Investing With An Asset Protection Mindset

The most commonplace risk that Lodmell & Lodmell has traditionally helped clients avoid is the risk of lawsuits.  It’s worth the time, effort, and money to hedge against lawsuit risk for one simple reason: Without asset protection planning in place, a lawsuit could be absolutely catastrophic.  It could wipe out your entire net worth and leave you with nothing to show for your years of hard work.  Investing with the wrong strategy could be equally devastating.

Return of Your Money Is The New Return on Your Money

One important aspect to investing with an asset protection philosophy is realizing that traditional methods of investing involve more risk than may at first be obvious.  Traditional wisdom is to buy and hold.  Well, if you had bought most asset classes in 1998 and held through 2008, you would have lost a lot of money.  The fact is that today there are unknown risks built into the market.  There is not only market risk (which most of us are used to) but there is also institutional risk.

Institutional risk goes beyond the risk of a bank or brokerage house failing and taking your money with it (think MF Global).  It also involves the risk that when a bank (or European country) fails, it could take the market down with it.  Add that to the fact that many banks and brokers trade for their own account–and many times in exactly the opposite direction that they advise their clients to trade–and you have a recipe for a potentially catastrophic outcome in the market.

Viewed in that light and combined with some of the lowest interest rates in history, a return of your money from banks is the new return on your money.

So How Do You Generate A Return?

The answer is simple.  Put most of your money in an absolutely safe place like a Swiss private bank or Treasury Direct where you will actually pay a fee to remove institutional risk.  Then, with the portion that you are willing to put at risk for a reasonable rate of return, invest it in a vehicle that is designed to take only market risk.

What does that mean?  It means you need to avoid ETFs, mutual funds, and other synthetic products that actually charge you a fee to give you less performance than the market itself will actually give you.  If you have questions regarding what kinds of products are pure market risk plays, call an asset protection attorney today!

What Is Your Investment Strategy? is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

A client holds her home in an asset protection trust and decides to refinance it.  The bank, however, has other plans.  The bank offers to refinance the home but only if the trust is amended to erode all of its asset protection features, rendering the trust totally useless.  But our clients are savvy, so they propose to remove the home from the asset protection trust and then refinance it.  Only one problem with that plan, as the bank usually proceeds to scare the bejesus out of the client by stating that if the home is ever deeded back to the trust, the due-on-sale clause will be triggered.  Effectively, that means that the bank can call the entire principal due on the loan.

It’s usually at this point that we get a call from the client asking for help, which is unfortunate since the bank is simply acting nonsensically.  Financing a home held in an asset protection trust does not impair the bank’s rights and security interest in the home at all!  It simply keeps your other creditors away from the home.  In short, the bank is massively wasting everyone’s time.

Federal Law Supports Asset Protection Trusts

For once, the solution to the due-on-sale clause threat can be found in federal law.  Specifically, the Garn St. Germain Act, which states that a due-on-sale clause cannot be triggered upon a transfer of property “into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.”  In other words, it would be unlawful for a lender to carry out the threat of triggering a due-on-sale clause if you deed your property into an asset protection trust created for you by Lodmell & Lodmell.

What You Should Do

All this boils down to a simple set of steps you can take if you want to refinance your home that’s held in trust.

1. Deed the home from your trust to your personal name.
2. Refinance the home.
3. Deed the home back to your trust, regardless of whether the bank tried to scare you with a due-on-sale clause scenario.
4. If the bank does try to accelerate your loan, pass your bank a copy of the Garn St. Germain Act.

Deeding Your Home To An Asset Protection Trust: Due-On-Sale Clause Lies is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

California Franchise Tax

If you are a California resident, you must pay a franchise tax for each business entity that you own.  That’s true regardless of whether the business entity itself is formed in California.  For instance, if you live in California and you form a California limited liability company, you’ll be required to submit the appropriate tax forms and remit the franchise tax payment.  The same thing is true if you own a Nevada limited liability company or limited partnership.  The tax still applies.  It’s important to keep all this in mind when forming your asset protection plan.

Avoiding Tax Base Reassessments

Another quirk about California is that upon any transfer of ownership of real estate the state can (and will) reassess the value of the real estate for tax purposes.  Effectively that means that if you don’t fund your plan carefully, you could end up paying much more in property taxes.  Since many plans involve holding real estate in limited liability companies which are themselves owned by a limited partnership, it can be tricky to transfer property into your plan without incurring additional taxes.  So here’s what you need to do:

• If you plan to transfer property into a limited liability company, make sure that company is owned by the same people and in exactly the same proportions as the property is owned right now.  Also, check with the recording clerk in the deed office to see what disclosures are necessary to make sure that no tax reassessment occurs.
• Transfer the property into the limited liability company with a quitclaim deed.
• Follow-up with the deed recording department to make sure that you have adequately disclosed to them that the property is still effectively owned by the same people  and in the same proportions as it was prior to the transfer and that no reassessment will occur.
• Transfer the limited liability company into your family limited partnership.

The same rules apply regardless of whether you are transferring property into a limited liability company, a family limited partnership, or an asset protection trust.

By following the steps outlined above very meticulously, you can avoid having your property reassessed for tax purposes, which can potentially save you thousands of dollars in property taxes every year.  The bottom line is that it’s just not fair to have an increased tax burden simply because of your desire to lawfully protect your hard earned assets.

Transferring Assets Into Your California Asset Protection Plan is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

But Not All Risk Is Bad

Yes, you read that correctly.  Risk is what leads to new developments and improvements.  Without risk, we would live in a stagnant world.  The question is not whether you should take risk (because we are all taking risks every day).  Rather, the question are:

• Are you fully aware of the risks you take?, and
• Are you being appropriately compensated for those risks?

These are important questions that many of us fail to ask, but recent events make this an important topic.

Municipal Bonds: Are They Risky?

You might be thinking “no way, munis are incredibly safe.”  The correct answer, however, is “yes, municipal bonds are risky.”  That’s not to say they are unreasonably risky.  All asset classes carry with them some risk.  Even the cash in your wallet is at risk.  You could lose your wallet, you could get mugged, or the value of the dollars you’re carrying could decrease relative to other currencies.  Those things happen every day, so to think your immune is unreasonable.

There are also risks associated with real estate, stocks, cash, and yes . . . municipal bonds.  The questions you need to ask with respect to any portfolio are the two questions above: (i) are you aware of the risk, and (ii) are you being appropriately compensated for it?

It’s not the intent of this article to pick on municipal bonds, but because munis are traditionally viewed as utlra-safe investments, they provide an opportunity for reflection.  You see, Jefferson County, Alabama just filed for bankruptcy protection.  It is the largest municipal bankruptcy in U.S. history, and it will cost creditors (bond investors) upwards of $3 billion!

Back to Asset Protection

Again, you should constantly be looking at the level of income you’re receiving relative to the risk you’re being asked to take.  Don’t accept less than reasonable compensation.  This is just a wake up call to those who believe that they are making “totally safe” investments.  In very simple terms, there is no such thing.  If you’re curious to read more about the Jefferson County Bankruptcy, the Wall Street Journal has a good article on the topic: Largest Municipal Bankruptcy Filed

If you have questions about asset protection or asset protection strategies, contact Lodmell & Lodmell today to schedule a consultation.  We’ll help you assess and understand the risks you’re taking, and we’ll help you protect your assets against potentially devastating events.

Are You Getting Paid Appropriately? is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

Defining Other Types of Risk

In the annual letter that all Lodmell & Lodmell clients receive, we outlined three broad categories of risk that could very well pose a greater threat to your assets than legal attack.  Those risks are:

• Institutional Risk — Remember Bear Stearns and Lehman Brothers in 2008?  How about MFGlobal in 2011?  Major institutions have failed, so it can certainly happen again.  Have you done your homework to decide for yourself whether or not your bank or financial institution is safe?  If you haven’t you’re in the realm of really scary risk, because you don’t even know how exposed you are.
• Market Risk — This is the risk of investments going down, whether due to micro (i.e. industry or company specific issues) or macro (the economy as a whole) conditions.  Anyone who has ever bought stocks or bonds has consciously taken market risk.
• Currency Risk — Yes, holding currency is risky, even if you hold it in 100 dollar bills in your home safe.  The reason is that the amount of goods of services that currency can buy fluctuates with the market and with the relative value of your currency to other currencies in the world.  That means holding currency is only safe if you’re holding the right currency!

More on Market Risk

Many professionals follow advice that traditionally has worked very well–they buy municipal bonds and hold them until maturity.  That strategy has worked well for many people over many years, and it might continue to work.  My goal is simply to challenge you to think: Does it seem to you that we are experiencing traditional market conditions?  Does the extreme volatility in the markets concern you at all, not to mention the market rattling news that comes out of Europe every week, the filing of the largest municipal bankruptcy in history, and rampant fraud in the financial services industry?  This is the one question you should be asking:  Given all the known and unknown risks in the market, am I being appropriately compensated for participating in the game?  If the answer is “no,” then consider sitting it out with a substantial portion of your assets.  That’s asset protection 101.  If you don’t know the rules (risks), don’t play.  Then, with whatever portion of your portfolio you do want to invest, seek the advice of professionals.  If you have questions on how to do that, contact Lodmell & Lodmell today.

Really Scary Risks to Your Assets is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

Unknown Market Risks

Here’s the reality, if you are invested in liquid markets (e.g. stocks and bonds), you are taking risk.  You can pick the fasting growing, lowest P/E company out there, but the truth is that the stock’s performance is at least somewhat tied to the overall market.  No matter how good a company’s management team is, there is very little that anyone can do about the macro-economy.  This simply means that all investments are subject to market risk on two levels: The macro level (overall domestic and now global economic conditions), and the micro level (ability to compete in a niche and generate high marginal profits that attract long-term investors).

Managing Your Own Portfolio

Many of our clients are investors, and many of them manage their own portfolios.  “Home gamers” are people who like to assess risk and allocate assets, but they are at a disadvantage in many cases, because they are often competing for returns against Wall Street professionals who are trained to do one thing: Get your money!  Remember, it’s a zero-sum-game.  For every winner, there is a loser.

Despite the fact that many do-it-yourself investors are sophisticated professionals, it’s surprising to find out how many of them are “long only” investors–how many of them don’t even know that going short (or selling assets that you don’t own in anticipation of the market falling) is even an option.  This type of knowledge is one advantage that professional money managers have over the typical individual investor.  It is a huge risk to invest when you don’t know what you don’t know.

If you’d like to learn more about investing your cash with an asset protection, risk management mindset, call Lodmell & Lodmell today.  We’ll be happy to discuss the options with you.

What You Don’t Know About Investing and Risk is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

In particular, institutional risk is the risk that the bank (or other similar financial institution) where your cash is held fails.  But it goes beyond simply the risk of your financial institution failing.  That’s because all of the financial institutions in our country and, to some extent, globally are interconnected.  That means if one bank or brokerage house fails, the risk of contagion (and of imminent failure) to other financial institutions is very real.

The Reason for TARP

Remember the Troubled Asset Relief Program, affectionately called TARP?  The reason for the TARP bailout was simply to prevent to a series of defaults to prominent financial institutions.  The truth is that if the federal government had not provided a bailout, the U.S. likely would have suffered the loss of a number of major banking houses.  The reason is simple: Banks are largely interdependent.  They loan money to one another to meet reserve requirements imposed by the Federal Reserve.  In other words, when a bank’s capital falls below the mandated minimum, it must borrow money on a short-term basis in order to stay in compliance.

When one major banks fails, as happened in 2008 with the failure of Lehman, then other banks become skittish about lending to one another.  That’s because the short-term “reserve requirement” loans become extremely risky, and financial institutions stop throwing life rafts to one another.  TARP was an injection of liquidity meant to keep the system moving forward–meant to keep money flowing between financial institutions so that the system didn’t “freeze.”

Money Kept in Banks is Also Exposed to Risk

This means that with very few exceptions, even the money we keep in banks at cash is exposed to some measure of risk.  The central message of this article is simply to alert you to that risk.  We all take risk every day.  What’s important is that we be aware of the risks we’re taking, because it is the unknown risks that really catch us off guard.

If you’d like to discuss institutional risk and how you can reduce or eliminate it as an added asset protection strategy, call Lodmell & Lodmell today.  We will be more than happy to learn about your circumstances and make specific recommendations.

New Risks to Your Assets is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

Protecting Assets Prior to Default

The Wall Street Journal recently published an article on this topic: House is Gone but Debt Lives On

The key observations from this article are that:

• While deficiency claims are still relatively rare, banks are pursuing them with more frequency.  In one Florida county, for example, deficiency suits have increased by 34%.
• Credit union and smaller lending institutions are much more aggressive than the “too big to fail” banks when it comes to pursuing borrowers for deficiency judgments. (It seems the old banker’s addage “know your customer” has been turned on its head–KNOW YOUR LENDER!)

A number of “experts” have predicted that banks will eventually become much more aggressive when it comes to pursuing deficiency claims.  We have no way of knowing whether or not that is true, but one thing is certainly true: Banks and other types of lenders are much, much more likely to pursue you for a deficiency if (i) they believe that you have assets to pay a deficiency, or (ii) they believe that you can afford to continue paying your mortgage but are, instead, choosing to shift the “loss” to the bank by walking away.

Asset Protection Tactics for Strategic Default

The worst case scenario is that a lender does obtain a deficiency judgment against you and then later sells that claim to a collections agency.  Collections agencies are relentless, and many of them will not stop pursuing your assets until:

• The claim is paid,
• They have repossessed your non-exempt assets (e.g. certain automobiles), or
• You file for bankruptcy.

Of course, prior to defaulting, there is no way to know whether or not your lender will pursue a deficiency, but you can do a few things to make yourself less attractive as a deficiency candidate.  For example, if you are preparing to default on an investment property but you live in a state with favorable homestead laws, you can pay down your primary mortgage.  Other options include moving assets into exempt asset classes (e.g. ERISA retirement accounts), or putting assets into a fully developed asset protection strategy.

Strategic Default: Mortgage Deficiency Judgments and Asset Protection is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

Early Negotiation: An Asset Protection Strategy

In an earlier article on how to protect assets against lawsuits we talked about the benefits of being judgment proof.  In the case of people who are concerned about protecting future assets from existing judgments or creditor claims, it’s a safe to assume that there probably aren’t very many assets to protect currently.  As much as that might seem like a bad thing, it actually creates a good opportunity for you.  Here’s what I mean: If you honestly don’t have assets to satisfy a judgment against you, your creditors have a choice between (1) waiting to see what happens and (2) taking what they can get.

If you have a reasonable expectation of personally receiving assets in the future (but don’t have many assets “on paper”), then it would be extremely wise to attempt to negotiate the current claim against you.  Your creditors will likely prefer to take a known lesser amount than to continue waiting (and incurring legal fees) indefinitely.  In other words, if your creditors see that you don’t have much, it’s very possible that they’ll take anything!  In short, this use of timing and strategy can be a very effective asset protection tool.

When It Works

If you can successfully negotiate a settlement, if you can get your creditors to accept a lesser amount of money than what you actually owe, then reduce it to an agreement to pay or some other form of promissory note.  Once it’s in writing as a settlement of existing debt, the creditors won’t be able to attack your future assets.  The trick is to get all your claims settled and off the table (not necessarily paid in full) before you receive assets in any substantial amount.

The next most important thing you can do is put together an asset protection plan that is capable of receiving and holding the assets that you acquire in the future.  The fact that you have had a judgment rendered against you already should be a wake up call.  Don’t put additional, future assets at risk.  If you have questions about setting up an asset protection plan, please contact an asset protection lawyer to discuss your situation.

Existing Judgments and Future Asset Protection Planning is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

Let’s back up for a second, in case we jumped too far ahead.  A writ of garnishment is a legal remedy available to creditors.  It allows creditors to directly receive certain types of payments that would otherwise go straight to you.  For example, if your wages are garnished, then your employer would actually hand a portion of your paycheck directly to your creditors.  In short, garnishment is a harsh remedy, and it can have devastating consequences.

Florida Asset Protection

Unlike Texas, Florida doesn’t provide the high degree of protection from garnishment available in Texas.  (The focus is on these two states because we have A LOT of clients in both Texas and Florida).  But Florida asset protection laws do make one notable exception to a creditor’s ability to garnish wages.  It’s called the head of household exemption.

If you live in the Florida and you are the head of a household, then your wages cannot be garnished.  To be clear, “head of household” is more of a family definition than it is a geographic designation.  What that means is that one can be the head of a household so long as she or he has a legal or moral support obligation for another person such as a spouse, child, or parent.  The supported person does not necessarily need to live in the same home with the head of household (e.g. think about a parent who provides primary support for a child but does not have custody of that child).

The Goal of Asset Protection Planning

The ultimate goal of asset protection planning is to help you set up business entities (e.g. limited partnerships, asset protection trusts, and limited liability companies) in such a way that the writ of garnishment does not apply–in such a way so as to take it out of the equation.  In that way, with a little careful planning and the implementation of tried and true systems, a good asset protection attorney can greatly reduce your risk of ever being garnished.  That’s not just better than the Florida exemption . . . It’s actually very much like moving to Texas (but without all the hassle!).

Garnishment and Asset Protection is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm