or you bring someone else in…?
Scott Smith: Yeah, that’s right.
Joe Fairless: Okay. You mentioned in the beginning – and you probably talked about some of these items, but I’m wondering if there’s anything else that we haven’t talked about that is relevant… That there’s a lot of bad information out there. What are some other bad information that’s out there?
Scott Smith: Another common piece I hear about is that people seem to think that insurance coverage is enough, and you’ll hear this from CPAs and a lot of keyboard warriors; they’re very famous. They’re saying, “Oh, you just run your business right and insurance will take care of you and you’re fine.” There’s a fundamental disconnect here, because these people that are saying this actually don’t even understand the nature of the risks that they’re engaging in.
The insurance protects you against different kinds of risk than a company structure does. Insurance protects you from accidents, like somebody slips and falls on your property – that’s a great one to have insurance take care of. I always have great insurance because of that reason. Insurance is designed for that.
Insurance doesn’t cover you for catastrophic events that could happen. So anything that would happen in the buying and the selling of a property – not covered by your insurance. Grandma falls through the staircase and has permanently disabled – definitely not gonna be covered by insurance. You know why? Guess what business the insurance companies are in the business of? They’re in the business of collecting premiums and denying coverage when it gets expensive. So when you have catastrophic events that are happening, the insurance companies will find a reason to deny you coverage.
So the insurance is important because on all of the small things that might happen, they’re gonna take care of that piece of our life and we don’t wanna have to deal with those low-level nuisance issues. But the company structure protects you when something really catastrophic happens, and the company structure provides a stop gap to say “I know the extent of my loss is gonna be limited to exactly this, no matter what.” That’s what you want. Because one lawsuit is enough to wipe out millions of dollars, and all it takes is one to get through for that to happen, and I’ve seen it happen, unfortunately.
Joe Fairless: You said you’re a real estate investor, so with how you have things set up – you’ve got a series LLC and you’ve got the… I think you call them “child LLCs” – did you call them that?
Scott Smith: That’s right, yeah. What you refer to is that you think about the series LLC as a parent/child structure. It has this parent LLC that’s filed with the state, and then this parent LLC can have as many children as it wants, and each child we call a child series. It’s a plural name, but it’s an individual thing. So you’ll have series A, series B, series C – that’s all inherently part of this series LLC, and each child, just like human children, are free to create.
Joe Fairless: And what’s the ongoing fee to maintain that? Is it just what a normal LLC would be?
Scott Smith: No, there’s no fee. No matter how many individual child series you get, there’s no additional fees; no matter how big you scale. The only fee that’s associated with it is the same fee you would associate with any other LLC, because the parent itself has to have a registered agent and file franchise taxes… But that’s the same as our traditional LLC, the normal one that you would think of.
Joe Fairless: And I imagine that’s how you have your stuff set up.
Scott Smith: Of course, yeah. I have all of my stuff set up with a series LLC and anonymity. You’re not gonna be able to find my name attached to anything, and that’s how I like it, except for I have operating companies that I use to shield any liability let’s say that a contractor wanted to sue me, or a tenant wanted to sue me… All of those business dealings are always done through a shell LLC, and that’s just a normal, traditional LLC that we have set up to be able handle those types of liability. Because what I want is people to only be able to sue the entity that has nothing. So if I’m not a member of the contract but my LLC is, if something goes wrong, they can only sue the LLC, they can’t sue me.
Joe Fairless: Based on your experience – we’ll stay on the legal front, versus you as an investor, but certainly that helps with the conversation… Based on your experience with asset protection and estate planning, what is your best advice ever for real estate investors?
Scott Smith: The best advice I can give you is to work off of one platform that you can understand, implement once and then use for forever. What I see people that end up in trouble is they try to set up systems where they don’t fully understand them at the front end; they never quite fully understand them, and they will end up doing things that are wrong, that have adverse tax consequences.
So really what you want is a really flexible system that allows you to be able to change what it is that you’re higher operating, without having a bunch of costs associated with it.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Scott Smith: I’m ready.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Scott Smith: The 4-Hour Workweek by Tim Ferriss.
Joe Fairless: Best ever deal you’ve done as an investor?
Scott Smith: I made $150,000 just by being able to coordinate two people to buy, as a broker. Basically, I wholesaled a deal inside of ten minutes.
Joe Fairless: How did you find that deal?
Scott Smith: I had a contact. I had a good network, they knew that it would take somebody like me to be able to negotiate with one of the parties, because they were an exceptionally difficult person to deal with… But that’s one of my talents – being able to talk to people.
Joe Fairless: Best ever negotiating tip?
Scott Smith: Always make them make the first offer. You never know what people are gonna be willing to accept.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Scott Smith: I didn’t verify all of the fundamental paperwork. It was a bank, and that person was saying that they were gonna be able to get financing on a particular deal to close on it, and I didn’t verify it with the bank, to be able to make sure that all of the terms were correct… So I got defrauded.
Joe Fairless: Best ever way you like to give back?
Scott Smith: I run groups to be able to help entrepreneurs, to be able to hone their businesses that are giving back to the local community. People don’t know this, but every non-profit, at some level, is actually a business, and I find that the more that I can help those people, the more good that they can reach out and do.
Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about your company?
Scott Smith: We have the website, RoyalLegalSolutions.com. You can also reach out to me personally at Scott@RoyalLegalSolutions.com, or we have a hotline set up for you to call. It’s 512-757-3994. We help people all over the United States, no matter where you live or what type of real estate endeavor you’re going into. We can either help you or point you in the direction of people that can.
Joe Fairless: Well, Scott, thank you for educating myself, and perhaps some Best Ever listeners, on the pros and cons – primarily pros – of the series LLC and how you use it in your own investing endeavors, and how it can be applied to ourselves, as we go about wanting to limit our liability and make sure our asset protection is not only as protected as we can be, but also as maintenance free as possible, in a simple way to understand things.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Scott Smith: Great, Joe. Thank you.