Minimizing Commercial Real Estate Exposure With Brian T. Bradley, Esq., Real Finds Podcast #25 Transcript
Gordon Lamphere: Hi, I’m Gordon Lamphere with the Real Finds Podcast, a podcast series where we interview key entrepreneurs, scientists, and activists who are shaping real estate and, as a result, our world. In today’s podcast, we’ll be speaking with Brian T. Bradley. Brian is Senior Managing Partner at Bradley Legal Corp and an advisory board member of the Asset Protection Council. On the podcast, Brian gives a masterclass on asset protection planning and discusses the costs and benefits of both domestic and foreign trusts. For real estate investors or their agents seeking to better safeguard their assets, this episode is well worth a listen. Brian, thank you so much for hopping on the podcast.
Brian T. Bradley: Thanks, Gordon, for having me on. It’s an important topic. I’m going to try to keep it fun and not legally dense. I’m not anyone’s attorney or legal guru here; we’re talking in generalities, and I think we’ll all learn a lot today. I hope the concepts we break down help you and your listeners understand this area of law, asset protection, and specifically asset protection trusts.
Gordon Lamphere: Before we get into it, why real estate? There are a lot of reasons people get into the industries they do, but why real estate law and asset protection?
Brian T. Bradley: I don’t really do real estate law. It’s just that most of my clients who have assets also own real estate. It’s another asset class you can invest in. Why asset protection? Because when you own stuff, you’re a mark. The more you have, the more visible you are, the bigger your red button is. So we have to make sure we protect ourselves from people trying to take your hard-earned cash and assets.
Gordon Lamphere: How did you get into law? I’m a J.D. who decided not to take the legal route. What inspired you to be a lawyer?
Brian T. Bradley: At first I wasn’t sure what I wanted to do. I was a college athlete and thought I might become a Navy SEAL, jump out of airplanes and blow things up. I was taking a bunch of philosophy classes, and my mom said, why don’t you go to law school? She talked me into it, and I figured I’d add it as a tool in my toolbox even if I didn’t practice. Then I just fell in love with law. I didn’t get into asset protection until four or five years into practicing. I was doing a lot of trial work, and I came into asset protection from the litigation side, where most people come from estate planning if they do it at all. I got tired of seeing clients being sued and having their lives turned upside down, coming to me after they were already being sued. At that point you’re too far down the rabbit hole. It’s like trying to get car insurance after the accident, or after your house caught on fire. It doesn’t work.
A lot of people think they don’t need to do anything until after the fact and just ride Lady Luck, but that’s wishful thinking. There are a couple of other misconceptions. They think insurance will always cover them, which it won’t. Insurance is important, you need good insurance, and I’d even say get an umbrella policy. But we’re seeing more and more claims radically in excess of coverage. Being underinsured is a big problem, and so is having your insurance company walk away from your claim, especially large claims. How does insurance make money? They take your premiums and don’t pay large claims. Umbrella policies, same thing. And a big one is thinking their family estate plan, the revocable living trust, will protect them. They lump everything into one category: I have a trust, a trust is a trust. But those aren’t designed to protect your assets. They’re completely different types of trusts, which we’ll break down. Asset protection hits all the areas of law I’m passionate about, investing, finance, tax law, and my trial experience, in one area, while helping people protect everything they have.
What Asset Protection Is
Gordon Lamphere: It blows my mind that you have trial experience, because it’s common for people to come into this from a wills and estates viewpoint. Let’s talk about what asset protection is from a legal standpoint. It’s a big term. What does it look like for a real estate investor?
Brian T. Bradley: That’s the great starting point. It’s not traditional estate planning; it’s modern estate planning. We’re placing a legal barrier between your assets and a potential creditor, the people suing you and trying to collect your money, before it’s needed. You’ll hear me say that a lot: before it’s needed. It’s a barrier, like a safe for your gold or your guns or your valuables. Anything of value, you want behind the legal barrier and out of your personal name, so it’s not easily attached with a lien or reached. Just like the rich. I love the Tony Robbins saying, success leaves clues. The rich don’t own things in their personal names. Their businesses do, their trusts do. They get the beneficial use and enjoyment while separating out the liability.
And it’s not hiding money or moving assets to avoid taxes. I get this call all the time: I want to set up asset protection because I don’t want to pay taxes. That’s illegal. You’re taxed on your worldwide income, especially as a US resident. Asset protection is not tax mitigation planning. We’re protecting your assets from being lost to creditors and plaintiffs trying to take your money.
Layering Protection Like Winter Clothing
Gordon Lamphere: When you’re developing an overall risk management and asset protection strategy, where’s the first place you’d recommend most people start?
Brian T. Bradley: It depends on their profile. Do they have nothing? A few assets? Or, I’m a surgeon investing in commercial real estate with over a million dollars in exposed net worth? I’ll break it down with an analogy: winter. The tools we use are different layers of protection: LLCs, limited partnerships, and asset protection trusts. Where you land depends on your risk profile, your net worth, and what you own and how you own it. When it’s really cold outside, we wear different layers.
The first layer is your base layer, the one on your skin. That’s an LLC. This is when you’re just starting out, with zero to three properties, and your exposed net worth is generally below $250,000. It’s worth defining exposed net worth. Your 401(k) is not exposed; it’s exempt from creditors through ERISA protections. Some states like Florida and Texas have really good homestead exemptions protecting the equity in your primary home. So we’re looking at what’s not exempt and protecting those assets. When I analyze a client, I ask what the value is, what the equity is, and what’s already protected versus what’s not. The protected things come out of the equation, and we look at exposed net worth.
As you grow and hit around the four-property mark, probably investing in multiple states or with multiple LLCs holding your risky assets, you’re generally around $500,000 to $700,000 of exposed net worth. That’s when you add a mid layer, a little thicker, like merino wool, or a cardigan for the ladies listening. That’s a management company. We specifically use limited partnerships for this. Some people use a Wyoming LLC, and I can get into the differences on this show or another one, because there are specific reasons. The second layer cleans you up from a tax perspective so you maintain one tax filing, gives you an easier way to manage all your assets, and lets us connect the final layer.
That outer waterproof shell comes once you hit around a million dollars of net worth. This keeps you dry and warm when the weather is really bad. It’s your doomsday lawsuit protection layer, the hybrid asset protection trust. We call ours a bridge trust. By layering like this, you’re more flexible and can adjust for comfort. When you’re shopping around figuring out what to do, remember the acronym ECCC. You want your plan to be effective. You want to control your plan. The cost has to be reasonable and sustainable wherever you are in your journey. And it has to be easy to maintain IRS compliance on. We can create the most elaborate thing in the world, but if you can’t maintain compliance and keep paying for it, you won’t, and it falls apart. Effectiveness, control, cost, compliance. The more of those boxes we check, the stronger the system.
Where to Form Your LLC
Gordon Lamphere: You mentioned out-of-state protection. Can you expand on Wyoming management companies and some of those more in-depth protections?
Brian T. Bradley: That goes to the first layer, asset protection 101, LLCs. We use limited liability companies as holding companies for risky assets like real estate. Anything that has a key, needs insurance, or can go boom goes into an LLC. The issue is where to set them up. You hear about Delaware, Wyoming, Texas, Nevada. It comes down to what you’re holding and where you’re holding it. A lot of attorneys who don’t practice exclusively in asset protection, and CPAs doing tax mitigation, really convolute this.
Say you own California real estate and you’re a California resident, and you set up a Wyoming LLC to hold that California property. You’re paying California franchise tax on that Wyoming LLC. What you’ve done is convert your Wyoming LLC into a California LLC, because you’re doing business in California. If you ever have a lawsuit in California, the judge in California applies California law, not Wyoming law. The judge doesn’t care where the LLC is registered. What matters is that it’s doing business in the state where the asset is. In legal terms, you’ve availed yourself of the protection and laws of the state of California. That’s the state the asset is in, where the injury occurred, where the damage occurred. That state’s laws apply. You don’t get to take Wyoming or Delaware tort and personal injury laws with you to another state. You can’t buy another state’s more beneficial laws. That’s what people get confused on. The general rule of thumb, especially for real estate, is to create the LLC in the state the asset is in. Tennessee property, Tennessee LLC. Florida, Florida LLC. California, California LLC. When we get to the management company, the second layer, we can start picking better jurisdictions, because it’s an actual management company, not where the lawsuit starts, and we can cherry-pick stronger charging order protection.
Gordon Lamphere: Very insightful. Why apply that extra protection through a management company? For a non-J.D. listener, why is that layer a great way to protect against issues that occur on a property in a less favorable state like California, Illinois, or New York?
Brian T. Bradley: For one, you get sued initially through the LLC, because that’s where the injury occurs. The lawsuit goes through the holding company. I’ll stick with California, because I like beating up on California, and I practiced out there a long time. Now you want stronger jurisdictions with charging order protection: Wyoming, Delaware, Arizona is a really strong one, Nevada. When I’m trying to pierce your veil and hold you personally accountable, one of the easy arguments against an LLC, especially for real estate, is that this isn’t a business. It’s just an extension of you holding assets. Nine times out of ten, that argument alone pierces the veil. Next, a lot of people are bad at managing money. They funded the LLC incorrectly. They’re commingling assets, using business assets for personal use, forgot the personal card and bought groceries on the business card. Your veil just got pierced, and now we can come after everything you have.
What you want is an actual management company acting like your business, holding all the assets you’re managing for yourself, with a real business purpose. That’s when we use stronger jurisdictions like Wyoming, Delaware, and Arizona. Charging order protection says we won’t hold the members of the limited partnership or LLC fully liable; we limit how much they’re liable for. Some states have strong ones. California and New York have very bad ones. I specifically like Arizona, and it’s surprising it’s the only state that does this: Arizona has a specific statute, 29-222, that allows what’s called a unilateral withdrawal on demand. Once we connect the trust to the limited partnership and you have a massive, multi-million-dollar doomsday lawsuit, the trust can demand all the assets the limited partnership owns and legally disconnect from it. Arizona is the only state that allows that by statute. You can try to do it creatively with LLC operating agreements, but you have to submit those to judges for judicial determination, and you’re basically saying, please rule in my favor. It’s a scary place to be, and most judges will say no, that’s not what LLCs are for. That’s why we use limited partnerships as the second layer rather than LLCs, in strong jurisdictions like Arizona.
Understanding Trusts
Gordon Lamphere: Say you use Arizona and you want that snug third layer. For somebody with eight or ten properties, what do you recommend?
Brian T. Bradley: That’s where the asset protection trust comes in. A great way to understand it is to break down what trusts even are and compare them, because people find the world of trusts confusing. They link the word trust to everything, like ice cream, but there are different flavors. If you don’t mind, let’s spend a little time on that.
Gordon Lamphere: I’d love to. As somebody who took trusts and estates, even my eyes glaze over occasionally. What are the standard trusts you see applied in real estate?
Brian T. Bradley: This is the final layer, your bad-weather outer shell, like we’re in Siberia or a massive storm came down on our ski trip. It’s the heart and soul of the system. Trusts are the longest-lasting entity of all for holding assets. Done right, they’re very strong, they can be sculpted to fit how you need them, and they morph as you need without the funding issues that get LLCs and business entities pierced all the time. I love trusts. What’s really important in creating an asset protection trust is picking the proper jurisdiction.
Like Baskin-Robbins, trusts come in lots of flavors. The 101 trust everybody knows started in the 1960s as the family revocable living trust. Trusts don’t die, so when you do, if you’ve funded the trust by transferring title to your home into it, you don’t have to go through probate. That completely changed estate planning. Then there are land trusts, which you hear about in real estate investing shows. They hold your land and connect to LLCs, but land trusts have no protection in and of themselves. They’re only as strong as the LLC they’re connected to, and we just talked about how weak LLCs can be. Land trusts are a privacy mechanism, not a protection mechanism.
Then you have the higher level, asset protection trusts, and I want to spend time on the three types. After this, your listeners will know more than 99% of attorneys out there about asset protection trusts, so you can start drilling them with questions. Asset protection trusts came into effect in 1984. They’re self-settled spendthrift trusts. Self-settled means you’re creating it for yourself: by you, for you, as your own beneficiary. And they have very important spendthrift provisions. That lets you protect your assets from creditors while you’re living, without relinquishing control. In the past, you could protect assets for your grandkids when you passed them on, but not for yourself.
You’re familiar with one self-settled trust already, the revocable living trust. Many of you, your parents, grandparents, aunts, and uncles have them. The asset protection version is the same in that it’s self-settled, but it includes those critical spendthrift provisions, which are the provisions that protect your assets from the people suing you. They’re the teeth. For them to work, the trust has to be irrevocable rather than revocable. It’s a very different type of trust, like chocolate and vanilla, both ice cream, very different flavors.
Irrevocability confuses a lot of people, but it’s simple. Irrevocable means once an action is done, it can’t be undone. Once you jump off a bridge, you’re off. There’s no coming back, unless you have a bungee cord. In the legal world, the term has more nuance, especially with irrevocable trusts. As a starting point, creating an irrevocable trust is like jumping off the bridge. Once created, you can’t revoke it. Its purpose and terms are fixed. But that’s not always the case. It’s possible to create a trust that’s irrevocable, meaning you can’t revoke the trust itself, but still have flexibility in its terms, including who the beneficiaries are, how assets are distributed, and the conditions under which certain actions can be taken. We’re attaching a bungee cord to portions of the trust so we can modify them later. That’s known as flexible irrevocability, and courts are completely fine with it. So there are ways to use irrevocable trusts with solid spendthrift provisions that keep your own money accessible to you and keep creditors away, while removing the risk of US courts tossing the trust. We do that by using really strong jurisdictions, like the Cook Islands, with hybrid offshore trusts.
Domestic, Offshore, and Hybrid Trusts
Gordon Lamphere: You mentioned the Cook Islands and offshore trusts. Even relatively sophisticated investors hear offshore money and picture islands and drug money. What is an offshore irrevocable trust, and how does it work?
Brian T. Bradley: Remember, there are three options: domestic trusts here in the US, offshore trusts in countries like the Cook Islands, the Caymans, or Belize, or a hybrid combining the strongest portions of both. Historically, the offshore trust came first, in 1984, with the famous Cook Islands creating the first asset protection trust. I like the Cook Islands best. They’re the strongest and have the best home-court advantage. They have this magical thing called statutory non-recognition of any other jurisdiction’s court orders or judgments in the world, including the United States, with an insane amount of case law over 40 years, up to the Supreme Court. It is literally the strongest thing you can create. There are a lot of statutory hurdles to get through, and no one’s ever been able to, not even the US government.
On effectiveness, it’s the most effective trust in the world. But everything has drawbacks. Remember effectiveness, control, cost, compliance. Effectiveness, five stars. Drawbacks: control, you have to be out of control for it to work. Cost, very high, generally around $50,000. Compliance, really hard, with mandatory FATCA disclosures that are very expensive. We tell people to plan on ten to twelve thousand dollars annually just to maintain it. Most people say, that’s the strongest thing in the world, but it’s overkill for me. So they create a domestic trust.
The domestic option came about ten years later. Of all places, Alaska started it. Then Wyoming, Delaware, and Nevada said, this is our domain, and came in as well. Now about 19 or 20 states have some form of asset protection statute. The issue is that not every state recognizes them. California doesn’t have self-settled spendthrift legislation, and there’s a specific case, Kilker v. Stillman, that said, we’re tired of California residents running off to create out-of-state Nevada asset protection trusts when they’re not Nevada residents; we don’t recognize them. That was upheld by the Court of Appeals. We also live in the US with the Full Faith and Credit Clause, Article IV, Section 1 of the Constitution, so we can’t just run away from other states’ court orders. Nevada can pass an asset protection statute, which it has, but it can’t ignore a California, Washington, or Florida court order. Where the Cook Islands can throw that California judgment in the trash, Nevada can’t. It has to respect it and litigate it. And courts are now ignoring choice-of-law clauses. Battley v. Mortensen, In re Huber, Dahl v. Dahl, a lot of domestic cases with good facts that should have been won, where the judge says, we don’t care, and uses the magic power of public policy to breach the trust, and breach means loss of assets.
So what do you do? Hybrid the two. You create the strongest trust in the world, the foreign trust, and domesticate it through the IRS under Section 7701 by naming the client as trustee and a domestic state like Nevada as the situs of the trust. You’re creating a bridge. As long as we maintain IRS compliance and stay classified domestically, the trust is cheaper to create, more flexible, with none of the IRS compliance disclosures and no separate tax filings, because it’s classified as a domestic US grantor trust. But you have all the power of the offshore trust, the statutory non-recognition and other statutory hurdles, in your back pocket, God forbid you ever need it. It’s like a hybrid car, combining the best of both.
Where to Start
Gordon Lamphere: You’ve given our listeners a phenomenal deep dive into the basics. Before the Final Four, a quick but important question: if a listener has five or six properties and wants to understand their potential needs, where’s the best place to start?
Brian T. Bradley: Start by doing research. I use my website as a legal reference for people. Jump on btblegal.com. I have tons of case law, educational information, and videos. The more educated you are, the better questions you can ask the lawyer. And I hope to God when you talk to people, you’re talking to a lawyer. A lot of CPAs are giving legal advice, and when it comes to asset protection, they’re messing it up, using S corps, which are great for tax mitigation and horrible for litigation and asset protection. Or you’re talking to legal business solution providers who aren’t law firms; you’re talking to salesmen. Is this your legal advice? Well, I’m not a lawyer. So I’m calling to protect millions of dollars of assets, I thought I was talking to lawyers, and I’m talking to a salesman. It drives me crazy. Then what they create doesn’t work, and when you get sued, they’re not there to represent you, because they’re not lawyers. When you want to protect your assets from the attorney shark trying to take everything, you’d better have a good lawyer draft it all.
The Final Four
Gordon Lamphere: Great advice. Sadly, we’re at our Final Four, so we’ll have to have you back for more deep dives. First, one of my favorites: where do you see the future of asset protection going? You’re not Nostradamus, but you have as much insight as anyone. What’s coming over the next ten years?
Brian T. Bradley: The hybrid trust. They’ve been around for 30 years, so they’re not new, but not many people have been this involved in their own financial lives and in investing in real estate. Our times are crazy, and we’re in a global economic mess. I see the hybrid trust coming more into play as people learn about it, as a way to mitigate the judicial mess we’re in. Once you hit that million-dollar mark, that’s where the hybrids come in. I see more of that happening now.
Gordon Lamphere: We’ve gotten out the crystal ball. Now let’s go back in time. Brian, if you were leaving high school or college and could give yourself one minute of advice, what would it be?
Brian T. Bradley: Be more patient. I’m one of those people who shoots from the hip and goes. Patience is a virtue, and when you’re young you have less of it and have to develop it. I still struggle with it sometimes. Take a couple of deep breaths and think before you go. But don’t think too much, or you get lost in analysis paralysis. Do your research, make a decision, and go learn from it.
Gordon Lamphere: It’s like the book Thinking, Fast and Slow. There are definitely times to be more patient, and I wish I was sometimes. On the subject of learning, we like to talk about books. I’m a voracious reader, at least in audiobook form when I’m winding down at night. Brian, are there books that have heavily influenced your life, in business or in general?
Brian T. Bradley: So many. It’s like asking a kid in a candy store. I liked Rich Dad Poor Dad and Cashflow Quadrant, the second one better than the first, because he really breaks down the principles. The Alchemist is a great personal development book. And not a specific book, but I like Graham Hancock’s series on the Younger Dryas. I’ve been obsessed with what was going on during the last ice age, now that they’re finding massive pyramids that predate the Egyptian pyramids and pushing the date of intelligent human life back six thousand more years to the last ice age. I’m obsessed with that right now.
Gordon Lamphere: Three phenomenal picks. Graham Hancock is always mind-blowing, Rich Dad Poor Dad is phenomenal, and The Alchemist is my little brother’s favorite book. The number one reason we bring folks on is that influencers in real estate and law who are in the arena tend to have the best advice about who else to reach out to. Who’s the next person we should have on the podcast?
Brian T. Bradley: You should have a really good wealth manager or CPA on, especially in today’s climate. You want to pay as little as you legally can in taxes.
Gordon Lamphere: I’m going to double down: who should that CPA be?
Brian T. Bradley: I’m not going to name a specific person, but I can email you a couple of people to have on the show. What I’d tell your listeners is that CPAs come in different flavors of ice cream. Some are very, very conservative. Some will walk you straight up to the line. It’s your job to find the CPA who matches you. Some are great at business and horrible at investing. Some know only investing and aren’t good with family matters. Find the right mix for your personality and how close to the line you want to go. Get a good CPA and a good wealth manager, because the secret of a wealth manager is they tell you what to invest in for your taxes. We need you to pay less in taxes, go buy this property. Then a good CPA goes through the IRS tax code and does their magic. You really need the combination of both.
Gordon Lamphere: One final question, and it’s one of the most important: if someone’s looking for asset protection advice or wants to reach out to you, what’s the best way?
Brian T. Bradley: Jump on my website for all the educational material, btblegal.com, or email me at [email protected]. I generally do a free 30-minute consultation, and I’ll send out educational information beforehand so you can learn the concepts in more depth. Those are great ways to reach me and get an idea of where you sit in this crazy matrix.
Gordon Lamphere: Brian, thank you so much. We learned a lot about the crazy matrix of asset protection today, and we have to have you on again.
Brian T. Bradley: Absolutely. Thank you.
Gordon Lamphere: Thanks again to Brian. We appreciate his insights. If you enjoyed the podcast, please give us a like, a five-star rating, or a review. Your comments, interactions, and subscriptions truly matter and help us continue to provide quality guests. You can follow us on YouTube, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with the Real Finds Podcast. Thank you for listening.
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