Asset Protection for your Real Estate Portfolio with Rich Dad Advisor Garrett Sutton

Asset Protection for your Real Estate Portfolio with Rich Dad Advisor Garrett Sutton

Today’s Flash Back Friday comes from Episode 947 originally published in January 2018. On this show Jason Hartman discusses the practice of asset protection for real estate investor and its importnce to portfolios. He brings on Rich Dad Adviser Garrett Sutton for a two part series where they discuss asset protection and LLCs.

Announcer 0:00
Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason is hand picked to help you today in the present and propel you into the future.

Garrett Sutton 0:12
Enjoy. This show is produced by the Hartman media company. For more information

Garrett Sutton 0:18
and links to all our great podcasts

Garrett Sutton 0:20
visit Hartman media.com.

Garrett Sutton 0:26
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 1:17
Welcome to the creating wealth show, Episode 947 947. This is your host, Jason Hartman, and listeners around the world. Thank you so much for joining us today. Why do I say us? Because I have got a guest doing the entire episode with me. He is a returning guest. He is a distinguished author and attorney. He also has been a speaker at meet the Masters for the last three years in a row. Many of you on your evaluations at the last meet the Masters said he needed more time. So I’m inviting him back and hey, you don’t even have to pay his hourly rate today. So it’s pro bono as they say in legal terms. Garrett Sutton Welcome back. How are you? Thank Jason, it’s great to be back. It’s good to have you. So you are a rich dad advisor, along with Robert, you know in Robert Kiyosaki book series and you’ve written many books, start your own Corporation, writing, winning business plans, loopholes of real estate, run your own Corporation, and buying and selling a business. And then you’ve got some books outside of the series. One I interviewed your co author who you did a great book with her on business credit, just got quite a distinguished career. I love your books, by the way, they’re funny, too. You know, they’re entertaining.

Garrett Sutton 2:34
Thank you, Jason. I appreciate it. I do enjoy getting up early in the morning and just sitting down and writing it is really enjoyable. So

Jason Hartman 2:42
well, that’s good. streets, keeps you off the streets. A good catharsis and also, yeah, just as some some good time, but you’re right, great stuff. And so we’re going to dive into some stuff and talk about asset protection today. In gear there are so many misconceptions Seeing this field, I hear them all the time. People ask, I can just tell they don’t understand it because they ask these questions that are just kind of obtuse. So we’re going to clear a lot of these myths up today, hopefully for the listeners, and we’re going to kind of expand on your presentation from meet the Masters, leaving out mostly at least leaving out all the stuff about the Socialist Republic of California, my former home state. So

Garrett Sutton 3:28
right there plenty of other places to invest. So let’s talk about the rest of the country. Yeah,

Jason Hartman 3:33
yeah, we definitely will. But hey, first, I want to share a quote, and it is from one of the Rothschilds. Now, as most listeners know, the Rothschilds are really the people that started modern banking, and who even knows what their this family’s net worth is. I mean, I’ve heard these insane numbers like trillions of dollars I mean, this is not on the Forbes 400 it’s way above that. It’s it’s like the nether lands, you know, here. Anyway, of course, we’ve had geogrid Griffin on a few times he spoke at meet the Masters the year before last now. And this Rothschild quote is such an important quote, and it goes like this, it says, Give me control of a nation’s money. And I care not who makes the laws, give me control of the nation’s money, and I care not who makes the laws. And I think the meaning of that Garrett, is that, you know, when you control the money supply, money is just, it’s sort of the context for life in general, after basic survival needs. Money is hugely important. And for those crazy people that minimize it and say, oh, happiness is more important than money, you know, grow up, seriously. I mean, grow up. You know, look, money is the Important in the areas in which it works, and it works in a lot of areas. Okay, it’s not everything, but it is damn important. Okay. You’ve heard that quote before, right?

Garrett Sutton 5:11
Oh, absolutely. And it’s kind of creepy it at one level and then it’s very sophisticated and another and the Rothschilds certainly believe that way and act that way. How many of the central banks in the world do they control? It’s almost all of them. Yep,

Jason Hartman 5:29
nobody exactly knows. But a Rothschilds are responsible for many wars, and many laws and just, I mean, control the money and you control everything. But Garrett, like I said before, I want to take this to another level, I would argue and you like music, you know, we went and we saw Ringo Starr and, and met him together when I was a highlight. That was just great. Yeah, you know what I mean to meet a former Beatle is Pretty cool, for sure. But you know, music is hugely important you like music I love music. And of course I wish you had stuck around at meet the Masters to hang out with our journey tribute band. They were so good. All I

Garrett Sutton 6:13
heard they were great.

Jason Hartman 6:14
Yeah, it was really good. So I’m going to make up my own quote here. Give me control of the music. And I care not who makes the laws or who controls the money.

Garrett Sutton 6:28
Well, that there, you get to the happiness quotient. Right? The music keeps you happy. And there is an energy to music. There’s an energy to money, so it’s all tied together. Yeah.

Jason Hartman 6:39
Well, that’s I like how you say there’s an energy to it. That’s certainly true. But you know, I mean, if you look at fairly recent musical history, and you look at how music changed the world, I guess the first mega change at least that I know of was Elvis Presley, right? That was a you know, bits before my time, but hey, I I watched movies. That was a shift. Yeah, that was the societal shift, total societal shift. And then the Beatles was, you know, written Of course, our man Ringo Starr was part of that that was a huge shift. And then each decade had its own flavor of music, of course, you know, hard rock and or classical classic rock, you know, Led Zeppelin and all the rest and just amazing, but, you know, I mean, so many people talk about how it’s kind of true but untrue at the same time, like the society is going down the tubes, we’ve lost the culture, war, blah, blah, blah. You’ve heard all this stuff. Right. And, you know, I would argue that that really began in about 1990. When the Seattle grunge music became popular when MTV was able to reach almost the entire planet. You know, Garrett, you’ve traveled extensively. So have I been to 81 countries? I don’t know if you’re keeping track but you’re probably you got a high number. They’re touring with Robert Kiyosaki and the rich dad advisors, it’s amazing, these kids around the world, they dress the same, the music is everywhere. You know, it just has such a long reach. And MTV was a huge part of that, in its heyday. And so, I don’t know, I think music is a pretty, it’s a pretty big deal. And in 1990, we had all this like, sort of caustic, urban, violent music, you know, and grungy music and that seemed like a big shift. I mean, do you do perceive it that way? You got kids that are in the age that were quite effective. Do

Garrett Sutton 8:36
you know, pre 1990s I would agree with you that the the music, at least for me was more enjoyable, more easy to listen to. I will tell you, my kids. I have three kids. They’re in their late teens, early 20s. And whenever we went on a family road trip we were listening to the Beatles were listening to the Rolling Stones. And you know now they admit to Africa. Having heard their own music for the last 10 years or so, they admit that our music was better. And I’ve heard other parents say the same thing that when you really get the kids listening to the music of our era versus the current music, which for me is almost indistinguishable song. Yeah, they do like the early music. They my kids just love the Beatles.

Jason Hartman 9:23
You know, that is amazing to me. I mean, many millennials I’ve met love the Beatles. And I was going to hire a Beatles tribute band. Rather than the journey tribute band that meet the masters. I really kind of struggled with that decision. So hey, a future event. You might be seeing a British Beatles tribute, as well. Hey, maybe now that we were in with Ringo Starr Garrett, maybe we’ll get him to come. I doubt it. He’d probably be a little expensive. But hey, we did get a photo op with him. So that was cool.

Garrett Sutton 9:55
He was a gentleman I really enjoyed talking to him. We had a very cordial nice chat.

Jason Hartman 10:00
Yeah. And he looks pretty great for a rock star. I mean, those guys usually wear themselves out pretty quick with a lifestyle right?

Garrett Sutton 10:09
Well, he he’s no longer doing drugs or alcohol. He’s a vegetarian. He told us he goes to the gym every day. Yeah, like you say he was in great shape.

Jason Hartman 10:18
Yeah, yeah. Well, good for him. Good for him. But But yeah, it’s it’s funny with the millennials like the Beatles. That does surprise me. But hey, it’s great, you know, music. That was just a simpler time back then for sure. So, so hey, speaking of complicated times, asset protection, no, but before we jump into that, I gotta I want to mention I want to remind everybody haven’t mentioned in a while. We have got a big event coming up. That is our trip to Sweden to go to the Ice Hotel. This is a bucket list item. Garrett. Maybe you should come. Okay. We are doing a venture Alliance mastermind trip but it’s also open to non members. You know, they’ve got a different rate of course, this is going to be a buck. gateless trip to the Ice Hotel in Sweden. first week of April. Go to Jason Hartman Ice Hotel calm. Jason Hartman Ice Hotel I know that’s a long domain name. Jason Hartman Ice Hotel com check it out bucket list item Can’t wait, hopefully to be sitting in one of those spas and the hot spa at night looking at the northern lights above me. I hope we’ll see him. It’s up to God. You know, we don’t get to schedule the Northern Lights, but be pretty cool.

Garrett Sutton 11:30
That sounds like a great trip. Jason. Yeah, it’s gonna it’s gonna be fantastic. And I heard of that hotel. Yeah,

Jason Hartman 11:35
go ahead and melts every year. So this this is the 28th year they’ve built it. And yeah, it’s going to be phenomenal. So Jason Hartman Icehotel calm. hope you’ll join us and we need a few more people to greenlight that trip. So go check that out and get your tickets for that today if you’re interested. So asset protection, Garrett, there are so many misconceptions about this. I commonly hear people make these statements that just you can tell they don’t get it. They say things like, well, what if my tenant sues me? And what if I get sued outside of like, you know, what if I get sued for a car accident and my insurance, you know, maybe it’s above my insurance limits, or if I get sued in my business, or a lot of doctors asked this question, what if I get sued for medical malpractice? You know, saying make a mistake, and I get sued for that? Can they take my properties? So this is the concept I want you to explain to the internal and the external threat. This is a foundational principle that people have to understand about asset protection. Now, here’s another one for you, Garrett. I’ll give you some stuff to chew on here before we dive in. Another one is I hear people sort of make these Cavalier statements about well, I’ll get an umbrella policy know what they like. What does that mean? Do you even know what that means? The umbrella policy only is an umbrella over certain assets from internal liability on those assets, right? Not an external liability. So, gotta dive into that a little bit for us.

Garrett Sutton 13:09
All right, well, let’s talk about the inside attack versus the outside attack. And And do we have a slide to refer them to Jason?

Jason Hartman 13:18
Yes. We, you were very kind to donate your PowerPoint slides that will explain this stuff. And they can go and they can get this at Jason Hartman, calm right in the show notes for this page. We will put the slides there. And so just Jason Hartman calm and just this episode 947 and they can grab the show notes that will include your PowerPoint slides. So thank you for doing that.

Garrett Sutton 13:45
Sure. Well, let’s look at the first slide and we have a picture of a California LLC. Joe is the owner of it. And we are distinguishing between the two types of attack that you can face the first attack is called the inside attack and that’s when a tenant falls at the property and is suing the landlord of the property, which is the California LLC. If your name was listed there as the landlord, if you were on title, the tenant could sue you personally and reach all of your personal assets. In this case, because the California LLC is on title to the property that to the tenants dealing with their claim is against the California LLC, they can get the equity inside that LLC. Now, of course, hopefully you have insurance. But let’s say it’s a horrific claim. And the tenant wants to get what’s inside there and his attorneys on a contingency fee does too. If you only have one property inside that California will see they can get the equity in the one property. If you have 20 properties in there, they can get the equity and all 20 properties. So this is Kind of a foundational point, how many properties do you put in one LLC? And this is a judgment call on your part. How What do you feel comfortable with?

Jason Hartman 15:11
Right? And really the question is not how many properties do you put in one LLC? How much equity do you put in one LLC? Because if those properties are highly encumbered and leveraged, then you know, there’s not much to get right. And so they may not pursue it. But why are we even talking about California? Again? What’s the significance here? Or are you just saying using an example like someone might own a property in California and this is what they’re doing? Certainly better.

Garrett Sutton 15:42
strategy behind this slide. Okay, good.

Jason Hartman 15:45
Tell us more.

Garrett Sutton 15:46
So, the inside attack applies in all 50 states, right, whether it’s a North Carolina LLC, a Wyoming LLC, whatever state it’s in, if the tenant sues they can get what’s inside that LLC. applies in all 50 states now. The outside attack is a different animal. That is where you get in a car wreck. It has nothing to do with the real estate there in California in that California LLC. But you have a car insurance rate that is not good. The company doesn’t cover you. It’s again a horrific attack where there’s a lot of damages. And the car wreck victim and their attorney on a contingency fee wants to get it that California real estate that will help satisfy the claim they have. And in California, the law is really weak. The courts in California say to the car wreck, everything Joe caused the accident Joe’s at fault. You can blow right past Joe get into his LLC and force a sale of everything. And so California that’s why we Put the slide up this way, is the weakest state in the union.

Jason Hartman 17:04
Okay? Okay. So that’s the reason so look, a lot of people listening don’t live in California. They have nothing to do with a socialist republic of California, but many of them do. So in other words, California, and we don’t need to keep harping on this California stuff, but they have really bad asset protection. Not only is it overtaxed, overcrowded and overrated. And I say this, it’s, you know, the place I lived most of my life, and it’s where something like 40 million people live. So it’s a very significant state. Obviously, it has very weak asset protection, it’s a very good place for a plaintiff in a very bad place for a defendant. It’s a very good place for the little guy, a very bad place if you want to accumulate any real wealth because you’re always susceptible to attack either from a creditor a lawsuit, probably a divorce, too, although we never really talked about divorce law. Put. And then also, of course, you know, the taxation and such is another issue,

Garrett Sutton 18:06
right? And so we just have to be aware when we’re dealing with California properties, we have to structure things the right way. So if we go to slide number two, we have a California LLC, owned by a Wyoming LLC. I like to have things flowing downward. That’s how the cash flows is downward. So we have the California LLC and slide number two on title to the property. And again, if a tenant sues it’s an inside attack against the California LLC who they’re renting from California, though, is owned by a Wyoming LLC. And Wyoming has superior asset protection laws. So when the car wreck victim says, you know, Joe, you owe us some money when they come from the outside and try to get past Joe into the Wyoming LLC so they can reach the public California, the State of Wyoming says now we don’t do it the way California does. We don’t let you get into that Wyoming LLC and force the sale of everything in there. Instead, our remedy is called the charging order, meaning you are entitled to distributions from the Wyoming LLC to pay the car wreck victim, but you can’t barge in there and force the sale of all the assets. So we like the charging order procedure, because the attorney on a contingency fee case doesn’t want to sit around and wait to get paid and have to monitor distributions from the Wyoming LLC. I always like to have my clients have a umbrella policy of insurance for home and auto that provides a million dollars of coverage for 400 a year in most states and the attorneys know how to get it that Jason but they’re not good. bursting through the wild. LLC and they don’t want to spend the time to do so. I mean, attorneys are rational economic animals, they’re going to take the next case that has more insurance money. So that’s the feature that we wanted to explain in slide number two. Okay.

Jason Hartman 20:14
So if someone doesn’t live in California, and they don’t own real estate in California, does this matter to them?

Garrett Sutton 20:22
Yes. Okay. This slide applies to the person who lives outside of California. And they own real estate inside California.

Jason Hartman 20:33
does it apply to someone who doesn’t do either they don’t live in California, they don’t own California? Oh, yes, this would apply to that. I’m sorry. This would apply to that person to the person who has lives in Oregon has an Oregon LLC for the Oregon property could still have the Wyoming LLC, even though they live in Oregon, protecting their Oregon or other out of state LLC, okay, so let’s just make sure everybody understands that your own Using California as an example, this could apply in any state. So for example, now a lot of people do live in California. I hate almost keep mentioning that because I think I’m confusing people. But just stay with us for a minute. You live in California, you live in New York, whatever, right? Too weak states, right? tax overrated and bad asset protection and both of them. You live in one of those, for example, you own investment property in Tennessee, Texas, Georgia, Indiana, right. So you own and those four states just as an example, if we’re investment property, but Wyoming is your favorite state as far as asset protection. So what are you going to do then? Are you going to set up a Wyoming LLC and then domesticated in Texas, Georgia, Indiana, are you going to set up an LLC in Texas, Georgia, Indiana, you know, Tennessee Then have the Wyoming one own, those

Garrett Sutton 22:03
have to be slide number five. Okay. So yes, that’s to give you a hint. Yes, what you said the second thing is what you’ll do, but we’ll we’ll look at slide number five and explain that to people. Okay, go ahead. slide number three deals with the California resident. And California’s law is really strict. If you have a California property and a California LLC, of course, you’ve got to pay the $800 a year the minimum franchise fee to California, but that’s not enough for them. If you use the Wyoming LLC for the best asset protection, and you’re a California resident, the state of California says All right, Joe, you’re managing a Wyoming LLC from the state of California. Air go the Wyoming LLC is doing business in the state of California. Pay us $800 a year for that one. And so in slide number three You would have to pay 800 for the California will see at the top and another 800 for the Wyoming LLC qualified to do business in California, right, but

Jason Hartman 23:10
it’s not the $800. That’s I mean, Cal, they’re rip off because it’s the highest price state in the Union, charging $800 a year even if you don’t make a penny, but it’s not that that’s the worst thing to add insult to injury, when you domesticated in that state. Does it then become subject to the laws of that state or does it retain that great Wyoming charging order asset protection?

Garrett Sutton 23:35
We don’t have a case on that. Okay. All right. So we have a strategy in slide number four, whereby we assert that Wyoming law will apply because we hold the certificates in the State of Wyoming. This is how banks handle financing transactions where they want that LLC security interest to be theirs. They will hold the certificate And that’s what we do for our clients in Wyoming. We call it armor eight. Here’s the reason we do this. If you live in California, and you hold your Wyoming LLC certificate with you in California, a California Court could say, that’s personal property that I oming certificate with you in California is your personal property in the state of California. So we’re going to let an attorney reach that certificate and gain control of the LLC. Our strategy is to hold the certificate for our clients in the State of Wyoming. And if an attorney in California wants to get at that Wyoming LLC, they have to go to Wyoming get a group to have us provide them with that certificate once they do that, Wyoming law wise. So we’re setting this up so that Wyoming law applies which is much stronger as we’ve discussed in California.

Jason Hartman 24:57
Okay, whenever you hear the word, California Yeah, you can mostly in this discussion substituted for any state. I mean, not exactly. But most of Well,

Garrett Sutton 25:07
you’re right, Jason, New York would be the same way. George is pretty weak, Utah’s really weak. And so you would want to have the armor rate certificate strategy used when you live in a state that has very weak asset protection laws. Now, for example, if you live in Texas, and you want the Wyoming LLC protection, you don’t have to qualify the holding Wyoming LLC in the state of Texas. So you don’t need armor aid. In that case, you just need it for the strong the weak states. Now why do you call this armor rate? It’s based on the Uniform Commercial Code, which is the law in all 50 states UCC, UCC and it’s section eight that allows for the certification of membership interests, and So we just, it’s section eight. And so we just call it armor aid is a way to explain and identify the strategy. It’s based on UCC section eight, okay. And I mean,

Jason Hartman 26:11
Garrett, that’s not a gimmicky thing. Like, you really need that. It seems crazy that in today’s world, we gotta pay to have a piece of paper stored in another state, or is there more to a nap?

Garrett Sutton 26:24
No, that’s what we’re doing. And we don’t recommend it for our clients that live in good states. It’s just if you live in a state like California, we want to protect you as as best we can. Again, we don’t have a case on this one either. But it’s only $75 a year. And we want to we want to protect you as best we can by holding that certificate in the State of Wyoming and if attorney in California is coming after you, you would tell them look, the Wyoming LLC, membership interest is up in Wyoming, you’re going to have to go get it and We want to put up as many roadblocks as possible whether they’re real or perceived. And some attorneys are going to be put off by this, some attorneys are going to say I’m just going to wait for the next insurance case to come along where the money is much easier than having to hire an attorney to fight for a court order in the State of Wyoming.

Jason Hartman 27:19
Okay. All right. What else do people need to know? I

Garrett Sutton 27:22
think people need to know that the LLC law is a developing area of law, LLC is have only been around for 40 years. And with the collapse in 2008, we had a lot of banks going after LLC interests and you know, the law is starting to get fleshed out, but we don’t have all the cases that you would want for the certainty so we don’t have a case on California versus Wyoming. We don’t have a case on armor eight, but I did mention that we we did have slide number five, that really your question dissipated, how we would structure things whether you’re in California or any other state. In slide number five, we have a situation where we have a Utah property. In a Utah LLC. We have a Florida property in a Florida LLC. Those two are owned by one Wyoming LLC. And if someone Sue’s you in that car wreck and wants to get at the Utah and Florida properties, they again have to fight through the Wyoming LLC. Wyoming says the court in Wyoming says you’re you’re entitled to a charging order, meaning you can receive distributions that the Wyoming LLC makes to Joe but unlike California, you can’t barge into that LLC and force the sale of the Utah property or the Florida property rights in other words in in in weak states, the law allows the creditor or the Plaintiff to foreclose on the assets of the LLC or corporation. But I in favorable states like Wyoming, and I think Delaware is this way to possibly, and some others are pretty good. I mean, they all vary, but they only allow them to get a part of the distributions that are taken out. And your premise is, well, you know, maybe you never need to take a distribution you can just make them wait forever and, and the ideas that will encourage some sort of a settlement or they’ll just go away, right? Absolutely. Right. Jason, you You nailed it. The you tie LLC, perhaps it needs a new roof so it doesn’t make any distributions it puts on a new roof. The Florida LLC needs to pay someone to do some work on the property so nothing is distributed to Wyoming. Air go there from Wyoming from there’s nothing distributed into it. Coming right from Florida, Utah, so that Wyoming doesn’t have anything to distribute to Joe.

Jason Hartman 30:06
Right. But there’s no rule that like if that Wyoming LLC has $10 million in it, there’s no rule saying you have to take a distribution out of it right or is there?

Garrett Sutton 30:18
No there isn’t. Some states would say, this is Utah’s law, for example, that if the creditor the car rape victim is not going to get paid in a timely fashion with the charging order, then they can go in and and foreclose on the interest. Now, part of me says yeah, they were in the car wreck they should be able to foreclose, but the you know, to protect my clients interest, I want to use the strongest state possible. And that is Wyoming there was a case recently where the exact same cases we have on this slide, Jason, there was a car wreck. The person wanted to get at the entrance. wrist inside the Wyoming LLC, it gave the opportunity for the person being sued to settle at a discount. So instead of settling for the full amount they were able to settle for 10 cents on the dollar. Now that’s a win. For Wyoming LLC provided a win for this client. They didn’t have to pay 100 cents on the dollar. They just paid 10 cents on the dollar. Everybody moves on the car wreck causer Joe was able to keep his properties this will be continued on the next episode. Thank you for listening and happy investing.

Jason Hartman 31:41
Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own and if you require specific legal or tax advice or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.

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