What My Mom Taught Me About Asset Protection

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As a young child, I – like many kids – thought my mom was the best, the bravest, the smartest.

I have vivid memories of her filling our house with a heavenly scent that signaled a cake or pie or some cookies were on their way.

Her cookies in particular stand out in my mind. How was she able to come up with such intricate shapes and designs in what seemed like a flash – simple (perfectly round) circles, stars, and other fantastical shapes?

Well, it turns out – unbeknownst to me at the time – that she had some help in the form of that classic time saving device we all know as a cookie cutter.

Now, you might be wondering what on earth a fairly standard kitchen implement has to do with protecting your assets and personal freedom.

Well – although most practitioners would never admit it – it turns out that cookie cutters and asset protection planning have a lot in common. Quite often – with very minor changes – the structure, entity, or plan put together for one client works just as well for someone else.

For instance, if you start a business, it often makes sense to push business liabilities into an entity called a limited liability company (LLC). By doing so – thanks to a certain legal concept built into this structure – it becomes harder to enforce a judgment than under other corporate forms.

In other words, if someone sues you and wins, it’s much more difficult to collect than under other circumstances.

Unfortunately, though, the cookie cutter approach doesn’t work if you end up using the wrong shape. Here are just a few examples showing what can happen when you think you’re making a star and end up with a circle…

Oops

Many years ago, I lived in Illinois and during that time, I learned about something called an “Illinois land trust.”

A land trust is an agreement that allows property to be held privately – your name doesn’t show up on the title in any public record.

How might this benefit you? Let’s say one day, you walk into a restaurant and accidentally step on the shoe of a tipsy patron leaving the premises. He shouts a few choice words of the four-letter variety and then takes a swing at you. His jaw is a can’t-miss target, and in your best boxing stance, you connect with a right hook. He drops like a stone to the ground, clutching his jaw.

Will he sue? Well, that depends on how deep he (or his lawyer) thinks your pockets are. Thanks to computers and the Internet, if you own property in your own name, it’s pretty easy to identify “you” as its owner. But, if you have your property in a land trust, your ownership is hidden. No one except the lawyer who put together the trust knows you’re the beneficiary.

Perhaps not surprisingly, this is one of those privacy techniques that’s all over the Internet. And, after a little reading, one might conclude they are a USA-wide thing.

If only that were true.

Recently, I consulted with a client from Arizona. He owns several parcels of undeveloped land he’d like to get out of his own name. And after doing some Internet research, he decided the best way to do it was through a land trust.

There’s just one problem: Arizona doesn’t allow such things. Indeed, if you try to form a “land trust” in the state, convey property to it, and don’t disclose the names of the trust beneficiaries, the transfer won’t comply with Arizona law. This gives creditors lots of ammunition to attack the transfer later on as fraudulent.

Oops.

Not only that, but even in Illinois, Florida, or other states that support the land trust concept, there’s no actual asset protection to property conveyed in this manner.

If you’re named in a judgment and forced to disclose under oath the assets that you own in any way, you need to list property in land trusts regardless. At that point – unless the property is otherwise exempt in some way – the creditor can foreclose, sell at auction, and keep 100% of the proceeds up to the awarded amount.

Double oops.

The Cookie-Cutter Self-Directed IRA

Now let’s talk about self-directed IRAs.

Again, the Internet is full of companies that will help you “unleash the power of your IRA” by making it self-directed. And, that’s usually a good idea.

Many of these companies will also sell you a corporation or LLC owned by the IRA. The sales pitch is that you will get “checkbook control” over your retirement savings. Not only does this make it easier to get things done, but you get access to non-traditional investments like those available outside the USA.

Unfortunately, trouble starts when you try to make investments through the entity – especially ones outside the USA.

Let’s say you want to purchase an apartment in Austria, for instance (a situation I’ve found myself in before).

With the right advice and some good research, you’ll quickly discover that the most tax-efficient way to purchase the property is through an Austrian entity. That LLC the (US-based) promoter sold you is about as useful for this transaction as a screen door in a submarine.

Although it drives our clients crazy, that’s the reason I tell them never to have their self-directed IRA form any type of entity until they know exactly what they want to purchase with it.

In the end, there’s nothing wrong with a cookie cutter approach so long as you get the right mold.

If my mom wanted to make star shaped cookies, she used the star shape. If she wanted circles, she used the circle shape.

She did not use a star shape and pray a circle would come out of the oven.

The same concept applies to asset protection. Choose your form wisely based on what it will actually do, rather than just what you hope it will.

And, as the saying goes, when in doubt, seek out an expert.

Reprinted with the permission from Nestmann.com.

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