Announcer: Please note disclaimers at end of show. Welcome to Creating Wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman, with the Complete Solution for Real Estate Investors™.
Jason Hartman: Welcome to the Creating Wealth Show. This is Episode No. 153, and I’m your host, Jason Hartman. Good day to you. It’s a stormy day again here in Southern California and all of those global warming people probably think it’s cooling because it’s warming.
We’re in our new office now, and I guess this is my first talk to you from our new office. I just interviewed John Perkins today. He is the author of Confessions of an Economic Hit Man, a game as old as Empire, and his new book, entitled Hoodwinked. So we’ll have that show up here in the future, but we just recorded it today. It was really, really interesting.
Today, we’re going to talk about two things really, but they’re sort of on the same subject matter. One of them is what to do if you are in trouble on a property. What are your options? What can you do to get out of a troubled property? If you’ve gotten yourself into a situation that isn’t supporting you and your goals and you want to fix it, what can you do to get out? So we’re going to talk about that. Again, that situation may have been brought about by a change in your personal circumstances, or it may have been brought about by a change in the property. It may have been brought about by the change just in your plans and what you want to do and what your goals are. So whatever the reason, we’re going to talk about how to get out of that.
And then after just a little bit on that, which I’ll talk to you about, we’re going to have an attorney on the show, and that is Mark Kohler. He wrote a book, entitled Lawyers are Liars, and I’m sure many of you listening may agree with that. Even if you are a lawyer, sometimes you’ll agree with that, I know. Not all lawyers are bad. They get kind of a bad rap, but a lot of them are pretty bad.
Mark will be talking about asset protection and how to structure your entities and your corporations and your LLCs, and just manage your assets properly. We’re going to talk about doing it in different states, what are some of the favorable and unfavorable things in different states, so make sure you listen to that interview that we’ll have coming up here in just a moment.
The other thing I want to say to you about that, though, is a word of caution. A lot of people, when it comes to this asset protection stuff, because we get questions on it all the time, they’re sort of putting the cart before the horse sometimes, where they’re so worried about protecting assets and they haven’t really even built any assets yet. So I don’t want you to go overboard worrying about protecting yourself if you don’t have anything to protect yet.
So there is a balance here. You want to think about this if you are building some assets and if you want to protect yourself from current and future liability, of course, but you don’t want to get so mired in this that you wait to invest or you wait to start a business because sometimes, you horse around so much with this whole area – and I’ve seen people do it and that’s why I have to say this – of asset protection, they never actually do anything and create anything worth protecting. So there is a balance and I just want to point that out to you.
Let’s talk about getting out of a troubled property. What if you were in trouble on a property, what do you do? Well, the first thing I want to say before we go into this is that we at Platinum Properties Investor Network, myself, our team here, we are not lawyers. We are not qualified to advises on legal matters, and we’re not qualified to advise on tax matters either. So we’re just giving you some concepts that you can then take to the appropriate professional for consideration. I do want to make that disclaimer. We’re not experts in this. We’re real estate people and educators, but not tax or legal advisors.
The first thing you want to do if you’re in trouble in a property, and this is the best thing of all, is you want you consider getting a loan modification. That is, without a doubt, the best route of all. Now, loan modifications are sometimes not too difficult; sometimes they’re very difficult or completely impossible. There is a lot to know about this. It’s sort of a new area the last couple of years. It’s sort of been the Wild West. I was able to modify 11 of my loans on properties I had myself and I was able to do that without ever being late on a mortgage payment or having any damage to my credit, or anything like that. However, I have tried to modify nine more of my loans and I haven’t had so much luck on those. So it’s a hit and miss thing.
Now, as you may know, we have published – my publishing company, The Hartman Media Company, has published a Do-It-Yourself Loan Modification Kit, which I’m not giving you a big sales pitch on it here, but it’s only $49 or $47 or something like that. And it’s a 50-page workbook and a two and a half hour audio download that you can get at the website, www.JasonHartman.com. That is a good place to start, rather than running out and hiring one of these really expensive loan modification firms that’s going to charge you $3,500 or something like that, and that’s just for one loan. You might learn loan modification, which is a somewhat involved thing, and be able to do ten of your loans yourself. I don’t know. It’s hit and miss.
I think on my first 11 of them that I modified myself, I had some good luck and I was just able to do it, and it worked great. Some of those techniques in the Do-It-Yourself Loan Modification Kit were employed and they worked. These other nine I’m struggling with; I’m having a harder time. I’m still committed to it. I still think I’m going to get those loan modifications, but do I have them yet? Nope, not yet. I’m working on it.
The other option is to refinance, refinance to a lower interest rate, different kind of loan structure, different kind of loan balance. Refinances are generally not working too well. We had a prior show where we talked about – we had Randy on that show, and we talked about two refinance programs that may help you. I don’t know the show number offhand, but if you’re a regular listener, it’s back there, and if you want to find that show, it’s at www.JasonHartman.com or on iTunes.
On that show, we covered what’s called the HASP program, where we talked about how you can refinance a property, even if you’re upside down or underwater on the property a little bit. Not a whole lot, but you can do it if you’re a little bit underwater on it.
So there are some options there that may help. Listen to that show for more details. But generally speaking, if you’re in trouble, the refi usually isn’t the way out because it’s usually not available to you or you wouldn’t be in trouble in the first place.
The next option and actually, these next few options involve calling your property manager. Actually, the next two involve your property manager. If you have a manager and you’re not managing your property yourself, I would highly recommend that you call your property manager up or shoot them an email, and say to them something like this, “You know, I’d really like to sell this property to the tenant who is in place in the property now. I am not looking to sell it any other way. I don’t want to put it on the market for sale. I just want to see if the tenant will buy the property from me. And if they buy the property from me, of course, you’ll earn a commission.” And that could be a good deal for your property manager.
Now, state-by-state, property managers vary. In some states, you have a different license for property management than you do for selling real estate, and a lot of these companies have a real estate sales department in their office and they’ll just refer it over to an agent there. Many times, your property manager can be the real estate broker as well. It differs state by state.
But the point is tell your property manager either you want to talk to the tenant personally or you want them to talk to the tenant. And you don’t want to get the tenant all freaked out here, thinking you’re going to sell the property unless you’re just going to blatantly, completely put on the general market for sale. What I think you want to do is go with a softer approach and say, “Look, I’d like to sell this property to you, my tenant. You’ve been there. You’ve been a good tenant.” Even if they haven’t been such a great tenant, just tell them you want to try to work a sale with them. And they may be more than happy to buy the property, and your property manager or the local market specialist that we referred you to if you bought through our network can help you with that process.
If you bought a property through us and you’re in trouble, that’s going to be pretty unlikely because if you followed my advice, you stayed out of trouble. But some of you listening, occasionally you don’t really follow my advice. I know. We all go astray sometime. But probably what you did is you bought that property through somebody else, and most likely what happened is your eyes lit up, it was at the peak of the market as the bubble was about to burst, and you bought a property in South Florida or Las Vegas or California or any of these markets that we really never recommended, and you bought it at the peak and got yourself in trouble because you were counting on something big to happen in the future, namely appreciation. Guess what? It didn’t happen.
Remember one of the Ten Commandments of Successful Investing is the property must make sense the day you buy it, or you don’t buy it. Keep that in mind. But we all get into a situation for one reason or another, at some point, and we run into a problem. And so that’s what this talk is designed to do is to help you with that.
Now, if this property is upside down or underwater, so to speak, meaning that the mortgage is too high to allow paying closing costs to get out and paying off the loan, you can work with your lender and do a workout or a short sale. And your property manager or your local agent in that market can help you do that. If you need help from us, whether you’re one of our clients or you bought a property from somebody else, talk to our investment counselors here and they can possibly refer you to an agent.
I’ll give you an example of this. We have contracts, I believe, now with agents, brokers, or builders, or banks in 42 different markets nationwide. And currently, we’re only recommending about 10 – 12 of those markets right now. So we have agreements in our network with people that we’re not really actively working with, only because we don’t really like their market at the moment. For example, I spoke with our Utah agent last week. Now, we’re not doing any business in Utah at the moment, but we still have connections in different parts of the country because we used to do business there. The prices got a little too inflated and so we stopped recommending that market.
So talk to one of our investment counselors here and we may be able to provide a referral for you if you don’t have someone so that you can have this property manager or the local agent do a regular sale or a short sale, where the bank actually will reduce the loan balance to allow you to sell the property. Ideally, you don’t want to upset your tenant. You just want to sell it to the tenant in place, in the property. So talk to your property manager or your tenant directly about doing this.
Again, the caveat here is don’t get your tenant all worried that you’re going to sell the property. Just talk to them about them buying it. Just say I’d like to sell it to you, nobody else in particular. I just want to see if you’d be interested in buying it from me. So that applies in a regular sale or a short sale. The first best thing, though, is a loan modification. That’s the very best thing of all.
The next thing, what else can you do if you’re in trouble? Well, if you’re in trouble, you might be able to do another sort of workout or sort of compromise with your lender and offer them what’s called a “deed in lieu of foreclosure.” Basically, what happens here is you turn over title to the lender and you hand them back the keys and you say, “Look, you’ll take this, and you agree by taking over the property that I’ve transferred title to you. You’re not going to foreclose on me.” That could work.
Now, I just want you to know your lender is not under any obligation to accept that deal, but they may in some cases be willing to do it. In fact, they do it fairly often I’d say. And the reason they would do it is because it makes economic sense to them because they know that if they have to go through the cost of foreclosure and the time of foreclosure, it may cost them a lot more money.
The other thing, and hopefully you don’t have to go to this one, is a foreclosure, letting the property go completely in a case where you stop making the payments and the bank eventually takes it back. Now, some lenders are fairly swift at this and they can do this in just a matter of a few months. Other lenders, I mean I have heard stories about lenders taking 16 months to foreclose on a property. And sometimes, the owner is collecting rent all along, or if they’re a regular homeowner occupying the house, they’re living there for free the whole time.
And I have to tell you, this is what’s called the “moral hazard” because what is happening in our society nowadays is people are actually doing this as a part of business planning, if you will, where they’re literally planning to go into foreclosure. They’re kind of weighing this out and they’re saying, “Look, if I can stay in this property for many months or maybe a year, or maybe even longer, and it’s going to damage my credit and it’s going to hurt, I’m going to just going to do it.”
I was at a cocktail party recently and I talked with a bankruptcy attorney. I asked him what’s going on in the bankruptcy world. He said that many of his clients were intentionally deciding to declare bankruptcy now so that in 18 months or so, they can fix their credit as much as possible and be back in the game because they’re kind of trying to time the market. They’re thinking there is going to be a lot of troubled assets that they can buy cheap and hopefully, they will have rebuilt their credit at that time. Folks, this is a risky strategy. I’m not recommending this. It’s pretty tense, pretty risky. A bankruptcy or a foreclosure stays on your credit report for a long time. Ideally, you don’t want to do this.
The other thing I want to talk to you about is if you go into foreclosure or do a short sale, be very careful – well, in a foreclosure, you don’t really dictate any terms that I know of, but in a short sale, you could. You could negotiate terms with that. I have heard some stories and someone sent me an article recently where it said that banks, lenders, were going after borrowers that were doing short sales or foreclosures for what’s called a “deficiency judgment.” Now, I’m not a legal expert, but here’s my take on that. It depends what state you’re in because some states are what’s called a non-recourse state and some states are a recourse state.
Now, in a non-recourse state, if you get a purchase money mortgage, meaning you use that loan to buy the house on the original purchase and you’ve not refinanced that loan or put a second trust deed on the property after purchasing it, then, in a non-recourse state – California is an example; I’m sure there are many others and I don’t know state by state. That’s why you need to talk to a lawyer about this stuff – you are not liable. They can’t come after you personally for any deficiency. All they can do is look to the property as the collateral, the entire collateral for the loan.
What a lot of people don’t know is that even in a non-recourse state, California being the example, if you’ve refinanced that property, then that becomes a recourse loan. However, don’t feel too bad because my take on this is that lenders don’t have time to go and litigate with all these borrowers for a deficiency judgment. I’m not sure how this process works. Again, I am not a lawyer, so you have to ask a lawyer, a competent lawyer. There are a lot of really stupid lawyers out there, too, so be careful who you’re talking to. Through our network, we offer that prepaid legal membership. That may be a helpful thing. One of the things I love about that is, for $26 a month, you can have a lawyer in all 50 states. Again, even in the prepaid legal network, the quality can vary, so it’s good to always get a second opinion.
So here’s the thing. My understanding of it is on this deficiency judgment stuff, I think people may be over worried about this because I’ve heard some reports that there are 3 – 7 million foreclosures in the pipeline in the United States. Now, they don’t know that this will actually come true. These are just properties they think are susceptible to foreclosure. In other words, they’re upside down, they’re under water; the borrowers aren’t paying on time, whatever those metrics are. I don’t know the details. But I’ve heard that there are still quite a few foreclosures in the pipeline to come through, and there have already been a lot of foreclosures, millions of them.
So if the lender has to go and sue the borrower to get a judgment against them for the deficiency, if that is the process – and as far as I would know, I think that’s the way it works – are they really going to do that? Are we going to see 3 – 7 million new lawsuits filed? I can’t imagine that the lenders have the time or the resources to do this.
However, I don’t want to say that and have you be the one borrower that they made an example of and they did pursue it. Just know they may have the right to do that, and you don’t want to gamble too much in that maybe they won’t do it because they might really do it. These are all just questions I’m bringing up again. You have to talk to a tax professional about the tax implications of short sales, foreclosures, deeds in lieu of foreclosure, that kind of stuff, and a regular sale as well because on a regular sale, here’s a consideration you have.
One of the beauties of investing in income property is you get this non-cash write-off, this phantom write-off called depreciation. Well, if you have qualified for that write-off and if you’ve been able to take that write-off, if you sell the property, you may have to pay what’s called recapture on that depreciation you took. Now, you may not because you may be selling at a loss, so again, I’m not a tax expert. Talk to your tax person about the tax implications. Talk to a smart, qualified attorney about the legal implications.
But talk to you property manager because if you just open a dialogue with them about – now, don’t tell your property manager, hey, I’m just going to let it go into foreclosure. You don’t want to panic them if you’re thinking about that. Don’t do that yet, at least. But do say that you’d like to consider selling the property to the tenant who is in the property. And the tenant may just turn around and buy the house from you and you’ll be out of it. And that’s a really nice way to do it.
The best thing, loan modification; second best thing, selling the property to the tenant in place. Those are some of the considerations you want to think about when doing this.
Another thing you want to think about is entities and entity formation. Now, this is not going to be for this troubled property probably, but it’s just general thoughts for the future of your business, of your real estate investments. That’s why we have the interview with Mark Kohler, the author of Lawyers are Liars.
Before we get to that, I have a special opportunity for you. This is a contest and what you need to do to enter is you simply need to go to www.JasonHartman.com/contest. Type in your information. It will take you 20 – 30 seconds. It’s really fast. Click submit on the form and this could get you a free ticket for two people to the Masters Weekend that we have coming up on March 6 and 7. So go ahead and enter that. We’re going to give away a few free tickets for that and then we’re going to give away a few discounted tickets for it as well. So www.JasonHartman.com/contest and you go there and you may win free or heavily discounted tickets to the Masters Weekend, and if you haven’t already registered for the Masters Weekend, if you’re not feeling lucky, go ahead and enter. You might as well. Even if you pay, we will refund your money if you’re a contest winner.
So even if you want to register just to make sure you come to the event, go to www.JasonHartman.com and click on Store and then Events, and you can register for the Masters Weekend on March 6 and 7. And by the way, we have the Creating Wealth Bootcamp, the next one – it’s a couple months away – coming up May 22. You can register for that as well. But the Masters Weekend, remember, the price goes up on that in just a few days here. We’re going to have to raise it another $100. The early bird pricing goes away.
Be sure to register for the Masters Weekend. It only happens twice a year and this one is going to be pretty special, the most unique one yet because we’re going to have some moneymaking experts as well. We’re not just going to talk about creating wealth through income property. We’re going to talk about making money with internet marketing, with a home-based business. It’s not particular business, by the way. It’s whatever business you might be interested in, whatever your passion is or your area of interest or whatever you having going on already. So go to www.JasonHartman.com. Register for the upcoming events. Get a copy of the Do-It-Yourself Loan Modification Kit, if you like. Look at our other information. We’re constantly upgrading this new website we have. And also, enter the contest at www.JasonHartman.com/contest.
Here’s the interview about asset protection. Here we are.
Interview with Mark Kohler, author of Lawyers are Liars
Jason Hartman: I’m here talking to Mark Kohler today. He is an attorney at law and a CPA out with a new book entitled, Lawyers are Liars, the Truth about Protecting our Assets. I’ve looked into this asset protection stuff for a long time now, folks, and I’ve heard a lot of sales pitches on it, and I think in the asset protection world, there are a lot of people being preyed upon that are basically being sold a lot of stuff they don’t really need. But then again, how can you argue with “you can never be too careful?” So anyway, let’s talk about that today. Mark, welcome to the show.
Mark Kohler: Well, thank you very much. Thanks for having me, Jason. It’s an honor. I love what you’re doing, and your students, the people that you educate and your clients, it’s an honor to be with you guys.
Jason Hartman: My pleasure. So tell us a little bit about what’s going in the world of asset protection. Society or the court system doesn’t really want people to use schemes to protect assets because nobody should be judgment proof. That basically puts them above the law, right? Can you really do this?
Mark Kohler: Well, absolutely. The theory of incorporating, in and of itself, is a legitimate way to protect yourself, and there are many things you can do with asset protection strategies. I’m sure we’ll talk in a little bit today about my chapter about O.J. Simpson.
Jason Hartman: Well, yeah, his retirement plan when Petrocelli attacked it.
Mark Kohler: He’s like the classic asset protection model to follow. Not life model, of course. But yeah, there are so many proper ways and strategies and things you can do to protect your assets. The schemes and the scams are why I had to write the book because I’m sick and tired – as you see, many, many people get ripped off. I’m sick and tired of it. And there’s no book out there as a watchdog book in asset protection. Everyone writes an asset protection book to sell their stuff, but not someone that’s going to call out the liars, and that’s why I had to write a book on this. It just drives you insane.
Jason Hartman: Well, again, Mark, I have to compliment you on your book because it’s footnoted, you back it up, it looks very, very complete. Again, I’m not expert here. I’m a layman and I’ve heard a lot of these pitches, though, in asset protections. I’ve read a little bit about it. What can people do to protect their assets?
Mark Kohler: That’s a great question because the book is really divided in two halves. Here are the scams. Watch out for the scams. And so I highlight, of course, five or six scams.
Jason Hartman: That’s a great way to start. Maybe we’ll start with that. Just kind of bullet point on the five or six scams out there.
Mark Kohler: And then the second half is what really works. We can probably dig into that later. But the scams are the big ones just to avoid. The first one that I, of course, talk about is the “silver bullet” type strategy, where people say you can hide your assets. Whenever someone says “hide” or “silver bullet,” that’s a key indication to run because any lawyer or planner that’s helping you legitimately is going to understand there’s nothing you can do for 100 percent protection. You can put up barriers.
So whenever you see that “silver bullet” one-size-fits-all plan, that’s the first scam, so watch out for that. If you’re in a room with 20 other people, or on a show, or you’re listening to a salesman and he says this is what everybody should be doing, that’s the first scam out there because they think they can sell it to everybody. Everybody’s different. I mean your plan, Jason, could be very different from mine. We could both own real estate, both have a family, both have a business, which we do, but your plan could be different from mine. And these scam artists out there prey on the one-size-fits-all approach. That’s No. 1.
No. 2 is the Nevada Corporation. You and I were joking about it before the show. It’s like every Tom, Dick, and Harry wants to sell on AM radio late at night, “Start your asset protection now.” And it’s just a nightmare. People don’t need to go set up an entity in Nevada. It costs them additional funds, and when you come back to California, you have to pay taxes anyway here and register your company.
Jason Hartman: Okay, so a couple comments on that. First of all, Nevada is kind of the desirable state for closely held companies because Nevada is a bit of a rebel state. They won’t share a lot of data with the federal government or at least they didn’t use to.
Mark Kohler: That’s the point.
Jason Hartman: And maybe they’ve changed that. I can imagine the Feds are putting tons of pressure on them as they do on other countries around the world, and there are some examples very recently of that with Obama.
The other thing about it is that if you’re doing business in California and you have a Nevada Corp, I can’t believe people fall for that one because they have what’s called the “domicile rules.” You have to declare income and pay taxes where you do business. This is a complicated subject and you can hire the $500 an hour Ernst and Young person to tell you about tax nexus and all that kind of stuff. But Nevada does have some traits that are desirable, right?
Mark Kohler: Well, actually, and this is why I have like 60 footnotes just on that chapter alone because we hear that and we want to believe it. Now, if I’m going to be doing business in Nevada and live in Nevada, absolutely you can save taxes. You can get better asset protection.
Jason Hartman: And what about privacy? They claim that there’s more privacy, like you don’t have to disclose who the officers and directors are.
Mark Kohler: That’s the old way. It’s the old school. In fact, just two months ago, Jason, this is why I’ve been on some radio shows in the last two months is letting the world know the Secretary of State has changed laws, Clark County especially, and all of the counties of Nevada have been getting the word out. Now when you register your corporation in Nevada, you have to file a separate schedule within 60 days and disclose all the officers, directors, and owners. Nevada is sick of it. They don’t want you to come here and hide anymore. It is over. I can hide you better in about nine other states.
Jason Hartman: Hiding is not necessarily the way you should be doing it anyway.
Mark Kohler: Yeah, exactly. It’s not even effective anyway. The hiding in Nevada is no longer an idealistic approach.
Jason Hartman: I know the other thing – that there was some connection between the individual and the entity, so I had heard a while back, like in Nevada, that you didn’t need to provide a Social Security number to open a bank account. I assume this has all changed with the Patriot Act and all this kind of stuff.
Mark Kohler: There’s a lot of wives’ tales of what you can get away with in an entity in Nevada and you’d hire someone to be your registered agent and they’d be your proxy, and then you’d never really have the stock certificates. Guys, for the last ten years, I’ve been fighting hokey – just case after case of people getting ripped off because they are non-lawyers typically, scam artists that move from one industry to the next, and we’ve seen them.
Jason Hartman: We have them in real estate.
Mark Kohler: They’ll jump over to mortgages one day. They’ll jump back to –
Jason Hartman: Loan modification the next.
Mark Kohler: Yeah, it’s just nuts. So anyway, folks, if you think you’re going to be able to hide out in Nevada, think twice. And here’s the problem. Once you step your foot over the border into California, Arizona, Utah, all these border states get this – once you step across the border and do business in another state or live in another state, all of those benefits are gone. There’s no tax savings. And once you register in California, you avail yourselves of California law. So now, if you did get a little bit better asset protection in Nevada, that’s only if you’re doing business there. Once you come across the border here and you’re in California, I have California law to deal with.
So I’m not getting any of those benefits. They’re all half-truths and see it in the airport in Nevada. “Do business here. If you do, you’ll get all these benefits.” Well, that’s if you stay doing business there, if you live in Nevada. Once you cross the border, all that’s gone.
Jason Hartman: I have to tell you something. There is a very posh area here, right near us in Orange County and it’s called Crystal Cove. And in Crystal Cove, it feels like about 30 – 40 percent of the license plates on the cars say Nevada. These are obviously people who have registered their car in Nevada because they either want to establish residency or so they don’t have to pay California income tax or whatever they’re pulling. But this is just amazing. The government has to be wise to this stuff.
Mark Kohler: They do, and absolutely. Here’s the important point, too. A lot of times these elaborate structures are more costly than they’re worth. You jump through all these hoops and you have some planner that you think is changing the world with your assets and you know no one is going to find you. And come to find out, you’re paying for more tax returns, more administrative fees, more filing fees, and you’ve always got that sick feeling in your stomach that, “Oh, my gosh, the IRS could knock on my door tomorrow,” or the Secretary of State of California or Nevada or the Franchise Tax Board. And Franchise Tax Board in California is not screwing around with this.
Jason Hartman: Oh, tell me about it. They’re mean, I hear.
Mark Kohler: Yeah, once you have a bank account in California, they’re finding out if you’re trying to do business here. There are several cases right now pending on this $800 minimum tax. People that try to set up their Nevada company say, “Well, I’m really just doing business on the web. I live in California, I have a home office, but I don’t do much.” And California is saying no way, you’re paying your $800 minimum tax here.
Jason Hartman: And that’s the annual fee for having the entity and the domicile in California, right?
Mark Kohler: Well, there’s an annual Secretary of State fee and then there’s the Franchise Tax Board minimum tax, and the more income you have – you have to have some serious income before it exceeds $800. But for all the corporations in the LLC, it’s actually a minimum tax. It could be higher. It’s based on your income. Then you have your annual fee to the Secretary of State and that varies from $50 – $100.
Jason Hartman: And I think the thing the listeners really have to realize is this, is that when you have a state – and that means a state meaning a country or a state within the country; either way, the state in general – when a state is hungry for money, and boy, it is at both the federal and state level in pretty much every state in the Union now and other countries around the world – when the state is hungry for money, they’re going to find ways to come after people to get that and make sure that people are complying.
So you don’t want to live your life worried about a knock on the door, the registered letter that comes in the mail. You want to just do things right so you don’t have to worry about that stuff. You can get a lot further in life by just playing the game right, but smart, and take advantage of every legal opportunity there is to protect assets, to reduce your tax liability. Certainly, that’s all fair, well and good. But don’t fall for these hokey scams.
Mark Kohler: Absolutely, and that’s the purpose of this book. You just said it, Jason. When you play it smart, when you work it smart, you have to be at least reasonably educated on these topics. I want clients to not be experts, but captains of their own ship. So this is a great opportunity. And that’s why this book is not a John Grisham. This is a reference manual, so when you’re out and doing business, you’re at a REA meeting, I should say, but if you’re out there and you’re doing deals and you’re talking to your advisor and they bring up a strategy, again, one of the other scams, land trusts. Land trusts can be very effective in transactions, but they’re not built for asset protection. That’s another chapter.
Jason Hartman: Tell the listeners what a land trust is real quick.
Mark Kohler: Some of you may have heard this. There are a lot of gurus out there that use land trusts. What the principle purpose of a land trust is is to hold property through the use of an internal document. It’s not registered publically. This trust document is going to set forth beneficiaries that are generally undisclosed, and then there’s a trustee for that trust. That document can be very helpful in buying property in a “subject to” scenario, with short sale strategies. There are a lot of great real estate strategies that use land trusts very effectively. I help draft land trusts for our clients around the country.
But the problem is these gurus out there that say, “Oh, yeah, but use the land trust to hide yourself. Hide your assets.” Hide, hide, hide; silver bullet protection. There’s literally a book on silver bullet land trust protection. Give me a break.
Now, maybe a land trust is camouflaged, but it’s not a bulletproof vest. And the land trust should not be used for asset protection. That’s what corporations and LLCs and our other structures are built for; not land trusts.
Jason Hartman: So I think you’ve gone over three scams, the Nevada – we’ll just call it the Nevada Scam. And then the land trust, and what was the other one?
Mark Kohler: Silver bullets.
Jason Hartman: Oh, the all – this will do it all type of thing.
Mark Kohler: The all-in-one.
Jason Hartman: What else?
Mark Kohler: No. 4 – you’re going to love this – offshore planning. A lot of times, as your wealth builds, these are the next layer of scammers. They’re not going after the brand new Mom and Pop operations. They’re going out after those folks that have been around a while. They’re learned these techniques, like Nevada doesn’t cut it. These people want more. How can I really expect –
Jason Hartman: That’s the guy in the Cayman Islands, the Cook Islands, the Isle of Man, all of those tax havens. And I tell you, it was funny because this girl I used to date a long time ago, after me, she got with this guy and I think she married him actually. And then her brother kept telling me they were always traveling to all these tax haven countries and talking about moving to one. And I thought what are they up to? This is some crazy thing. I mean I’ve heard that if you fly to these places too often, the IRS will probably audit you.
Mark Kohler: Right, and right now, we’re in a major situation with the Swiss banks.
Jason Hartman: Obama really just said, “Look, you have to come clean on that company.” And you know what? The listeners ought to really understand the way this works internationally. From what I gather, it works like this. These countries, the U.S. obviously, are this huge empire and we’re doing favors all over the world, getting involved in everybody’s business, which we shouldn’t, but that’s another topic. But whenever there’s a hurricane on one of these islands where people are hiding money and they need aid, the U.S. says you have to disclose the accounts. You have to come clean on this stuff. They use the Patriot Act and this stuff.
And they’re really pressuring these other countries, like the Swiss. And UBS I know turned over all those accounts. The U.S. is going to figure it out. You have to pay tax on all income worldwide.
Mark Kohler: Absolutely. And there are two things going on. There is asset protection offshore and then there’s tax planning offshore. And in this book, I talk about the asset protection aspect as well as taxes, but the bigger issue is can people hide their assets offshore? And with, like you said, the Patriot Act I and II, and trust me, if you’re moving money offshore, there’s some guy in the basement of the Pentagon with a little headset watching and looking at your transaction. Money does not move offshore anymore without being watched, period.
Jason Hartman: You might be accused of being a terrorist or something.
Mark Kohler: Absolutely. Now, here’s the thing. Does asset protection offshore work? Yes, it does make it harder for people to get at your assets in a lawsuit. Now, are we talking about hiding from the IRS? Absolutely not. You’re taxed on your worldwide income. We want you to be full disclosure with the government, and you’re not hiding when you’re going offshore. You’re just putting up another barrier.
Now, here’s the scam. People will go out and sell this elaborate offshore planning strategy to the folks that don’t have the assets to afford it or it makes sense.
Jason Hartman: They don’t need it.
Mark Kohler: They don’t need it.
Jason Hartman: It’s overkill.
Mark Kohler: Yeah, it is absolutely overkill. And so it’s over sold. But I need to say it works and again, we’re not trying to hide from the IRS. I have another chapter coming out on Wesley Snipes. We don’t want the IRS throwing us in jail.
Jason Hartman: He’s in trouble now. What’s going to happen to him? Is he going to go to jail?
Mark Kohler: Yeah, he’s in jail now.
Jason Hartman: Oh, he went to jail. Oh, my gosh. How long?
Mark Kohler: Yeah, he’s just sitting there. No one knows. It’s going to be like a 2 – 3 year thing, and he has probation coming up.
Jason Hartman: Don’t mess with this stuff, folks. This is serious.
Mark Kohler: It’s scary, yeah. There are a lot of examples out there of how to watch yourself when someone’s saying hide your assets to save taxes. That’s a whole other topic and it’s just crazy.
Jason Hartman: So we should distinguish between asset protection from liability in a lawsuit or something like that and tax liability. Those are two different topics.
Mark Kohler: Yeah, when you’re going offshore, people get sold that kind of double whammy. “Save on the IRS. Hide your income and hide your assets.”
Jason Hartman: Okay, now let me ask you this. I remember hearing a reading, Mark, about a case – I don’t know – 3 – 4 years ago or something, and you just kind of hear these things vaguely and I’m not expert, but I kind of tune in. One of them was some businessperson got sued and lost and the other party got a judgment against them. Then the businessperson claims, “I don’t have any money.” And the judge says, “Well, we think you do and I’m going to just let you cool your heels in jail until you figure out how to make this money get here.”
I think, actually, it went more like this. He said he had money, but it was offshore in another entity he didn’t control, and the judge just said, look; I don’t believe that. You better figure out how to control it because the reality is the judge was wise and knew it was probably one of these asset protection schemes, right?
Mark Kohler: Absolutely. In fact, in my chapter on that topic, I quote some of the cases that were just like that. There’s a variety of them. Affordable Media and Goldberg vs. Lawrence. There are a lot of those cases where folks are charged with contempt of court for essentially lying to the judge. So he says, you can go to jail and when you want to bring that money back to the U.S., you can get out of jail. Until then, prove that I’ve violated the Constitution. And the court, of course, wins in those cases.
So, now, again, does it make it hard for someone to get after your assets if you’re going to go to that level of protection? It does, but the government has a long arm, so we need to be careful.
Jason Hartman: Other scams.
Mark Kohler: Yes, last one. Jason, you’re going to love this last one. And this is the chapter I finished the first section with is the biggest threat against your assets is yourself. It’s you and me, Jason. There are so many times – and I know you probably fall prey to this, too – we think we’re above the scam. It’s not going to happen to us. We do partnerships on a handshake. We don’t fill out the LLC the way we should have, we don’t have an operating agreement, we do everything on a napkin at Denny’s, and that is our biggest threat to an asset protection lawsuit is our partnerships and our marriages. People go into marriage when they should have had a prenuptial. They should be doing a post-nuptial because the marriage is on the rocks, but they don’t do it. And people do so many business deals without proper documentation.
That is the biggest threat to people’s assets and it is so hard to take that time to document things carefully. And people, it’s so important. You’re the biggest threat to your own assets.
Jason Hartman: Okay, so just not setting stuff up right. Now, that doesn’t have anything to do with entities or things like that. Well, what do you mean in the partnerships? Do you mean in a general partnership, you have unlimited liability as a general partner, right? Is that what you’re talking about?
Mark Kohler: Yeah. What I’m saying is, Jason, your No. 1 potential for a lawsuit, Jason is not getting hit in a car or in a car accident tomorrow night. It’s your partner. You’ve undocumented something that you should have had a partnership agreement. How are we going to split profit? How are we going to share this or share this deal or that? And your partner feels like he’s putting in more time or money or they should have got paid more, and that’s where the lawsuits come from. That’s the majority of lawsuits in the court system.
Jason Hartman: And that’s in a business partnership, right, because usually on a real estate deal, if you’re just taking title tenants in common and the property has insurance, I mean tell me about that.
Mark Kohler: Oh, Jason, seriously, yeah. If you go into a TIC on a deal and you’re on a tenant –
Jason Hartman: No, not on a TIC. I hate TICs. TICs are a scam. I just read about a huge one. It was right here and I’ll tell you this. This is a company called For 1031, and they were doing business with this master leasing agreement through this entity called DBSI that had been around for decades, and they kept pitching us to get into that and they wanted to come into our meetings and talk to our investors. And I said, look; that violates Commandment No. 3 of my Ten Commandments, which is, “Thou shalt maintain control.” Be a direct investor. Control your own investments.
But that doesn’t mean that there might not be a deal because I’ve had partnerships in real estate before, where as long as one person doesn’t live in the property and it’s arms length for both partners, those partnerships are pretty simple. You’re really just splitting expenses, splitting tax benefits. I haven’t had problems with those. Some of them I’ve had for years and years. But what I mean is don’t invest in a fund where you don’t control it or someone else does. I don’t like those kinds of deals.
Mark Kohler: When I said TIC, that has a lot of loaded language because a tenant-in-common is a TIC and then there’s these TIC funds and all that stuff.
Jason Hartman: But I could buy a four-plex with you and we could buy a tenants-in-common between the two of us. That just is how we will our half.
Mark Kohler: Yeah, but here’s the thing. And first of all, I want to create the caveat here or make the caveat I have nothing against partnerships. I think that’s the best way to do business, synergizing capital and experience and leveraging time and effort, awesome. But documenting it properly is the big deal.
So you and I go in on a deal, Jason. We see a little duplex down the street. Great! Let’s go in tenants-in-common. And then we don’t put in place a partnership agreement. It’s all done via email or a handshake. And then what happens if you think we need to improve the property, or you don’t like the tenant, or what happens if we need to put more money in?
Jason Hartman: And then we have an argument.
Mark Kohler: And then we have an argument. And then you want to sell. I don’t want to sell. And that’s where the fight gets and it’s hard to get out of a property with a situation of a TIC in that the court has to get involved to bifurcate the sale, force the sale. There are no buy/sell provisions. I just wish more clients would take the time to document properly. And it doesn’t have to always be an LLC. It could be a joint venture agreement, something, but we have to be careful. That’s that last scam is people not taking care of that good housekeeping skill.
Jason Hartman: Okay, so what are the cures? What are the ways to do it right?
Mark Kohler: Well, there are a variety of strategies based on your situation. And how I make sense of this in my book and for folks – and this is going to be, again, a huge resource to many of your listeners and your members – is that I create the story of a medieval battlefield, where your castle and your assets are at one end of these huge rolling hills of land. And how are we going to protect those assets? Frankly, the more assets you have, the more protection is required.
So the first point that I make to clients is that you have to realize it’s a barrier process. And some clients that don’t have a lot of assets, it can be very simple and affordable. I have a whole section on exemptions, protection with your Homestead exemption, and then you have the tenancy by the entirety, and your retirement plan exemptions and all these little, easy statutory laws that you can take advantage of. I call those battlefield strategies, simple, affordable things you can do.
And in those is included setting up an entity. If you’re going to do business or you’re going to buy a piece of real estate, is it an LLC? Is it a limited partnership? Is it a corporation? And that’s where the tax factors come into play and there are so many people giving asset protection advice that know nothing about taxes. That’s really the difference in a lot of these entities.
So I go through that, making sure that those basic, fundamental battlefield strategies are taken care of, and then we can add the moat, the barricades, and the earthworks that might include umbrella insurance and multi-entity structuring, or family limited partnerships or just a whole host of easier, more basic strategies that the little more successful investor might need to take advantage of.
And then I have the fortifying the castle strategies and these are strategies that are more elaborate. They take a little more work and cost. They’re typically going to involve trust work and maybe offshore planning, and asset protection strategies that we call DAPT, Domestic Asset Protection Trust.
Jason Hartman: The word “trust,” can you just explain? Everybody pretty much nowadays knows what a corporation is. There are two types, a C Corp and an S Corp. Everyone pretty much knows what an LLC is, but when you talk about trust, there are so many different types of trusts. Maybe just define for the listeners, if you would, Mark, what is a trust and how many different types are there? There’s like an endless variety.
Mark Kohler: You bet, and Jason, I’m glad you asked that question because you just caught me rattling. I was just rambling. And the hard part about that is there is just a toolbox of so many little asset protection strategies based on your situation. And so when I start rambling, I’m glad that you stopped me and said, Mark, just stop. Take a breath. What is a trust even because, again, a lot of these strategies we don’t have to be experts in, but a trust is going to be a fundamental tool in that toolbox. A trust is oftentimes, most oftentimes, nothing you’re going to record. It’s very private and there are charitable trusts, irrevocable trusts, revocable trusts, living trusts.
Jason Hartman: Spendthrift trusts.
Mark Kohler: Spendthrift trusts, beneficiary defective trusts, offshore trusts. I mean trusts go on and on. But the basic fundamental principle is there are three pieces to a trust. There’s a grantor, someone that is going to create this trust and put property into it. There’s a trustee, someone that’s going to manage it. It could be you or someone else. When you manage it, it’s typically going to be a revocable living trust and you’re in control, and there’s no real asset protection benefit. Revocable living trusts are an important part of an estate plan.
Then the third piece is the beneficiary. Who’s going to be the beneficiary during your life? It could be you; it could be children or grandchildren, or someone else. And so with that basic definition or understanding, then things get more elaborate from there. There might be a charitable beneficiary. You might have life insurance as the key asset in the trust. It might be real estate. You might be the trustee. You might not be. Is it irrevocable? Is it revocable?
And so when you sit down with a planner – now, this is the point, Jason, that when you sit down and look at your strategies and what is the advisor that you’ve been working with telling you. Is what they’re saying making sense? Do we have at least a basic understanding of it? Do we have a weird feeling that maybe this sounds too good to be true? Is it more elaborate than it should be? When those red flags go up in our minds, where do we turn? Sometimes we turn to a second opinion. Is there an attorney that we can trust out there?
And that’s where, in the last ten years, we’ve built our business and that’s what this book is about, is giving people a resource.
Jason Hartman: You know, Mark, I think one of the reasons there are so many scams in this asset protection world is that, No. 1, the buyers of it, they don’t really know what they’re buying. But No. 2 is this area of the law doesn’t get a lot of – it doesn’t get a lot of publicity. Everyone kind of knows that they might have a claim against them someday that could cause them to lose their money that they’ve saved and worked hard for and invested.
But it seems like a lot of these groups they just sort of sell people stuff and then it’s either never tested – hopefully, it’s never tested – but if it is test, it’s many years hence, and that lawyer isn’t around or that company isn’t around, and you just sort of don’t know whatever happens to it.
Mark Kohler: Well, I think that’s a good point that that’s where people get away with making promises in asset protection because who knows when that fateful day will be? And for 90 percent of the folks, that day never comes. So those promises were never tested. That’s why I threw 250 – 300 footnotes in my book of showing over the last 50 years what’s worked and what hasn’t, so at least we have a roadmap of the past. And those promises that people make we can rely on something.
But this is such a great point, Jason. People, I’ve been on several TV shows and I feel like John the Baptist. I mean I’m out there in the wilderness, trying to tell people how important this is, and it’s amazing. You’ve seen it in your groups out there. You talk about that 50 percent of Americans work as a sole proprietor. They just think that’s the way to do it.
Jason Hartman: That’s terrible. Boy, that’s amazing.
Mark Kohler: Yeah, they’re just sole proprietors. They don’t trust lawyers. They’re apathetic. They’re frustrated. And that’s really the group that saddens me the most is that people just give up and they don’t do any asset protection at all or tax planning. That’s my next book. They go hand in hand, the tax plan. It’s so important.
Jason Hartman: Yeah, no question about that. Tell us about the O.J. case a little bit because as I understand it, O.J. did two things well. No. 1, he had a big retirement plan and the retirement plan is kind of like a separate entity. It’s not subject to judgments, right?
Mark Kohler: It is not.
Jason Hartman: Daniel Petrocelli got that judgment for $33 million against him on the civil case and couldn’t touch it, right?
Mark Kohler: Yeah, absolutely. And he wrote a book about it. They could touch the revenue from the book sales, but his retirement plan they still could not touch.
Jason Hartman: But what about when he takes money out of the plan? When he takes distributions, isn’t that subject to the judgment?
Mark Kohler: No. They still can’t grab it. It’s amazing. And Jason, this is an important point. I talk to real estate investors a lot about it. Now, for those that are listening, obviously you wouldn’t be listening to Jason if you didn’t believe in real estate as at least a part of your portfolio, which I whole-heartedly believe in as a CPA. This is very, very important.
Well, when you do real estate, there are two types of real estate investors. There’s the ordinary income, operational, “I’m gonna turn property quickly” ordinary income strategy. And then there’s the buy and hold, or take more time, passive income strategy. Well, with a passive income strategy in rental property, there’s not much opportunity for a retirement plan. There just isn’t. But for those real estate investors that are creating ordinary income with a fix and flip, a short sale, a wholesale strategy, or some sort of rehabbing process –
Jason Hartman: They have a lot of tax liability.
Mark Kohler: They have a lot more tax liability, yeah. So where does this come in? The retirement plan. I love talking about the self-directed, individual retirement plan, the 401k, because it’s just what O.J. had. It’s the same thing that the NFL set up for him.
So, Jason, when real estate investors catch the vision of this, they can shelter so much income from their short-term real estate strategies and completely asset protected.
Jason Hartman: But they have to put in the plan. They can’t have the money.
Mark Kohler: No, they have to put in the plan, and then they can keep buying real estate with it.
Jason Hartman: With the plan?
Mark Kohler: With the plan. Obviously, anybody in real estate has heard about self-directing. It’s nuts the benefits of that. So here’s the point. I mean literally, you could rehab a property tomorrow, make $20,000 – $30,000 on it, take that money, put it into a 401k plan, and the contribution limits far exceed IRAs. My clients don’t do IRAs. Forget it. We’re health savings accounts and 401ks, baby.
But one that money is in the 401k on Day 2, you could literally be drunk driving tonight – I mean that sounds terrible. You could be out and kill someone on the freeway and no one could touch your 401k. So not only are you getting tax benefits. You’re allowed to continue investing it the way you want to. Now you can be completely asset protected, and that’s that O.J. Simpson model that so many people have been shocked about.
Jason Hartman: Well, the other thing that O.J. did is that’s why he moved to Florida, right because they had either an unlimited homestead exemption or a $1 million.
Mark Kohler: It’s unlimited in Florida.
Jason Hartman: Okay. So you might own a $5 million, $20 million house in Florida and if you own that house just outright, all of the value of that real estate – well, it has to be personal residence, though. It can’t be an investment property. All of that property that you live in, it’s shelter. They can’t touch that. They can’t force you to sell it. They can’t do anything, right?
Mark Kohler: Oh, no. It’s amazing. And I know you have listeners from around the country listening and this is why, in the back of my book, I have four different tables, appendices going over LLC and LLP variations, something we ought to talk about, too, Jason. But I have a whole table on the homestead exemptions. It’s Table C. Different states have different rules for this homestead exemption. You have unlimited exemptions in Florida, Iowa, Kansas, Texas, Oklahoma, states where if you move your domicile to those states, no one can ever touch the value of your home. And O.J. saw it coming. He moved his domicile even before the criminal court proceedings were over. He moved his assets to Florida, bought his home in Florida, and it’s never been touched since, and it’s just unbelievable.
So using the homestead exemption and using retirement planning exemptions, and I have a whole table in the back of the book about your retirement plan. How is it going to be treated in your state? IRAs are very different than 401ks.
Jason Hartman: Now, just one question on the O.J. thing. So O.J. is in jail now finally. They got him for something else.
Mark Kohler: Richest man in Clark County Jail. He’s still getting his retirement.
Jason Hartman: Probably true. But there are a lot of other criminals outside of Clark County Jail that are free, and they’re even richer. But if he sells that house in Florida, then he loses the homestead, right, and all the money from that sale is open to judgment or no?
Mark Kohler: No, because that’s the theory. That’s a great question. I apologize. I probably need to brush up on my laws.
Jason Hartman: I’m just curious because why would he want to keep that house? He’s in jail. Maybe he wants to liquidate that, and if he does, maybe then it becomes –
Mark Kohler: Yeah. That’s the thing is that a judgment cannot force the sale of your home. Now, if you were to sell it and take that cash, would it be subject? And you know, I don’t know the answer to that.
Jason Hartman: I’m thinking it probably would.
Mark Kohler: I have to write a note. This is in second edition.
Jason Hartman: What did you want to talk about in the table that you mentioned, the differences between LLCs and what?
Mark Kohler: This is an important point, Jason. A lot of people don’t realize this. A lot of folks say, “I’m going to set up my LLC to protect my rentals. To protect my real estate, I’m going to set up an LLC.” Now, that is a very loaded statement because the LLC is built in all 50 states to protect you from the rental, but it’s not to protect the rental from you.
So, for example, you get in that same car accident tonight and someone comes after you for killing someone.
Jason Hartman: Well, it doesn’t work. The shield is not that other way, in reverse.
Mark Kohler: That’s right. You have inside and outside protection, and I call this a “charging order protection entity,” something Jay Adkisson, a guy I quote in my book quite a bit – he’s an excellent attorney around the country on this – the “charging order protection entity” is very important, so folks, don’t gloss over here. What I’m talking about here is an LLC protects you from the rental. If something goes wrong with the rental, some renter gets hurt, there’s mold, or someone falls off the balcony, you’re protected as long as you weren’t a slum landlord. But if you get in that car accident tonight, can they get inside that LLC and liquidate that property, take it?
Jason Hartman: Sure.
Mark Kohler: They can.
Jason Hartman: Is there a way to protect that?
Mark Kohler: Well, in 13 states you have protection outside, so you can’t get in the LLC either. It’s from both directions.
Jason Hartman: Which states are those?
Mark Kohler: Well, we can rattle three of those, Jason.
Jason Hartman: Let’s read the book. You have to buy the book.
Mark Kohler: But no, we can go through these. We call these “charging order states.” And this is Appendix E. As you look at it, Jason, it’s the last appendix, Page 231. And you can look at Column 5 of Charging Order States. Now, some of these are important states.
Jason Hartman: Explain to the listeners what a charging order is.
Mark Kohler: A charging order is if you were in that car accident tonight from drunk driving – I’m just continuing with that theme; I apologize.
Jason Hartman: Do you keep mentioning that because drunk driving insurance doesn’t cover it?
Mark Kohler: Yeah, exactly. You’re dealing with a felony and so your umbrella insurance isn’t going to cover you. Your auto insurance isn’t going to protect you. So people are going to come after your assets at that point. And so do you have a homestead exemption? Do you have a retirement plan? Do you have a charging order protection entity?
So here’s the issue. A charging order is a judge that makes an order. So here’s the judge saying if I charge you, Mark, to not pay any money that comes out of this entity, this LLC, I charge you, I make an order of the court that you are to pay any money that comes out of that LLC to these people you’ve harmed. And that’s the charging order.
Well, the judge in these 13 states can’t force you to sell what’s in the LLC. He can only make a charging order that you’re going to give any of the money that comes out of the LLC to these people. That’s the order. That’s the charging order. So if you want – most of us want a charging order protection entity because they can’t foreclose on the LLC or dissolve the LLC. All they can give you is a charging order to pay any money. And of course, what do you do? Most lawyers walk away from this because they know that you’re not going to take any money out of the LLC, and so it’s a waste of time.
So important states that would affect us here on the West are Arizona, Alaska, Idaho.
Jason Hartman: What column are we looking at?
Mark Kohler: Column 5. And you want to have an entity in that area. Now, this is where Nevada jumps in. Nevada is asset protection from the outside. You have New Jersey on the East Coast, Oklahoma, Utah, and Wyoming. So California is a hard one and LLC in California does not protect the asset from you. It protects you from the renters.
Jason Hartman: Oh, very interesting.
Mark Kohler: Now if we go to a limited partnership, now we have charging order protection. See, if you look at Column 2, most states have limited partnership charging order protection.
Jason Hartman: But is that only if you’re the limited partner, or what if you’re the general partner?
Mark Kohler: Well, I would never make you a general partner, Jason. Your corporation would be the general partner. So, they would have to get through the corporation and they couldn’t do that either, so folks, here’s an important point. Jason, you’re going to love this.
Jason Hartman: I see this right here.
Mark Kohler: A lot of seminars you go to people sell the limited partnership because it gives you better asset protection.
Jason Hartman: Is this a family-limited partnership or is it just a limited partnership?
Mark Kohler: In asset protection, it could be either one. If it’s all family members, then it’s an FLP, family limited partnership.
Jason Hartman: I’ve heard that one used a lot.
Mark Kohler: Yeah, and it’s great. It’s good. We use it for estate tax planning and all sorts of good stuff. So here’s the point. When you go out to a seminar and people say in California, you need a limited partnership for better asset protection, they’re right. In California, a limited partnership is better than an LLC. But here’s the caveat: the IRS throws a wrench into this, and this is it. This is the earth shattering; this is the golden nugget of my book, Jason. You’re going to love this. A LLC doesn’t give you as good of asset protection, but it gives you better tax write-offs because when that depreciation and flow-through losses come from your rental property, which are a huge benefit of rental real estate – you know that – when those losses come through, you can write those off against your ordinary income as a real estate professional or active investor, but only if they come through an LLC. You can’t do that with a limited partnership.
So I don’t have my clients put their rentals in limited partnerships because we don’t get the tax benefit. So I use limited partnerships for the beach house, the second home, the cabin, the racehorses, the cash accounts, the Merrill Lynch account because they’re charging order protected.
Jason Hartman: Don’t have an account at Merrill Lynch.
Mark Kohler: You’re so funny, Jason. I love it. But where do we put our rentals? We put those in LLCs, and you may say, “But Mark, I’m not getting the best asset protection in California.” Well, here’s the point. You’re going to carry umbrella insurance anyway. You’re going to be stripping equity to buy more rentals as well. And your exposure is going to be very – you’re going to have two layers of insurance going. You have your LLC. It’s going to be hard for someone, not impossible, like an LP, but it’s going to be hard for someone to get in your LLC and you’re going to get the tax benefits. This is where comprehensive planning, the rubber, meets the road. This is where it really is.
So the LP/LLC distinction has a whole chapter in my book. I have a whole table on it because I want real estate investors to understand those differences because the taxman could screw up your asset protection plan. It’s crazy.
Jason Hartman: Oh, yeah. This is complicated stuff. One of the things that really sounds like a good opportunity to me, and we’ve had people come speak on it at our groups, is the Series LLC. And I noticed that and asked you about it because you have it here in Column 6. Only a few states do the Series LLC, but this seems like a really efficient way because you can just have one LLC with all of your real estate in it maybe. I’m hoping this is all true. Tell me in a minute. But my assumption is you can have one LLC, put all of your real estate in it, and I know some have like 16 sort of separate compartments or firewalls, and you don’t have to file 16 tax returns. That’s really nice. Or keep 16 sets of books. You just have one. And is it just one bank account? Can you have one bank account or do you have to separate the bank accounts?
Mark Kohler: You have to separate the bank accounts. And let me define this. You’re right on, Jason.
Jason Hartman: Tell everybody what a Series LLC is.
Mark Kohler: You’re right on. You’re very bright, Jason. I’ve been so impressed with you.
Jason Hartman: Be careful. I’m no lawyer. I’m just a hack.
Mark Kohler: Well, you know what you have is you’re the captain of your own ship. You’ve got the type of knowledge that I want my real estate investors to have. You’re not going to go out and do your own entity. You’re not going to do it online. You’re not going to use Legal Zoom. You’re going to use a planner. But you know enough that the planner isn’t going to take advantage of you and they’re not going to sell you crap you don’t need. And that’s the type of education I want my clients to get with their tax and legal advisors.
So anyway, in a Series LLC, folks, if you’ve never heard of this, a Series LLC is a special LLC where you can have subseries, and you can have as many as you want. You can have 16, 3, 5, 2, whatever you want.
Jason Hartman: Can you have more than 16?
Mark Kohler: You can have 20, 100, as many as you want.
Jason Hartman: Oh, really?
Mark Kohler: Yeah. So you can have as many subseries as you want. I have clients, like for example, I had a client this week that I was working with has 42 rental properties in Oklahoma. So we set up a Series LLC that had about 6 – 7 subseries and we put about 6 – 7 properties in each sub. Now, why we didn’t do a subseries for every rental is because you do have to have a separate checkbook for every subseries because who are the renters going to pay the rent to? They’re going to pay it to that sub-LLC and you’re going to collect rent in that sub-LLC, so you have to have a checkbook for that sub.
But the beauty is, Jason, you’re right on, one big tax return at the end of the year, one filing fee to set up the LLC in the first place, so you’re getting six or seven LLCs for the price of one.
Now, for the bad news, for those who are listening in California, we have the Terminator and the Terminator says if you’re going to have a Series LLC in California, come to our state. We would love it because we’re going to tax you $800 per sub to do business in California.
Jason Hartman: Oh, so they offer it in the People’s Republic of California, but they just charge you per sub?
Mark Kohler: Yeah, so you have that $800 minimum tax per subseries. I know. So I don’t have my clients in California set up a subseries LLC. But there are six states that have Series LLC. More states are coming on board with this.
Jason Hartman: It doesn’t show that on your chart. It says California doesn’t offer it.
Mark Kohler: That’s right. They don’t offer it.
Jason Hartman: Is it new here? It’s probably new.
Mark Kohler: Well, now here’s an important point. California does not offer the Series LLC protection. Moreover, if you bring a Series here, they’re going to charge you $800 per subseries. So no one does it.
Jason Hartman: What do you mean bring a series here?
Mark Kohler: Great point. You talked about this earlier, domesticating. So when you set up an entity in Nevada or Utah that has a Series LLC, and then you register it here in California because you’re doing business in California, that means you’re domesticating your corporation here. And once you do that, once you cross the border, like your Nevada entity – once you set up the Nevada entity and bring it to California, I have to register here as a foreign entity or else I don’t get any protection. Once I do that, California says great! We’re going to charge you $800 per entity. Oh, and if it’s a subseries, we want $800 per sub. It just doesn’t work here in California.
Jason Hartman: Okay. Hey, Mark, I have to ask you for some free advice and this example might apply to some other people listening.
Mark Kohler: Absolutely.
Jason Hartman: I am working on a deal with one of our clients, listeners that are listening now, and we’re looking to buy a pretty large property in Oklahoma. We’re going to set up an LLC to buy this together. We’ll fund the LLC together. And Oklahoma, I believe, has Series LLCs. But in which state do we set it up? Do we set it up where the first property is? I’m in California. This person is in Oregon. Those are both totally unfriendly states pretty much on every count.
Mark Kohler: Unless you need medicinal marijuana. Then you’re set. Then you’re hooked up.
Jason Hartman: Then you’re set, yeah. They want you to be really apathetic here and stoned out of your mind.
Mark Kohler: Yeah, you’ll pass any law.
Jason Hartman: These states are crazy. They don’t make any sense to me. Certainly not attractive to businesspeople, but I happen to live here, so here I am.
But what do we do? Should we set up an LLC in Oklahoma, and if so – I mean I’m not doing business in California, although I’m receiving income from the property and I live in California. But the property is there.
Mark Kohler: Yeah, and it’s a great question, Jason. A lot of people, again, overdo it and are spending for things they don’t need. You are here in California and your partner is in Oregon and you’re going to buy a property in Oklahoma. Well, the first thing is we have a great state to deal with. You have inside/outside protection.
Jason Hartman: Oklahoma.
Mark Kohler: In Oklahoma. And you’re going to set up the entity in Oklahoma. Heaven forbid we set it up in California or Oregon and then register it in Oklahoma. Now we’re paying filing fees in California and Oregon that we don’t need to and minimum tax of $800 in California, which we don’t want to do. And the point is here you are doing business in Oklahoma with that property. Not in California.
Here’s the trick, though. I would want you to set up the bank account in Oklahoma with a national bank like Wells Fargo or Wachovia where you can access branches here. But I wouldn’t want you to domicile the bank account here in California. This is one technique California is using right now to come after you for doing business in California.
Jason Hartman: I would think you’d put the bank account there. But here’s the question. You have a Series LLC in Oklahoma, for example, and then what happens if you want to pop some other properties into it. Some are in Texas, some are in Georgia, some are in the Carolinas. Do you know what I mean?
Mark Kohler: Yeah. Well, here’s what you do is – this is another – you’re asking great questions because these are golden nuggets of the book.
Jason Hartman: I don’t want to get in trouble.
Mark Kohler: No, it’s a good question. Okay, say I set up my Series LLC in Oklahoma and you and your buddy buy three properties. So we set up two subs, one for the parent and two subs. You have completely isolated asset protection in Oklahoma. They respect the Series LLC. You have the cost of one LLC. You’re doing business in Oklahoma. Everything is clean. Your bank account is in Oklahoma.
Then you go buy a property in – let’s use our first example – let’s say Utah or Nevada, another Series LLC state. Can I register my Oklahoma series in Utah or Nevada? Absolutely. So now you can immediately just file one document. It’s $52 in Utah. Now you’re doing business in Utah and you can set up as many subs as you want there.
So now you start buying some mobile homes or you buy some single-family home college rentals, whatever it is, and now you’re off and running. But, oh, now I’m going to buy some property, like you said, in Texas. So we go to our table and go, oh, does Texas have a Series LLC? Nope, Texas does not have a Series LLC.
Jason Hartman: Texas is so business friendly. I love that state. I’m surprised it doesn’t. Maybe it will get one soon. These are pretty new, right?
Mark Kohler: They are. They’re just in the last 4 – 5 years and they’re growing. So now we go to Texas with our Series LLC. Will they respect the Series LLC? The Series they will not. They’ll consider it all one big LLC. So if you go to Texas and you start doing business and buy two or three properties into a series and you say, oh, there’s a lawsuit on my property No. 5 in Texas. But it’s in the subseries. Texas will go, well, that’s great, and thank you for coming to Texas and doing business, but we’re going to treat your LLC as one big LLC because we don’t have a Series LLC statute.
Jason Hartman: If you get a judgment in Texas, it’s going to attack that whole LLC.
Mark Kohler: That’s right. Now, the subseries isolates the bubbles, so you have these little chunks. But more states are going to be getting it. So I tell my clients if you’re going to do business in a Series state, wonderful. Buy as many rentals as you can. It’s a great deal. But when we go out of there, we’re going to use other strategies. Again, Texas, where the Lord giveth, the Lord taketh away, Texas has an unlimited homestead exemption.
Jason Hartman: Texas is great in every other way. They just haven’t gotten around to this and I’m sure they will. They’re so business-friendly there. They have no state income tax. I mean how can you complain about Texas?
Okay, so what else should people know? We have to wrap this up. Mark, this has been very interesting and the book looks really interesting. I can’t wait to dig into it. What’s the big takeaway here that the listeners should know? Obviously, they should be talking to a professional, doing something. Don’t overspend for a bunch of junk you don’t need. You call those “mills” in Nevada and they just sell you everything under the sun.
Mark Kohler: They do.
Jason Hartman: It’s just ridiculous.
Mark Kohler: And I love that you warn them.
Jason Hartman: And they’re like telemarketers. You’re talking to some moronic telemarketer that just doesn’t know anything, doesn’t have any property, doesn’t have any entities himself, doesn’t know how this works. The other thing I want listeners to just remember is that this seems somewhat simple at first, but when you start getting all these separate bank accounts and all these separate sets of books and all these separate tax returns because I do this – I have a few different corporations and man, it just starts complicating your life pretty quickly to keep track and keep this stuff. It has to all be kept very separate. You have to be very careful.
The companies and entities can do business with each other, but they have to be treated as though they’re really separate people.
Mark Kohler: Exactly or that protection doesn’t happen. And before I give you a takeaway, I just want to echo that. That’s a great point, and in my book, I talk about the administrative process and processes that come with asset protection. People need to look in the mirror and say how anal am I? Am I going to keep track of this stuff or am I going to throw everything in a shoebox, because if you are, slow down, Tiger. Let’s get the right support group in there for you and make sure it’s properly handled.
My biggest takeaway, Jason, I just think is so important is that people need to be the captain of their own ship, and this book is a resource manual for that. What are the scams out there in asset protection? What really works? I’m working on a second edition. I have another book coming out on the tax strategies. It’s going to be the second companion book to this. These are resource manuals that people can use and I’ve found people are starving for this and they don’t know where to turn. Some of the biggest gurus that I quote in my book, around the country, have written books on asset protection. But you cannot understand the book!
And then you get the gurus out there that are selling crap and their books are understandable, but they’re selling garbage you don’t need. This book is in the middle. You can read it in one flight on an airplane. It’s a resource handbook that you can look at, and that’s what I want to challenge people to do is be the captain of your own ship. Understand enough to protect your assets and protect yourself from the scams that are out there and what’s really going to work. And folks, you’ll find strength in that. You’ll feel like you’re being a much stronger investor and you’ll be more successful.
Jason Hartman: Yeah. Where can they get the book, Mark?
Mark Kohler: Lawyersareliars.com.
Jason Hartman: Oh, that’s a great website.
Mark Kohler: That’s crazy. And I have a video on there where you can get a sense of me and I talk about why I wrote the book. And lawyers out there, you hear the title and I know you want to throw a dart at me on the wall. I get some hate mail here and there.
Jason Hartman: They know they’re liars, too.
Mark Kohler: Yeah, wake up to the truth. I’m just joking. The book is about the topic, Lawyers are Liars, and I talk about groups in there that call lawyers liars and all that. It’s an inflammatory title, but we’ve sold over 10,000 copies. It’s actually been out – this is our two-year anniversary this month, so it’s been out there. I’m working on a copy of this in Spanish, as well as the second edition, updating because the laws are constantly changing. Jason, thanks for having me here.
Jason Hartman: Good stuff. Mark Kohler, thank you very much and we’ll look forward to your new book on tax planning and maybe have you back on the show to talk about that one.
Mark Kohler: I would love it, and Jason, you are so awesome. Keep doing the good things you’re doing out there to help investors. I think it’s awesome.
Jason Hartman: You do the same. Thanks, Mark.
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Duration: 72 minutes