Asset Protection- Ten Layers Using Trusts

Mike: Welcome back to the FlipNerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Jack: Hi, my name is Jack Shea and I’ve been a real estate investor for about 30 years. I’d like to tell you some advantages of trusts that I do. All my deals, I’ve never done any kind of deal. . .

Mike: This REI Classroom real estate lesson is sponsored UglyOpportunities.com.

Jack: . . . real estate or note transaction without it being in a trust. I grew up in Chicago where trusts have been the law since 1891. I moved to Florida and met Mark Worda who also grew up in Chicago as an attorney and learned about trusts at the University of Illinois, and I hired him as a trustee for me and we’ve been partners and friends for many years and what we have found is, right now he is a trustee for over 1,600 trusts so we have a good database. My father had properties in trust so it is not any kind of myth or [inaudible 00:01:28]. It’s just the law of the land, Florida happens to have a very strong statute but it is usable in all 50 states and we have a book that has the details on that.
The asset protection that we develop inside the trusts are formidable. The first and the largest advantage is the name of the beneficiary is not on the public record and it’s the name of the trustee and it’s the name and there is no mention of the beneficiary, which could be a person or an LLC or a corporation. First of all, that’s your purse to bend. Secondly we have a trustee that’s a qualified, reliable person whether it’s an attorney or just a reliable partner or friend, they are immune from attack if they stay within the rules of the trust agreement.
The trustee has ten levels of asset protection that we have. The beneficial interest can be held in an LLC or a corporation or a trust, or other device or still personally. Many thousands of people coast to coast just use one layer of asset protection, that’s the trust. Next we have the liability insurance so we always have that so fires, falls, accidents, liability. That’s available and you should have that on all properties.
You can, by using K1 reporting, you can get real estate off your tax return. On the back of Schedule E there is a trust income reported. It says Trust ABC, the Wilson Family Trust, there is no detail on Schedule E so the finances, it’s all carried in K1’s as a trust report.
One other thing that people do is they leave a mortgage on the property or they put a mortgage, maybe just a small mortgage with 18% interest, with no payments but the mortgage protects the equity in a property, makes it less desirable to the angry people or contingency fee attorneys who may decide to go after a property. By having all of your properties in separate trusts, if there is a fire, accident, death, a lawsuit that is successful, they get that property, they don’t get all your property. They have no way of finding out that you have 40 or 60 or 80 or however many because they are isolated. There’s firewalls between each property.
There’s a little known position inside a trust that’s not in the deed. The deed has only the name of the trustee. In the trust agreement, there can be a director. A director is often common, if there are four or five or seven or several investors so that they don’t give conflicting direction to the trustee. One says sell, one says mortgage, one says lease, rent or whatever. The trustees that I know say that if you have multiple owners, you nominate one person as a director and that’s the only person I’ll follow the orders from.
You have a director, you can pledge the beneficial interest for a line of credit. If there’s a $100,00 line of credit on a property, the public record showed that there’s a $100,000 mortgage on the property. So there are various ways to protect the privacy, you could sell an option on the property. Sell an option to some person or entity for less than market value. They’d pay for an option. There are many levels of legal, honest, simple devices to make trust property unattractive.
You don’t even have to name the name of the trustee. You can have the name of the president of the XYZ Corporation. That’s the trustee and that could be a moving target. There’s at least 10 levels that you can build in to a trust to provide for your privacy and your safety and avoid frivolous lawsuits. It does not avoid serious problems. If there’s an accident, you are liable. It avoids harassment and angry people, tenants and bureaucrats.
If you’d like further information you can look on my website at jackshearealestate.com has many blogs and articles and products about trusts. Happy investing.

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