A Spendthrift Irrevocable Trust might just be the the asset protection strategy you have been looking for. It allows you to own nothing, but control everything.
Bruce Mack is a real estate investor, Licensed Financial Advisor and student of how Trust work to provide maximum asset protection and tax benefit. He utilizes Spendthrift Irrevocable Trust offered through Platinum Trust Group. His primary clientele are Real Estate Investors.
Insurance is a recognized first line of defense for protecting your assets. But when you read a policy and find the exclusions, you realize there is a potential gap in what could happen, and the coverage the policy provides. Bruce has multiple examples of clients who found out the hard way that their insurance was not enough. And, because they had assets, the court award required that their assets be liquidated. Here are a couple of examples:
That does not affect me because, I have an LLC. When you use an LLC, C-Corp or S-Corp to hold title of your real estate, you separate you, the individual, from your business that owns the real estate. This is referred to as the “corporate veil”.
This is a fairly straight forward strategy. If you own multiple properties, for additional asset protection, you may be advised to create multiple separate entities for each property, In theory, this makes sense, however, the cost to maintain and operate multiple entities is not cheap.
For each entity you create, you are required to pay separate state business filing fees. This is in addition to the tax return required for each entity. Multiple state fees and tax returns add another level of expense that reduce your profits.
On top of the fees, you must follow the formalities outlined in the corporate operating agreement and bylaws. Failure to follow these can blur and lessen the the distinction between you and the entity. When opposing counsel has been able to prove the lack of structure and record keeping, they have been able to pierce the corporate veil and hold the individuals personally responsible. This opposing counsel strategy is referred to as the “alter ego”.
Bulletproof asset protection. Your assets are protected when placed in a properly structured Spendthrift Irrevocable Trust. This deters opposing counsel from suing. If the opposing counsel were to sue and win a judgement, they would place a lien against the trust. This lien would be satisfied when the trust is liquidated. That happens 21 years after the last beneficiary dies.
Tax advantages for the trust. When your assets are placed in an irrevocable trust, all ordinary and capital gain income from rental properties go into the trust. Tax is due when one of two things happens:
Property held in a irrevocable trust can prevent the need for a 1031 exchange to avoid the taxable event. A trust can hold assets, receive income from those assets and pay the operating expenses required to maintain the trust. Only the distributions paid to the beneficiaries are taxed at the ordinary income level of the receiving beneficiary.
If you are selling an asset, or buying additional real estate, you should look at the protection provided through an Spendthrift Irrevocable Trust. Both asset protection and tax savings are reasons to look into the benefits of irrevocable trust.
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Each week I ask my guest what is the Biggest Risk they see that real estate investors face.
BIGGEST RISK: The chance of being completely wiped out due to an unforeseen event.
How to manage the risk?: Follow the advice I give my clients. I have placed all my assets in an Spendthrift Irrevocable Trust.