Should You Use Extreme Asset Protection?

There has been an interesting discussion about asset protection for accredited investors inside the 506 Investor Group. Should investors use off shore accounts, special vehicle LLC’s from certain investor friendly stats, insurance policies etc..? The group members have varied backgrounds, but none are asset protection attorneys. While this discussion is very interesting, it is not legal advice.  From my perspective, the investors most worried about taken extreme asset protection measures are doctors.  They face life or death decisions every day that could open them up to a world of hurt from a malpractice lawsuit.

Do you need to lose sleep over Asset protection? Here is some of the discussion on asset protection from our members. You may learn a thing or two

Investor 1

I'm not a lawyer, but I have studied extensively into these matters many years ago.   Initially, I sought advice of lawyers, namely "asset protection" lawyers.  Bad move.  I spoke to like 10 different attorneys each recommending their own thing.  From off shore trusts to multi-layers of trusts, llc, limited partnerships, etc., costing 10's of thousands to set up and thousands to maintain.  Yes I even paid for a consultation with Garret Sutton himself.  It was all useless, because if you find an attorney that specializes in this, they will say "yes you need to do it".  Then they will regale you of nightmare scenarios of people that have lost their entire fortune...

So, I finally decided to learn it all myself.   

Bottom line: 

1) It's just legal theory, with very little "proof" that it works  

2) Ultimately, whether a person decides to do this or not depends on how risk averse they are and what will cause them to sleep at night.

3) Make sure you 1st understand the intricacies of operating within an LLC if you don't know already, you might decide having separate bank accounts, registration, taxes, bookkeeping, annual paperwork, etc just becomes too annoying year after year

4) If you have some other reason other than pure asset protection, such as estate planning, then it makes more sense to do so

About umbrella insurance:

IMO, if you are in this group (an accredited investor), then you probably should be carrying umbrella.  But umbrella only protects you from liability from home/auto/personal.  It does not cover you from professional or business liability.  For instance, since I'm still a practicing physician, it does not cover medical malpractice over and above my med mal insurance.  Hence, I do have another "plan" in place.

Investor 2

Whenever I see these assets protect guys, I just see guys making money overselling fear.  

In my life and career I have rarely if ever seen people have these nightmare scenarios - granted, I don't talk to a lot of dentists or doctors.

Investor 3

Disclaimer: I'm not a lawyer, so please do fact check me, and this is not legal advice.

I invest via an LLC for the following reasons (in no particular order):

1. My SSN is not visible to the end Sponsor, only the EIN of my LLC. If I invest with 20 sponsors at any one time and +/- 5 new ones per year that's a lot of Sponsors and their employees who have access to my sensitive information. Considering these Sponsors are experts in their field and not experts in security, things could go wrong with them storing my info in a non-secure manner.

2. I can gift away shares of my LLC every year to my children (after they turn 18) as a way to pass on my wealth and do it tax free.

3. I do keep things separate, separate bank account, separate credit card, separate accounting. And this makes it easier for me to keep track of my ROI and also any expenses because I charge them to the LLC credit card.

4. Protection that an LLC offers.

Yes, there are extra fees to having an LLC but those fees are all relevant to how much your returns are.

Investor 4

There's no such thing as a bulletproof plan.  A creditor with a lawyer that is dedicated enough can pretty much break through any asset protection plan.  Unless you truly give away your assets, but then they are not your assets anymore.


IMO however, it works generally like this (numbers completely made up):

Be a decent human being, treat people right, don't lie-cheat-steal, practice common sense like get insurance - 99% effective

Add on a LLC - 99.3% 

Add on a Trust - 99.5%

Establish offshore account - 99.8%

So I think too many people are focused on the less than 1% chance that some sue-happy litigant will take all our wealth.  In reality, the biggest wealth eroder is .... getting married (and then divorce, with divorce rate around 50%), but no one thinks about it that way.  

 On the other hand, it does matter how much wealth you have to protect.  If your net worth is in the 8 digits, then I would think you should get some sort of plan in place.

Everything's a tradeoff with asset protection.  The more protected you are, the more fees, the more headaches, the less tax efficient, the less control, the less return, etc.  

For instance, a lot of people are eager to pull their 401k from their employer into a solo self directed 401k to start investing in RE.  However, a 401k established by the employer falls under ERISA and is virtually untouchable by your creditors (with well-established precedence).  A solo SD 401k (as well as a SD IRA), is protected only up to $1MM and only if one files bankruptcy.  So by keeping your assets in your employer (or ex-employer's) 401k, it is safe.  But in exchange, you likely would earn less return than in the hands of an experienced real-estate investor. 

Most books about asset protection are essentially written advertisements by attorneys (Sutton has a few books that I've read and basically advertises his services).  If anyone's interested in learning more, the book that I recommend (and is not advertising for business) is Asset Protection by Jay Adkisson and Christopher Riser.

Investor 5

Fantastic perspectives across the spectrum, very helpful to hear the various opinions and experiences. It seems to me that, based on what you've set up, at least you don't appear to be an enticing target if attorneys have a choice in who to go after as "low hanging fruit", no matter how bullet-proof it is in the end.  I'm not in CA so I don't think the fees are quite as bad here in my state (or WY) for LLC's. 

Although I have an umbrella policy, I'm not sure I feel 100% comfortable with it given the 50+ pages in those typical insurance policies, most of which probably spells out all the circumstances in which they would not cover me.


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