Intro:   Welcome, this is the Real Estate Investing Mastery podcast.

Joe:      Hey everybody, welcome, this is the Real Estate Investing Mastery podcast and I'm with the one and only Alex Joungblood, how are you Alex?

Alex:    I'm good; you are the one and only Joe McCall.

Joe:      Well, yeah, I know it shocks, but we got a great interview today with a gentleman named Greg Christiansen. And I don’t know if you are hearing those beeps, but that's my computer if you are. I'll try to shut that off here in a second.

Alex:    That's very unprofessional Joe, very unprofessional.

Joe:      I'm not in my office today, I'm actually in my home office, I'm in my other office today. And I don’t have my podcast recording mic, so hopefully you can hear me okay. But guys go to RealEstatetInvestingMastery.com to check out our site, check out those show notes, we have our first cash survival kit. It’s a survival kit, Alex maybe we need to put something in there about asset protection.

Alex:    Absolutely.

Joe:      Which is what we are going to be talking about today.

Alex:    That would definitely be a survival item, but it's not… it's more of a long term thing, especially when you start making some money and having to write some checks to the IRS. I'll tell you it's a very sad day for me like October the 15th after the extension happens, it's just oh, honestly it is such a sad day.

Joe:      It's pretty…

Alex:    I write checks to the IRS which people would wish they made in a year, I'll put it that way.

Joe:      Yeah, right, that's a good way to look at it.

Alex:    Indeed.

Joe:      But my goal is to pay a million dollars in taxes every year. Well, what kind of money are you making if you pay a million dollars in taxes every year?

Alex:    You are making a lot of money, but I think there's a better way, there has to be a better way out there. And hopefully our guest today can… because it's not what you make, it's what you keep, isn't it?

Joe:      Yeah, and I'm sure Greg will have a lot to say about that.

Alex:    It really is.

Joe:      Yeah, you are absolutely right. But listen Alex, I want to jump right into this interview, normally we banter back and forth quite a bit, and we talk about deals, and we talk about what else? The weather and sports and the kickboxing, so let's not do that today, are you still kickboxing by the way?

Alex:    Yeah, I have taken not as hardcore as I was and here you are talking about kickboxing but not as hardcore as I was, because I'm trying to finish up my house and that’s taken up a lot of my time. So once that's done I will have so much time, I will not know what to do with it, and I will resume kickboxing more regularly, thanks for asking.

Joe:      All right, good, good, good. Let’s jump in… Guys we have a guest Greg Christiansen from Guardian Law. And Greg is going to introduce his company and talk about it some more here, but I thought it would be good coming up on tax season right now; I'm not sure when everybody will be listening to this yet. But this is an important time to start thinking about these things. How are you doing Greg?

Greg:   Good, how are you guys doing?

Joe:      Excellent, you can tell from our podcast we are really professional and we take this stuff really-really seriously. So why don't you introduce yourself to our guests, you are… just so everybody knows you were introduced to me from somebody in our mastermind. And I'm glad we get to talk to somebody about this stuff, because we don’t think much about it, and that’s part of the problem we don’t really think about asset protection, until maybe it's too late, right?

So would you… I was just going to say Greg, would you just introduce yourself and the company that you’ve started, and kind of what's this all about?

Greg:   Sure, so again my name is Greg Christiansen, I own and operate a law firm by the name of Guardian Law. We have a staff about 20 individuals, sort of have midsized law firm. My partner and I started this business about 12 years ago; we cut our teeth on various marketing and real estate transactions, and started really focusing on corporate structures and the state planning and asset protection.

So for the last 12 years or so we've kind of put together our portfolio of clients we've represented across United States that vary in sizes from multimillion dollar corporations to small mom and pop individuals to people who are just trying to invest in real estate. So we as a firm set up about 2000 entities per year, and do about 300 interstate plans per year. So it’s a big portion of our underlying practice.

So anyway which it's good to talk about this asset protection and what people can do especially real estate investors, how they can try to protect their portfolios by engaging just a couple of simple procedural applications. So I'm more than happy to go through that with you guys today and explain to your listeners about what things they can implement and there are some services that are available either through their local attorneys or through our firm will be more than happy to assist them with that.

Joe:      Greg why don’t you talk about why you got started in this part of the business?

Greg:   Yeah, that’s a great question, so I went to Gonzaga University and graduated there from the school of law there. And I was… so I'm a little sad because Gonzaga has lost to Duke there.

Joe:      Oh, sorry about that.

Greg:   I know, I bring it up because you guys wanted to talk sports beforehand and I was thinking about how sad I am that we couldn’t be Duke, because Duke is Duke and… Not to offend any of the Duke fans out there, I'm not a hater, I'm just upset that my team lost.

Joe:      Yeah, I can understand.

Greg:   But after graduating I went to work for the Nevada Supreme Court as one of the clerks for one of the judges there. And Nevada at the time, we are talking about 12 years ago was a real hotspot for companies to start up their businesses, and Nevada had… has very favorable corporate governance laws, shareholders protection laws and LLC charging orders. And so the kind of the new trend about 12 years ago across the nation was to set up a Nevada LLC for asset protection purposes.

So when I was clerking for the Supreme Court I really got indoctrinated into that civil protection from personal liability, and some of the assets that were afforded… some of the benefits afforded by operating under a Nevada corporation. And that sparked my mind and I said well, what are… other states are out there. And so I started looking at what favorable states exist and trying to do business and what type of asset protection is out there, and so that's kind of where we started. My emphasis in law school was corporations and corporate law.

And before going to law school, I worked for fidelity investments, and have a kind of a security background with it as well. So I have always been kind of interested in how we can protect the portfolio that you have, as a licensed broker. I did that before law school and then during law school, I was always thinking about okay, how can I help clients keep what they have?

And so that’s how we got started, it was just getting an interest in that, then we jumped into it and we started meeting clients that had parallel interests, and needed help on how to protect their corporate structures and their personal assets, and we started from there and we built the practice that we are still 12 years in going strong and we haven’t had many famine years, we've had a lot of feast years, just because there is a need out there, and this individuals learn about that need whether to supply their resources for those needs.

Joe:      So do you have like an emphasis or do you focus on helping real estate investors? I guess my bigger question is why real estate, why is real estate important for somebody concerned about protecting their assets?

Greg:   We probably put together 2000 entities here just for real estate investors. And you really have to look at asset protection in two different categories; one is business activity, which we have a more than a model that we have instruments to help protect for that. And then the other kind of block is personal assets, and how we try to protect our personal assets. And there are strategies to do that. For the real estate investor there's just automatic risks they are going to come up against when they are out there engaging in business in the market.

And so some of those activities and you probably talk about this on your other shows, it can range from flipping homes, buy and sell homes, entering into sign the contracts with individuals who are engaging in the contract that you eventually signed to somebody else. Going in and just like the traditional buy and hold and become a tenant, a landlord situation. Every one of those situations involves some sort of risk. They can potentially cause an individual to be personally liable for their actions.

And so the general premise of the business side, I mentioned there's kind of two buckets, the business side of that, the general premises is that, I would never advise a client to engage in business when they are going to engage… purchase any type of real estate or engage in any type of contract, where they didn’t have… they didn't do it, so under a business entity. So the idea is that, if I go out, I'm going to say I'm going to do a traditional buy and hold property, I'm going to lease it out to some tenant.

That if I do that individually, I buy that property individually, then that part… say that tenant goes down, checks out the laundering, and this is an actual case that I have actually dealt with the last 10 years. Start the laundry, put it in the dryer, something goes wrong, there's a short, burns down the apartment, the children inside become smoke annulated, they have to be taken out of the home, and then everything is just right.

Tenant gets upset, sues the land board which in this case can potentially be me individually, and not only once all their assets to be replaced, but also maybe damages for their children who were harmed in this terrible accident. So it's an individual under that fact pattern, if I own that property myself and say I have insurance, say I have renter’s insurance or something. But it's not enough to cover it for liability that arises from that damage; I'm personally liable for those actions.

So in order to avoid that personal liability which then this one renter can then go against any other properties that I may own, and then go and collect for my entire portfolio. In order to limit that exposure, I would operate under an entity. We generally operate under what we call a dual entity structure, where we have a parent's limited liability company or C corp depending on what tax benefits you want to take advantage of, and then the operating LLC which will own that home.

So in this case if the home was owned by the LLC, if the renter were to sue the company that owns the home, they would be locked into the assets of that one LLC. Not all of the potential assets of the landlord.

Joe:      But Greg, I'm sorry. Alex, go ahead.

Alex:    They can't sue the landlord as well as the LLC and say well, you are a member of the LLC so…

Greg:   Yeah, good question, right. So generally speaking one of the benefits of having an LLC is the protection, well I call it the shield of liability that you get from operating under that business structure. What it basically means is unless the individual tenant or the person bringing the suit can pierce through that corporate entity and get to the assets…

Alex:    That's a good term piercing the corporate veil, right?

Greg:   It's piercing the corporate veil that's correct. Unless they can prove that through one of a couple of various theories, then the underlying member is not liable for that activity.

Alex:    Sourcing is the very term right? Limited liability Corporation?

Greg:   Correct, right, and not to get too technical for your listeners, but every state has what's called the charging order. And that's basically what governs what creditors or potential litigants can actually pierce and get to the assets of an LLC. So a charging order in most states limit individuals who are suing an LLC for either getting to the principal assets of the LLC, or the income from the LLC, it just depends on what state you are in.

So we've done a lot of research I have mentioned first the call about what states are the best to do business in. It really comes down to a couple of main states, and that would be Alaska, Delaware, and Nevada. And Delaware and Nevada are a little more expensive and so generally speaking we help people do it in Alaska. Alaska has a very protective charging order that does allow individuals to get to the assets or to the interest from or and go…

Alex:    I could operate in Virginia, but there will be an Alaskan LLC and receive the benefits of an Alaskan LLC state wise even though I'm operating in Virginia?

Greg:   You could, the way we structure that is that, if your property was located… a lot of investors don't have the property located in the state where they live. So you first have to check whether or not the state laws of that state require the LLC to be formed in the state where the property is located. There are 23 different states that its law you have to have it set up in that state. But with the structure we suggest it doesn’t matter, because we would always say to have an LLC in the state where the properties are regardless.

So the way that this would work is we would have a parent corporation which would be an LLC out of Alaska, which would wholly own an LLC in the state where the property is located. And then that gives you another additional layer of protection, so to go back to your question about the piercing is properties owned by an LLC, a member of that LLC is another LLC that’s formed in Alaska. So the tenant has to sue the LLC in Virginia or Texas or wherever it's located, get a judgment pierce through that entity and then go to Alaska and try to pierce through that entity as well. And it's nearly impossible under the current laws in Alaska to pierce through that market.

Alex:    Do they need to get somebody in Alaska, like they have to retain somebody in Alaska to do this?

Greg:   No they don’t, our firm is licensed there, and we act as registered agent for them if they want to use it…

Alex:    I'm talking about the seller, I mean the potential law suit – what is bringing the suit, do they have to go to Alaska?

Greg:   Yeah. If they are going to try to pierce though that then they would have to try to do that in Alaska as well. Unless they could argue that there is some sort of situs argument that it’s in their local state. But even so… if they are in Virginia, for example, and they are suing Alaska Corporation, they’ve got to prove to that Virginia court that there is jurisdiction there to sue that court. So that’s another reason that makes it difficult, people look at that and they are like I don’t want to sue this, I don’t want to get involved in this mess.

I don’t want to try to pierce this, I'll just take whatever assets that are available under this one LLC if I'm successful, and I'll leave it to that. And what that really helps is most clients that we do business for, they don’t have one property, they have several properties. And they are also engaged in several different strategies. They are not just buying holders, they are flippers, they are… have signed a contract, they are made bulldog for people. They have a whole bunch of different avenues they execute and strategies they use for real estate investing.

So say they have four properties, where we have one parent company, and then each one of those properties is in a wholly owned LLC subsidiary of that parent company. And so if there's any liability rises from the four hold properties they have, it’s isolated to that individual LLC. And then if they are on the other side they are doing assignment of contracts, they have another company that’s just doing the assignment of contracts. Now that's a more complicated, more complex set up than most people probably need or use. But for the average real estate investor that's spending hundreds of thousands, if not millions of dollars a year in real estate investing, we set this type of structure for a lot of people and they use it very successfully.

Joe:      Hey Greg, I was going to ask you like, you are not… well, you are not talking about being protected from law suits, you are talking about protecting your assets in case you are found negligent in the law suit, right?

Greg:   Correct, the question is this, are you personally liable for that, or can you defend your personal assets from liability?

Joe:      Every law suit that I’ve seen, and I’ve been involved with law suits with tenants. They name the LLC, they name you, they name your spouse and your kids, and your grand kids, and your future kids, and they name your project managers, property managers, everybody that could have even remotely been involved with you, and that deal is going to get named in that law suit. And so if you do get… if you are found negligent, what prevents the judge to say you know what, you have a judgment Joe McCall that you have to take care of.

And it gets attached to my name because I was named in that law suit. Does it really matter… let me just play devil's advocate, does it really matter that you do anything in an LLC if you are going to be named in a lawsuit personally?

Greg:   Yeah, let me address that, it's true that there are quite a few law suits by tenants that do name the individual owners for that. My firm's been quite successful on getting those dismissed. Because it's clear in evidence… the key with that is going to be making sure that you don’t… you don’t play multiple roles in a transaction. But if you are engaged in a land board tenant deal, they write their checks to the LLC, they pay the LLC, the communications and correspondence is always in the LLC’s names. If it's done correctly like that, and they bring a suit against the individuals, it’s right for dismissal, meaning the judge should dismiss that case 99% of the time because there's no proof.

Now if you go and you intentionally harm somebody on your property, then that’s a little bit different, it's intentional, then you are always going to be liable. There's no protection for that type of activity. But if it's somebody falls down the stairs because there was a loose step on your property and breaks their hip, then there's definitely protection for that from tenants that would fall under the scope of the LLC as long as it's one form correctly into that you adhere to the tenets of doing business completely under that entity. So yeah it's possible for you to sue this individual, but if it's done, it will protect you from personal liability.

Joe:      But every attorney who’s bringing this law suit is going to try to go after you personally, right? And so then it becomes, then is it up to the judge to determine whether to allow that or not. Let’s say the judge finds that the tenant wins, “Yeah you know what, you should have put salt on the drive way. You were responsible for that and you didn't do it. So you are going to be held responsible.” But if the LLC doesn't have any assets and they award a $500,000 judgment, can they just say, “Oops, I'm sorry. The LLC doesn't have any assets?” And then the judge…

Greg:   That’s right.

Joe:      But is it realistic to expect the judge to say, you know what, you are going to have to find a way Joe McCall to satisfy this judgment because you owned that LLC.

Greg:   No. That’s the whole idea of having that shield of personal liability. That’s the idea of having a corporation is that you are not personally liable for those wrongful acts unless it's proven that you intentionally did it, which in most cases isn't the fact other than we look at. In most cases it's something that’s occurred that wasn’t fore-seeable and then there is a law suit that came. But even if it was fore-seeable and there's some sort of negligence, it's trapped to that individual LLC. So there's only $100,000 worth of assets in that LLC and they have a claim for $500,000 and they get a judgment. That’s all they’ve got against that individual LLC. They don’t generally get that from you individually unless they can prove a fraud, or they can prove intentional harm, which is very difficult. Both of those are very difficult to prove.

Joe:      So if they could prove fraud… fraud would “pierce the veil, the corporate veil,” right?

Greg:   Yeah it's one of those where it's… a Fraud is proven when—I'm not going to get into the legal too much with it. I'm sure there's some attorneys out there, but it really comes to the mental state that you had which is did you intentionally mean to deceive them by doing some act. That’s the general, I mean very layman’s term of fraud. And most states have a very high scrutiny standard for you to bring, you have to plead with particularity on how to bring up fraud cases. Most courts don’t like fraud cases, because they are left a lot of interpretation and they have to prove there’s mental state that they intended to do that. It’s very difficult to do so most of the time you can avoid.

You don’t see a lot of fraud cases involved with real estate crimes. Mostly it's some, a slip and fall or unforeseeable thing, black mold, something that comes up that you didn't know about. And then if they did run on the deed, there then maybe they can potentially be liable beyond the LLC, but most of the cases it protects them. A lot of the squabbles you’ll look at where there's not really looking at one strategy here with buying homes, is really I've got hurt on the property and I want some compensation and the insurance policy is not sufficient enough to cover that. Or something happened where the property wasn’t kept, maintained to a proper order so you basically evicted me because I couldn't live in it. That was inhabitable.

And those are I would say a majority of the law suits we see of that and we are quite successful. And a good attorney in the way things are set up will… can easily defend a case like that and limit it to the LLC. But I don’t want to just say that it's limited to that type of risk exposure, I mean there's also like an assignment contract, we all see contracts that go south. If you enter into the contract to sell a properly and one of the parties defaults in some way, and it makes it look like you are part of the problem. They see you but it's very rare that in a contract case that they ever pierce, they ever are able to pierce that corporate veil and get to the individual—unless again they prove fraud which is difficult to do.

But my ability is only on the business side is only one reason that you would do on a state plan. I think or excuse me… have a business entity structured to do business in. I think it's a great way to do it. My law professor in law school always called it building paper fox holes, just to be able to put walls between you and personal liability. That’s one reason why we do a duo entity so that you have the one LLC that owns the property and then it's owned by another LLC. So even if they try to “bring the members in” the member is another LLC. It's not you individually. But the other side that you want to look at—go ahead.

Joe:      I was just going to ask, let’s say the LLC or the plaintiff, the tenant is awarded damages. And that judgment gets attached to that LLC, I mean obviously the judge wants… the law says you have to take care of that judgment and pay it. So that judgment is going to sit out there. Does that, even though the LLC—the question I guess I'm trying to ask is like, just because I own that LLC is that judgment going to follow the investor all around when wherever they are trying to do business in the future, because there’s a law suit attached to the LLC that they used to own, does that make sense?

Greg:   Yeah I understand. So it's really a twofold question, or answer to your question and that’s yes one it potentially could follow the LLC around. But most likely what you would do in that case if you had a judgment like that is that either you would liquidate the assets from the LLC and try to satisfy the judgment to that, or try to exhaust insurance proceeds or some other resource to pay that judgment. But if it wasn’t sufficient, then you just let it sit. Because it's really, other than that, those law suits are unsecured debts that can be either extinguished through bankruptcy, and I'm not suggesting you would file bankruptcy in that case. But it's just –they wouldn’t have any ability to try to enforce that other than go against the assets in that LLC.

And so once those assets are exhausted, then it sits there in judgment. And a lot of jurisdiction depending on where you resides, you have to collect on a judgment within seven years otherwise it's just dismissed. So the idea is that you would have a judgment against that former company that you used to own that’s been liquidated and there's no assets on that. Look at Donald Trump. If the case was going to hurt real estate empire, then he would have been bankrupt and out of business years ago, but it doesn't—I mean that’s the whole idea behind these corporate structure is to allow people to cut their losses and go on to the next transaction.

Joe:      Okay, but it doesn't protect stupidity, right?

Greg:   Yeah if you are stupid it just, and you are intentional, then you are going to be liable for something.

Joe:      So you’ll probably… the judge would probably attach the judgment to you and your LLC in that kind of a case, right?

Greg:   If it was shown that you knew about—say you knew that there were black molds in the apartment you owned or a condor and you didn't correct that and it came out, then you could personally be liable for that. That’s the intention.

Alex:    Yeah, that’s what I'm saying. So like I've got a lot of different structures and properties we are doing. So I was trying to see what type of—what would be the best type of protection. It's almost like, “Okay, if you are going to do a property, one property is it best to set up an LLC for that particular property, so in case somebody had a complaint down the road or something and they wanted to sue, they would just go after that LLC, but you would have a bunch of LLCs at that point.

Greg:   You could. You can also block properties like you can put similar properties into this LLC. So if you had, maybe you are going into low-income neighborhoods and you are buying a whole bunch of properties so the total investment value is under $100,000 for five or six homes, you could log those all in there because you know you risk…

Alex:    That sounds like your neighborhood Joe.

Greg:   Yeah we call it a war zone.

Joe:      That sounds like the slums of Virginia Beach, what are you talking about?

Greg:   I was thinking more of Detroit, but who knows? From Virginia? I'm just saying. The liability side is only one half of the equation. The other equation is the tax; you kind of alluded to that in the initial part of the calls. There is definitely liability protection from operating under a business structure, but the second main benefit is really the tax consequences, and the tax deductions and liabilities you get when you operate under an entity. So most individuals that are just purchasing into real estate, they do it under a sole practitioner model which is really they haven’t registered a business entity anywhere. They are just doing it under their own personal name. Besides the risk exposure they have, because they are absolutely 100% certain, and we talked about probabilities. Well you could be, well if you do buy a property and it's just under your name and somebody gets hurt, you are liable.

But on top of that you can’t take certain business deductions which individuals who have a form structured entity that’s filed with a state can take advantage of. And those deductions can vary from management fees. You may pay for a management company to take care of the property, to tax as the ePay, I mean everybody can take certain taxes they pay and deduct those. But any expenses that could be legally and lawfully attributed to the business which are quite a few, then they can be taken under your real estate entity that’s set up.

And so the ability to take tax deductions and carry forward losses under an entity are far greater than individual who’s just sole practitioner. And I can give you a couple of real life examples. So generally speaking, let’s just talk about loss. Even though it's a dirty word and no investor wants to lose money, but it just happens, it's every business person when you engage in a transaction where you may lose money. Well a sole practitioner who engages in a business and loses money, they are capped at a certain amount for the next year of how much they can carry forward on that loss to their income. So if they have a $30,000 loss, and they are capped at $3,000 a year, it could take ten years to take full advantage of that loss.

The business owner under the correct corporate structure isn't capped at that business loss. They can take those losses and carry forward them indefinitely in an undefined capped amount against future gains. So there are just certain criteria and certain benefits of operating under a business entity especially tax-wise. It allows you to take advantage of some of these deductions and benefits that the IRS gives us through their internal revenue code. Losses, is one. General business deduction expenses, I can attribute my laptop or my cell phone or my utilities or an office, all of those become potential tax deductions which generally speaking aren’t fully available through an individual that’s just operating as a sole-proprietor.

Those are all things that just automatically give you benefits. Now one benefit—and sometimes we would set up a C corporation, a parent corporation, and the reason we do that is because C corporations allow the corporations to set forth certain criteria. They can have in their bylaws which are the documents that basically govern the cooperation that all employees will get fringe benefits of some sort, maybe it's healthcare benefits. What that means is either that individual who’s investing in real estate needs healthcare insurance. So they go out and they find some provider of health insurance and they sign it up under the C cooperation and their bylaws says “We are going to cover 100% of the premiums for all of our employees of the C cooperation,” which generally speaking could be a man and his wife, or maybe his children.

And so they go out and they generate money through the real estate investing. They throw it up through the C Corporation to cover the premiums for those which become tax deductible and expenses to the business. Where otherwise you and I as sole practitioners, if we go out and we get an insurance policy, we have to try to pay that out of pocket, then we don’t get to deduct that until we've made a certain amount of our adjacent gross income exceeded. And so there are just certain benefits of having a corporate structure that’s properly and specifically tailored to the individual that allow them to take advantages of tax benefits that are just not available to regular individuals.

Joe:      Now does it matter Greg what state you create the LLC in for tax protection?

Greg:   No because most tax laws are federal. Now I say that with the caveat that everything I'm mentioning is federal law. Every state does have their own—there are certain states that do not have income tax, Washington, Nevada. And there are certain states definitely they are out there that don’t have income tax, but there are other states that do, Utah, Wyoming. I mean there are several states that do have income tax. So it just depends on where you are living or where the property is that you may have to also think about state income tax.

But for the most part, the main benefits come from that federal income requirement with the IRS. I mean it's most likely you are more afraid of dealing with the IRS than dealing with some state tax commission. Yeah most of the benefits are going to be federal. There will be some states that are in for it as well but you don’t normally take expenses deductions from on the state. They’re more just how much income have you made. You know, what are you paying in the federal government. And most of the time it's tied to what you are paying the federal government anyway, and how they determine how much your state liability is.

I mean it's just smart business to do your real estate investment under a corporate structure, because you can take advantage of both liability and the business tax. And I'm not even talking about—I mean there are specific sections in the internal revenue code when you first start a business. There're just automatic deductions that you can take and expenses that you can write off that is like a sole practitioner, they can’t. There's startup cost, there's operational cost. I mean IRS allows you to take $5,000 for business entity for startup cost, $5,000 for operational or administrative cost; it's almost $10,000 for entity that you can expense if you pay those expenses.

And depending on—I'm sure there are quite a few listeners that have gone ahead and have gone to maybe some real estate training. They’ve attended conferences, they’ve paid for things out of their pocket after they’ve engaged or set up a business, all those become potential expenses, and right offs that as sole practitioner, individual isn't even afforded and can’t even do that because they haven’t set up a proper entity. I mean they say the sky is the limit, I mean there's just there's a lot of benefits for operating as a small business when you are engaging your real estate transactions.

Joe:      Will you talk about—because a lot of our listeners here like to wholesale properties. They are just in and out, they flip the paper. They assign contracts, they wholesale. I’ll say the average investor out there who is wholesaling a lot of properties probably wholesales three to five properties a month. What would be a good entity structure for somebody who just does wholesaling like that?

Greg:   Just a simple LLC. I think they can do it. Then the wholesaling is even better. I mean the risk exposure we talked about all black molds or… that doesn't even apply. It's a simple business transaction. It's a contract issue where you are entering into and execute that contract under your business name, if something goes south, it stays 100% on the business, not talking about personal liability at all. But if you do that as an individual, they sue you, they win, they go after your home. And so it's just—I think just a simple LLC in the state where you reside is sufficient to provide protection. We can debate. I know there are a lot of attorneys that look at different structures. We could argue that maybe an S corporation gives you certain benefits where an LLC does. But I mean when I talk to a client, we’ll tailor… we normally tailor their needs to what their situation is, but for the most case generally speaking a simple LLC will do the job for you.

Joe:      We also have a lot of people listening that own rental properties, maybe they rehab and they will sell to retail buyers properties like Alex was talking about, so that’s when it gets a little more complex right, what kind of entity structures you should have?

Greg:   Yeah normally in that case I would set up a parent LLC that owns the LLC that owns the property. And it sounds complicated, it’s really not, it’s one of the most simple structure. I mean I have looked at this business for a longtime and there’s… if you want to it complicate it you can do a family limited partnership or you own a C corporation that owns one percent of several small family limited partnerships. And because in a family limited partnership only the general partner is liable.

And if you make the C Corporation the one percent general partner of the family limited partnership, then if somebody were to sue that FLP then only the C Corporation is liable, but it only owns one percent. That is a… I mean that takes time to structure. But a dual entity will provide a majority of the benefits for that type of structure just in a simplified form, just one entity that’s a parent.

Then you can own several subsidiaries, it just depends on how many properties you own and what lines of business. I mean a lot of clients I talk to they’re not just real estate investors, they’re pet shop owners, they’re truck drivers, they’re accountants, they’re attorneys, they’re doctors, they have other practices. So a lot of times I’ll talk to them on the phone, or I’ll meet them in my office and we’ll set the structure up that will cover not only their real estate transactions, but their entire business portfolio. So they have one organization that’s a parent and then everything else is under their bad parent corporation as subsidiaries.

Joe:      Okay, I was just going to ask you. What are some common things that you see… mistakes that you see investors making that are in the investing business?

Greg:   Yeah, I think one of the big things is when they start comingling their business funds with their personal funds, then they just make themselves just to be just one big entity. It would be… it’s the surest way to just expose themselves and to being just personally liable. Another one is not setting up a business structure when you know you’re going to engage in business, and know that there’s going to be a ton of different deductions available to you.

And so I have a lot of clients that they go out, they invest in a property, they lose a ton of money on something not intentionally, and then they want to set up an entity and then they want to be able to take care of those loses, but the loss occurred maybe the year before and they haven’t had the entities set up. And so I really can’t help them at that point, they’re just stuck, they have to take those losses over several years, and they just… they get stuck.

I think another big issue that I see a lot of clients is that they go through and they want to build this huge empire of real estate transactions, and real estate holdings, and then they don’t have a properly formed estate plan. So if something was to happen to them, or their spouse, or significant other, then the state gets to come in and kind of dictate what happens to their estate. And that’s really another side… and when I say there’s kind of two buckets in the beginning of the call, one bucket is business transactions the other one is personal transactions.

And the personal… your personal assets and your personal dealings should really be governed under a properly formed estate plan, and that includes a trust document that dictates what… how your property and how your assets should be divided if you were to die. A proper will which covers just more detail on how certain assets should be distributed, and then two different documents which would be a healthcare directive and power of attorney.

And we can go into more detail on those, but I find a lot of clients will spend years accumulating their wealth and they won’t spend $1,500 to $2,000, or $4,000 to have a proper estate plan that’s going say how that wealth is going to be distributed if they die. And then their kids and their estates are left to try to figure it out, and it has several problems—it just raises several problems one which is monetary, second which is just logistics of how you handle it, and the last is the emotional drama that it creates amongst families when they don’t have a proper estate plan.

And really when you’re talking asset protection you want your business assets to be protected and you want your personal assets to be protected. And without doing that, if you fail to do that, then you subject yourself to letting the state coming in and determine where you want that. It’s funny I was looking at Marilyn Monroe, I always get these different articles passed to me and I was reading about Marilyn Monroe’s estate.

She left her estate to her agent and her agent married somebody else and he died really fast, and so the royalties that come in for her estate they go some lady she didn’t… she never met, she never knew. And so it’s just funny that a proper estate plan can just really avoid all of that. I was looking… Robin Williams is going through it right now. His kids and his wife, his ex-wives are all fighting, and with his wife he had before he died. It’s just… it’s all if you have it done it correct you just avoid all the craziness of all that, and if you don’t have that done then you’re just going to deal with a lot of heartache, at least your kids or your heirs are going to go with a lot of heartache.

Alex:    You would have thought Robin Williams has got it right, you know.

Greg:   Yeah, at least he did, he did have the estate plan, he just wasn’t clear enough in it. The whole fight on that right now is that he has this one home and he was going… which he left to his current wife when he died, but he had certain items in the home that he wanted to leave to his kids, but in his estate plan… the way he wrote is he gave her the home and she’s already knew everything in the home is the home.

And so it’s funny and then apparently this home is monstrous and we’re talking about like Oscar awards, and watches, and jewelry, and a ton of other property there, but the key is to have a proper estate plan. Elvis died without an estate plan that was a total mess. Now his estate is one of the most successful postmortem estates in the history of United States. He’s just… I think he’s like until Michael Jackson died was like one or two celebs that generates more money per year after they die than when they were living. So it’s funny that people that don’t have a proper estate plan…

Alex:    I wonder who gets all his residuals, that’s interesting and how that…

Greg:   Yeah, well he left… I think his mom originally took it until she died and then Lisa Ann Marie I think is and finally her mom finally took over the estate and they kind of… they went through Graceland cleaned it up, and they’ve kind of taken over the estate since then, but it originally wasn’t that, it was left to other people, it just run this to the ground.

Alex:    I’ve got a question for you, let’s say you’re running a corporation and you didn’t want to set up a whole bunch of other corporations, you wanted to do multiple things out of one corporation i.e. wholesale, rehab, whatever and you didn’t really pay yourself, I shouldn’t say that, I would say you wanted to keep the money in the corporation rather than your own personal accounts. Would you be able to protect yourself with a UCC? Meaning you would go in and make yourself personally indebted, or your company personally indebted to you, so if somebody were to come in and try to sue your company, you could then pay yourself out first before bankrupting?

Greg:   I think the key with that would be is whether it’s a legitimate arm length transaction, or if you’re trying to do it for the sole purpose of protecting… hiding your assets.

Alex:    How could it be arms and length though, because it’s you want to clean yourself?

Greg:   The only way it could is like this; let me give you a fact pattern I think could fit in to that. Say you take $500,000 out of like and IRA, you owe it to yourself direct IRA and then you take the $500,000 you buy a home that you’re going to… it’s going to be an asset you’re going to rent out to high level home that you’re going to rent out to some tenant every month. It’s almost like you’re creating a mortgage from that self-directed IRA to that… it’s not almost like you are… you’re creating a mortgage…

Alex:    Yeah it’s like… it’s a first lien, that’s what it is.

Greg:   Right, it’s a first lien and you go and you file on title that you have first rights under UCC, and that is legitimate, you can do that. So if somebody were to sue you have first right on that asset just like a mortgage company would have, the problem would be…

Alex:    Right, so I’m not talking about, “Oh crap he’s suing me, I’m going to go make a UCC real fast,” I’m saying in advance.

Greg:   Yep, you’re absolutely right, if you do it and there’s a proper and formal functions…

Alex:    In advance.

Greg:   In advance before any intention or notice of law suit, then you’re going to be fine. The problem is when you’re like, “Oh I think I’m going to get sued on this property, oh remember I loaned this entity $100,000?” And then you file a UCC two weeks before a lawsuits file, you’re going to have… you’re going to run into issues for that.

Alex:    Right, so what would be the proper way to do that, it would be to say, “Okay, today it’s a clear day, clear slate, nobody is out looking to sue me, I just want to make sure that my money is protected within my company.” Would you go in and just make yourself a UCC for whatever the amount of money that you feel that… I mean because if you are running in an LLC partnership, all the money flows through you on to the tax form. So you… I mean you are one in the same, but if you want to protect yourself, I mean I guess that would be the one way to say, “Yeah, that’s my money right, I’m just letting the company use it?”

Greg:   Yep, so the cleanest way we do that for those investors who are listening that do pull money out, they’re personally paying for property, then once they’ve done that and if it’s in an entity like an LLC, then I would go ahead and I would… once they’ve made the investment, they bought the property from the personal funds that were invested in the LLC, I would automatically once that property is purchased, I would put a lien on the property based on the UCC.

Alex:    But I‘m not talking property purchase, I’m just talking general, like let’s say you have $30,000, $30,000 is sitting in your bank account and you say, “Oh crap I want to protect that money, so I’m going to say…” it is my money because I’m the one working the corporation, so I want to go ahead and put a UCC out for 30,000 so that way all that goes away, I mean that shows that’s my money just in case there was always ever a problem.

Greg:   Yeah, again it’s really going to really revolve around whether or not there’s a legitimate reason for the UCC. If you remain…

Alex:    So you can’t just say my company owes me that money because it is my money?

Greg:   Right, no you can’t, that wouldn’t be a valid reason to do that. Instead you’d have to say I had invested $30,000 in this company, and they owe me this money back so I’m filling a UCC against. But I think the other way you could handle that is not… I don’t know many in real estate investors who’d actually keep that much money in one checking account for the corporation. Normally since an LLC is a pass through, they’ll either take their money or pay expenses and then they’ll take it out and then they’ll put it into another account that’s not tied to the LLC. So if the LLC is sued they’re not personally liable for that, so they can’t… a creditor can’t go through the LLC to get to their personal money, they’re just left with whatever money is in that LLC.

Alex:    Interesting so.

Greg:   So most client I deal with don’t leave large amounts of cash in the LLC unless you’re doing something with it like buying property…

Alex:    So how would you that, how would you do that… then how would you have a separate account to have that set up to do that? Would you…

Greg:   I would do a distribution out of your LLC personally after expenses were paid.

Alex:    At the end like in a tax event situation?

Greg:   It’s not a tax… well I mean it’s a taxable event at the end of the year when you file taxes because you’re going to pay… because an LLC is a pass-through entity, any money that stays in there at the end of the year depending on what basis you’re going to do, you’re going to add tax most likely on that money, whether it’s cash or accrual you’ve got the money. So you’re going to get…

Alex:    So you can just put it whatever account you want?

Greg:   Yeah you could take it out, you can transfer it from the business account to your personal account as a “distribution,” and then at that point it’s out of the LLC. So most clients don’t ever keep that amount of cash…

Alex:    So get your money out of the LLC is what you’re saying?

Greg:   Get your money out right. And if you put in the individual then there’s a couple of other protections you can have the trust set up, like I talked about with the estate plan. You can have a trust account, you can put it in which affords some protection or I always encourage clients to put money into IRAs or 401ks, because those are instruments that the government protects from any sorts of attack including bankruptcy and government lien.

I always say put your money into those types of vehicles even if it’s a self-directed IRA, because it just affords so much more protection. Now granted you’re limit to each years to those types of contributions you can make to that, and then I mean if we wanted to get into more complex accounting and tax ramification that’s another reason to do a C corporation, because there’s matching contributions and so forth that you can do that could potentially could you help you increase the amount of contributions you made to an IRA or 401k or etcetera. So that’s how I would handle it.

Joe:      Alex that’s a good question and I’m glad you asked them, but we’ve got to wrap this up.

Alex:    We do have to go.

Joe:      We got to wrap this up. There’s a lot more we can talk about Greg, how can people get a hold of you if they have questions and want some help doing this stuff?

Greg:   Yeah, I know I think it’s pretty easy. They can contact me via email; my name is Greg, G-R-E-G@GuardianLaw.com. That’s G-U-A-R-D-I-A-N-L-A-W.com. Our website is GuardianLaw.com, and they can reach out to us via email, they can give us a call on our general office line which is 801-884-7672. We’d be more than happy to talk to them if they have any questions about tax, estate planning, business entity setup. If they have local attorneys, and they used to working with, I’ll be more than happy to get on the phone, explain some of these principles to their local attorneys.

Really, we’re here just to kind of help out as a resource, we believe in good karma. So if we help other people out even if we don’t generate any revenue from it, we feel like eventually maybe that will come back and help us in some other way. And it normally has, that’s just the way we do business. So we’re here to be a resource and more than happy to help out where we can.

Joe:      And bottom-line it’s better to get this tuff taken care off before it becomes an issue right?

Greg:   Yeah because…

Alex:    That’s when it’s too late.

Greg:   Right that’s when it’s too late, hitting the nail on the head. Once you’ve been sued you can’t go back and form an entity, you’re stuck with that liability.

Joe:      Well good. Greg, thank you very much, and Christiansen is your last name?

Greg:   Christiansen.

Joe:      Christiansen.

Greg:   If you go… if you’re from Minnesota they say it right so.

Joe:      Well, I apologize for getting it wrong.

Greg:   Not at all, I’m used to it, I’m used to it. Well, I really appreciate both for your time today and feel free to use me a resource if you have any other questions.

Joe:      All right Greg thank you again.

Alex:    Thank you very much.

Joe:      Greg’s email is Greg@GuardianLaw.com. The website is GuardianLaw.com. The phone number is (801) 884-7672. All right Greg, hey thanks a lot.

Greg:   Hey thanks again guys have a nice day.

Joe:      Goodbye.

Alex:    Thanks Greg.

Joe:      All right see you bye, bye.