As an entrepreneur, you want a stable cash flow to provide your loved ones with a comfortable life. Listen to your host Lisa Hylton as she talks with Clint Coons about asset protection while investing in the real estate industry. Using his legal and real estate experience, Clint gives investors a deeper understanding of asset protection strategies. Real estate investors should start enhancing their knowledge of making real income and business activity through their properties. In this episode, Clint shares common misconceptions about asset protection and how you can educate yourself to prepare for the future. He emphasizes the significance of planning and taking action and discusses retirement accounts, taxes, income, and managing finance properties. Tune in to learn how to protect your LLC-held real estate and analyze different asset protection entities.
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Asset Protection While Investing In Real Estate With Clint Coons
I’m super excited to have on the show Clint Coons. He is one of the founding partners of Anderson Law Group. He has grown his legal and tax farm to over 400 employees by assisting real estate investors with creating and implementing solid entity structuring plans. His success in these regards is in large part due to his personal investing experience. Taking what he learned growing up in a real estate family, he has acquired over 100 properties, from single-family homes to commercial buildings. He’s a prolific writer and educator and has published hundreds of articles and videos, many of which I listened to in preparation for this interview. I’m super excited to have you on the show, Clint. Welcome.
Thanks. You make me feel old when you read that.
Jumping right into this episode. One of the things we talked about right before we started is that one of the most popular questions that I get from investors every day is, “I’m investing passively in real estate syndications. Do I need an entity?” Can you talk about your answer to that question?
I was an attorney in a firm that sets up entities. The answer is yes. You’ve got to create a structure, but the reality is this. When you invest into a syndication, you are investing passively. It’s a limited liability company. You are going to be protected from whatever goes wrong with that asset. If something were to transpire and a lawsuit develops, they will sue the syndication, and the most you stand to lose would be your investment into that deal.
On the flip side of that, an area that people don’t necessarily focus on is what we refer to as outside liability. We tend to look at the property and realize, “People get hurt on real estate. It can create a lawsuit,” but we don’t think about the situations in our personal lives that can also lead to lawsuits, such as every time you sign a contract, you enter into a lease agreement, you get behind the wheel of your car and you hit someone, or your kids do something stupid. You are responsible now for those claims.
How do we go about protecting that interest that we hold inside of a syndication? As I explained to people, is that with the syndication, it’s run by a third party and they have many investors and they are not going to be beholden to one investor. They are going to make sure that every investor is getting the return that they anticipated.
If somebody sued me and they got a judgment against me for $300,000, the courts stated, “When you receive a distribution from that real estate investment syndication, you’ve got to pay that over to your creditor.” I can’t call up syndicator and say, “Sponsor, that next distribution, don’t pay it out to me because I got to pay it to her creditor. Pay everyone else but hold mine, and I will tell you what I want them.” They are not going to operate. They are going to kick it out to you, so then you would send that over to the creditor that has a judgment against you.We don't necessarily focus on outside liability. We tend to think that people get hurt on real estate but don't think about the situations in our personal lives that can lead to lawsuits. Click To Tweet
I tell people that if you were ever in that situation, you’d be better served if you were to set up an LLC and have your syndication interest held by that limited liability company. If you were ever found yourself with a judgment entered against you, it wouldn’t touch that syndication distribution because you don’t own the syndication.
You own an LLC that you own and control that holds an interest in the syndication so that LLC would receive the funds and then nothing gets paid to the creditor. I recommend it. It’s great for asset consolidation. If you make multiple investments in different syndications, a state planning component can come into this as well. It’s valuable for people to have.
Digging deeper on creating that LLC, does it matter where they choose to create the LLC?
Yes, it does. Number one, when you set up an LLC, one of the main benefits of having that LLC from a scenario like I described is that the state in which you are creating it in offers what we call charging order protections. What that means is that a court couldn’t force you to give your LLC to a creditor. A court couldn’t force you to distribute out and liquidate all the assets and give all those assets to your personal creditor.
What it states is that, “If you take out a distribution, then you must give that distribution to your creditor.” That’s what a charging order is. If that’s the sole remedy available to a creditor, then you are in a pretty strong position because I guarantee you, if you sued me and you got a judgment against me for $500,000, and the courts said, “Clint, if you ever take a distribution out of your LLC, you have to pay it to Lisa.”
I hate taking distributions. I’m going to hold onto them until that thing expires. That’s important and not all states offer those types of protection. That’s number one. Number two, what I look at is anonymity. I don’t want people to know what I have or to easily look up my name and find, “Clint has five limited liability companies.” You could appreciate. Somebody can find that information. Now they see it, they may assume that you are a juicy target because you got a lot going on in your life versus that other individual there contemplating suing that has nothing. I would focus on you. Those are the two big factors I look at.
Digging deeper on anonymity, there are also ways that people can protect even their personal assets. Everything from if they decide to buy different homes in different states and cars and vehicles like that. If they have done something that someone seeks to go after them, that could also make them more attractive to creditors.
That’s one of those things that a lot of attorneys, they don’t appreciate the benefit of anonymity and what it can do for someone. One of the sayings that we have is, “You can’t see what you can’t see.” If I can put up walls and anonymity is a smoke screen here. I’m going to have a bunch of smoke around myself. You can’t see through it and you know how valuable I am.
I will tell you a story, and this had to do with a client that I was working with several years ago in California. They had a lot of assets, business, vehicles, and real estate, and they wanted to protect it, then on a little bit on our own, but they still had a lot in their own names. I showed them a plan where we could take their real estate. Their name would no longer appear on it. We could take all their business interests. We could get all their names off it with the secretary of state, and we would protect it in such a way that when anybody ran their individual names, that they were sued personally, they wouldn’t be attached to any of these assets.
We did that, and then unfortunately for them, about four years later, they were involved in a lawsuit where the three attorneys representing two plaintiffs asking for over $15 million in damages were on their tail. They were hunting them down and they were going to get paid. Through the discovery process, the attorneys doing their own discovery trying to figure out what they have. People think, “I will bring you into court and I will depose you,” and I will say, “Tell me everything you own.” It doesn’t work that way. You can’t ask. You can ask those questions, but I don’t have to answer them until you’ve got a judgment against me.
The attorneys looking at this discovered zero in my client’s name. Figured they were a renter. They settled with them and took their policy and insurance limits of $1 million, and my clients walked away. I didn’t lose a single dime, but the father of one of my clients was a joint defendant in that case and he was the least culpable or least liable of the group. All he did was own a building where the accident occurred.
They wouldn’t let him walk away, and here’s what the attorney stated. “We let your son go because he has nothing.” We took his policy limits, but we did an asset search and we noticed that you are worth at least $15 million, so you don’t get the same offer. You have to pay. The son’s worth more than the father, but they didn’t know that. This is how anonymity can help you in avoiding or going through that entire process. Get them to settle, take your policy limits, and leave you alone. That’s why you have insurance and then you keep your business rolling.You have to determine why you're investing, whether you're doing it for cash flow or just to turn around and flip the property. Click To Tweet
It’s so important. I also want to pivot at this point to talk a little bit about LLCs. Granted, people don’t necessarily need to set one up, as you mentioned for passive investing, but you also mentioned all the reasons why having one. What are some of the mistakes? Many people reading might say, “I’m going to go to legal and go get it sorted quickly.” What are some of the mistakes that can cause you to lose everything when you set up LLCs, probably cheaply or not knowing?
People don’t know what they don’t know, and so they receive an operating agreement that it’s a form document. It’s not custom drafted to what they are looking to use or how they are going to be using that LLC. Many times, it’s missing some of the key provisions that you would look at in the event you are in a lawsuit.
I will give you a couple of examples of that. This is drawn from a case out of Utah. An individual did exactly what you described. Set up a Nevada limited liability company, probably because he heard that Nevada offers strong charging order protection. It’s a great state to create LLCs. He set this entity up and created his operating agreement. He ends up getting sued and a charging order is entered against him. The court said, “If you take any money out, you’ve got to take the first $2 million and pay it over to your creditor.”
He transferred his interest to his wife and started distributing money to her, and he wasn’t taking any money. They dragged him back into court and they said, “You’ve been taking distributions.” He said, “No. I haven’t taken any distributions. In fact, I’m not even a member.” They said, “Prove it.” He showed them, “I transferred my interest to my wife.”
They looked at his operating agreement and they look what he used to transfer his interest to his wife. They said, “The operating agreement, there were four steps you had to go through. You only accomplished two of those and transferring your interest. Therefore, that transfer was not valid.” Now he’s a member.
Now they still got their claws into him. They said, “You gave your wife $2 million. You should have given yourself $2 million because you are a member.” He said, “No. I never took the money.” They then showed him two words in his operating agreement. They said, “This word right here, pro rata, do you know that means?” Of course, he didn’t. “It means that when you have pro rata distributions, they all have to be equal. If your wife takes $2 million, you have deemed distributions of $2 million. Those are owed to us. You never paid them to us. Now we are going to move to break your LLC,” which they did.
That whole case turned on three additional letters. How do you set up an LLC that says the manager’s entitled to make non-pro rata distributions? He could have paid his wife $2 million and he didn’t have to take a nickel, and those creditors would not have been successful in that action. Unfortunately, his operating agreement was missing a three-letter word.
This is what comes up a lot when people are setting up LLCs. They don’t understand the ramifications of the language, such as where they have provisions that require them to take distributions on an annual basis. That defeats what I described, the ability to hold back money if I have a creditor not pay it out or the ability to restrict transfers.
What I find is that individuals want to bring in their family at some point in the future. What happens if you bring your son or your daughter in and all of a sudden, she falls in love with someone else, and she’s like, “I want to show my love and give him 10% of this.” Do you want to be in business with that person? I don’t think so. You want to make sure you can restrict transfers of interest.
A lot of that goes into drafting an LLC that most people are not aware of because these issues, they only come up when you are involved in a lawsuit. The point I tell people is like, “You are setting this up to avoid having to pay out to her creditor. Why wouldn’t you address the issues on the front end and make sure you are protected all the way through?”
You never know what could potentially happen later down the line. Then this moves nicely to self-directed IRAs. This is one of the vehicles that many investors use to invest in real estate using their retirement accounts. Sometimes they get a very unfriendly surprise when tax time comes. Can you talk a little bit about the tax implications of self-directed IRAs and what you’ve seen advising your clients who choose to set these vehicles up?
I get it. I don’t want to be in equities. I want to be in real estate. You get better returns typically, and people feel that they need diversification. They want to take their retirement account, their IRA and put it into an area or a plan that allows them to make an investment into a syndication. The problem for self-directed IRA investors is that when you invest into a syndication or you make any investment where leverage is being used.Individuals need to value money more. They should know how to invest, start a business, or do something that's going to create income for years rather than immediate gratification. Click To Tweet
Syndications are built around leverage. They go in at 70/30, maybe 60/40. They do value adds. Then they go back and they re-leverage to pay back all the money back to their investors through debt, and so that debt creates problems for IRA investors. With IRAs, when you invest into an asset or are you making an investment where leverages are involved, then the IRS looks at that as Unrelated Debt Financed Income. It is the term that’s used so that any income drive from that asset.
Let’s say I invested in a syndication that’s leveraged at 70/30, 70% debt, 30% equity. My distribution is $100,000. $70,000 of that $100,000 is subject to tax. Unfortunately, it’s 37% inside of an IRA. Your IRA has to pay tax at 37% on the 70% of the $100,000 you received because that’s the debt finance portion, 70%. People are shocked when their CPA, if they catch it, they say, “You owe tax on this money your IRA received from that syndication.” Here’s the other kicker on that. You don’t get a deduction when you take that money out. If it’s traditional IRA, you paid 37% as it comes in, and then when you take it out. If you are in a 25% tax bracket, you are going to pay 25% when you pull it back out.
That’s a trap for a lot of people. Many times, what we’ll do when we see that in having a strategy session with potential clients is we’ll make recommendations such as, “Have you considered using a solo 401(k)? Here’s the fix.” When you roll that investment into a solo 401(k), you are no longer subject to that tax because 401(k)s are treated differently than IRAs, depending on the investment. If it was a smaller investment and your income is maybe $10,000 or $15,000 a year, I wouldn’t worry about it. Many times, you are going to have enough losses, the depreciation that will offset that income, but if you don’t, then you want to maybe explore other options.
Also, for solo 401(k)s, people need to make sure they have a business because if they are strictly a W-2 employee, then I don’t think that’s an advisable route as well to take. Another item here that comes up a lot is investors who have multiple different assets. Not necessarily syndications per se, but maybe buying multiple single-family homes, and then they are trying to determine whether they need to set up a separate LLC for each of them or whether they can do an LLC that holds them all.
What I tell my clients is that, “First, determine why you are investing. Are you investing for cashflow? Are you investing to turn around and flip the property?” Most people who buy single-family or even multifamily and they want to hold onto it and make it a legacy investment. They are going to keep forever. You are buying for the cash that comes off that deal.
Protecting that cash is paramount to the equity that builds up inside of the asset itself. I used to teach people, “Put 5 or 6 properties in one LLC.” As my own investing started to grow, I started to realize that I’m buying these homes because I’m making $500 a month off that property, and the last thing I’d want to do is lose $2,500 a month in rental income because I had five properties stuck in one LLC. I encourage people when they are first getting started up to about 15 to 20 properties, separate them out. One LLC per property. After you get to a certain level, you can start putting more assets into various LLCs.
In my portfolio that you read, it’s at 100. It’s closer to about 300 properties and I don’t have 300 LLCs. My hair would be even grayer than it is right now if I had that many. I have, say, 30 LLCs. Each holding ten properties each and each of those LLCs maybe generates $40,000 a year in income. I could lose ten properties. I had two houses burned down. Luckily, I didn’t get sued over it. Nobody got hurt, but if I lost ten properties, it sucks, but it’s not the end of the world. It’s not going to change my lifestyle.
I tell people that you can adjust this. What’s important when it comes to real estate investing is for people to understand this concept that it’s about asset protection. It’s about tax and business planning. When you create a structure, your structure should not be solely focused on asset protection or taxes because people tend to gravitate towards 1 of those 2. By doing so, you are going to miss out on the opportunities that come from investing because it’s going to limit your ability to grow. If you are not focusing on, I like to say, all three legs of the stool.
As you bring that up, one of the other things that ties nicely with that is many people are investing for retirement. They are investing for the years ahead. Can you talk a little bit about estate planning? As people continue to buy more assets for themselves and for their children, what are some of the things that many investors aren’t thinking about when they are thinking about leaving things for the next generation or being able to retire in the end?
You have two schools of thought there. I have talked to plenty of clients who say, “I’m investing for myself and whatever the kids do with it after I’m gone, I don’t care.” Granted. I’m going to tell you it’s going to change your mind about how you take care of this stuff. If your goal is to create a legacy, you’ve created the foundation. You want your children to build upon it. Maybe their children and that. The income that comes from these investments can ease their burdens in the future.
Then you should create a plan, and we use a living trust to do this to ensure that those assets are going to continue on. What happens, especially with real estate, if your beneficiaries aren’t involved in real estate and you have twelve properties? What are they going to do when they inherit this? They are probably going to sell it because they don’t know how to handle it, but if you set it up the right way, you can ensure that they are going to get an income stream from that property. It’s going to be managed by someone who understands real estate, and they are going to preserve that and ensure that we are maximizing the income that comes from that. You are going to get further along towards creating that generational wealth.
Our own family, my wife and I, our kids, they worked for my firm. My son’s an attorney and my daughter’s a legal admin, but our assets are real estate. They are going to be held in trust and are going to get the income off of them, but they are only going to get the income up to the, to a certain point and the way we set it up as that, “You get as much as you are earning.”Get educated and understand what your options are in real estate. You don't need to know it all. You need to know what the issues are. Click To Tweet
Even if the property, let’s say that they throw off $1 million a year and they are entitled to $500,000 each, you are not getting $500,000. I don’t want someone sitting on their couch and watching TV, playing video games, and doing nothing with their life because there’s income there. I’m going to incentivize you to do things that are important to us work.
Our daughter said maybe she wants to be a stay-at-home mom. Great. Do that. We’ll compensate you for that charitable work, teachers and things like that, but not doing nothing. You can do a lot of that through your estate plan and everyone has a different value set. If you want that value set to continue on, you can use your trust to encourage those behaviors that you value and discourage behaviors that you don’t value.
It’s almost like the government and the tax code. Tax code like if you do the things that provide housing and jobs for people, then you get tax breaks for doing that stuff. You set that up similarly with your living trust as well. That’s pretty interesting. The last thing I will add to that is that I believe that I heard somewhere that generational wealth only survives 1 or 2 generations, something like that. As it goes along, the lessons and the values haven’t necessarily been able to be successfully passed down to the next generation and they don’t see life the same way.
Correct. Look what you’ve become. I assumed there was somebody in your life at one point in time that taught you these things or instilled in you this, and if you don’t have people in your life to do that, had not to value it. I have seen individuals inherit a couple of hundred thousand dollars and what happens to it, brand new vehicles right away. Then they blew it all rather than go out and invest it. Start a business. Do something that’s going to create income for you for years rather than immediate gratification.
This was so awesome. You’ve provided lots of information here. Anything else that I didn’t ask you that you think would be beneficial for people who are thinking about investing in real estate and they are thinking about asset protection and getting themselves sorted out in that area?
Here’s what I would suggest, get educated. Understand what your options are. You don’t need to know it all. All you need to know is where the issues and that when those issues arise in your life, you know like, “Before I do something here, I’m going to call or I’m going to work with someone who understands it because we have talked a lot about LLCs.”
LLCs are not the only tool in the book because depending on where you invest. We would explore other entities because there are tax issues in certain states with using LLCs, so you have to look to statutory trust, land trusts, and series LLCs. It can get complicated and you want to align yourself with professionals that are going to stop you from making mistakes. I have dealt with people before that. Their CPA set up structures and they were paying $45,000 a year in franchise taxes that we eliminated in one year by tweaking the structure because the professional they were working with didn’t not understand the nuances of the particular state where they are investing.
They want to learn more. My partner, Toby Mathis, and I teach an event every couple of weeks. It’s on a Saturday. It’s seven hours, unless he talks for a long time, then it’s eight and a half. It’s on tax and asset protection for investors, and we talk about these issues in detail. If they want to join, there’s no cost. All it is seven hours of your time. You have to go to ABA.link/level.
If you go there, you can register for the event. Sit down. Here’s the thing about it, which is unlike so many other programs that people attend, is that at this event, we teach it live. I have attorneys and CPAs on there with me, so you can bring your questions and they will get answered. You type them in, and I have professionals that are answering those questions for you because I get it. Everyone’s like, “How does that apply in my situation because Clint talked about this, but mine’s slightly different.” That’s why we have them on there because the goal is to get people educated.
Education is super important in all things in order to make sure that you are making the right decisions for you and your family. Without a doubt. Thank you again, Clint, for coming on the show. I appreciate it.
Thanks for having me on. This was fun.
About Clint Coons
Clint Coons is one of the founding partners of Anderson Business Advisors, where he has grown the business to over 400 employees and tens of thousands of clients. As an attorney, Clint specializes in asset protection, tax reduction, and estate planning. As a real estate investor, Clint has invested in over 250 properties. Using his legal and real estate experience, Clint gives investors a deeper understanding of asset protection strategies. Clint has published hundreds of articles, videos, and workbooks about real estate investing and asset protection.
On social media, Clint has helped over 500,000 people build real wealth and save millions of dollars. In his most recent book, Asset Protection for Real Estate Investors, Clint uses his life experiences to show investors how they can protect themselves from the IRS, creditors, and plaintiff attorneys. Clint’s ability to cut through the confusion of asset protection for real estate investors is unmatched. He has taken this high-level topic and reduced it to simple concepts by using his easy-to-understand speaking and presentation skills. With simple outlines, diagrams, and illustrations, real estate investors everywhere can see the real value of asset protection–and why it’s so critical to the livelihood of real estate investors. At every event/ presentation, any investor can walk away with knowledge and actionable items they are unlikely to get anywhere else.
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