Asset Protection: How to Set Up Your Real Estate Entity

March 14, 2024 00:25:56

Show Notes

Success as a real estate investor doesn't depend on how much money you make--it depends on how much you get to keep. Knowing how to guard your assets with the right legal entity and tax protections is vital. So, in this episode of The WealthBuilders Podcast, we teach you how to do just that. Karen Conrad Metcalfe sits down to talk with expert real estate attorney and investor, Bill Bronchick, about all things asset protection. Listen to learn how to keep more passive income in your pockets!

Shownotes: https://www.wealthbuilders.org/asset-protection-how-to-set-up-your-real-estate-entity/

Register for the Real Estate Workshop: www.wealthbuilders.org/events

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Episode Transcript

[00:00:16] Speaker A: Hello and welcome to this week's Wealth Builders podcast. I'm Karen Conrad Metcalf. I'm the vice president of wealth builders, and I am so blessed that you chose to join us today and many of you join us every week. Hey, you may have noticed we have a little upgrade going here in the Wealth Builders podcast. We have added video. We really love that because then you can see our faces. We can get the PowerPoints to support what we're talking about. So you can still listen by audio if you use Spotify, Apple podcasts, whoever you listen. But here we are for you, and we are so glad to connect. And today I have the most amazing guest. I want to welcome Mr. Bill Bronchek. [00:01:02] Speaker B: Thank you, Karen, and happy new year to everybody. [00:01:05] Speaker A: Bill is, of course, our most coveted attorney, you might say. He is a partner. He helps all of us. And I'll tell you, Bill, you are such a blessing. You have guided us in so many areas and our coaching clients, they get to have a free consultation with you as part of their program. We partner together with access to legal whiz, and you're just the best there is in real estate law. So we are so grateful to have you. And as we start out here, we're in February of 2024, early in the year yet, but this is going to be an exciting year. And what I've asked Bill to talk about is just talk to us about asset protection. We do a lot about investing. We have our businesses. And as we move forward in those, there's some ways for us to get legal protection, tax protection, and 2024 has got some changes. And so, Bill, I know you have prepared some information for us. I am so excited. I've got my notepad out. I'm ready to take notes. So I'll turn it on over to you. [00:02:14] Speaker B: Great. Thank you and welcome, everybody. Let's see if I can get. This is a new format here. Let's see if we can get it going here and back. And let's see if it shows up. With my PowerPoint, we go. All right. Well, welcome, everybody. We're going to talk a little bit about asset protection and choice of entities for real estate investors and other small business people. This doesn't just apply to real estate. It also applies if you are in the business, so to speak. So they say that in law and in business, and when it comes to rules and regulations, there's what you know, there's what you don't know. And then the scary part, what you don't know that you don't know. And that's why people come to me, because they say, I don't even know what I don't know. Enlighten me. And you don't want to be in front of a judge being told what you don't know that you don't know. You want to do this preventatively to avoid that. And especially we have a lot of real estate investors who are in wealth builders and business owners, and they're very easy targets, very easy targets for lawyers. And people say, well, that's obvious because landlords and business owners, they have money. But it's not just that. It's just who makes up the jury pool? Tenants and employees. You think you're going to get a jury of your peers if you go to court, other business owners and landlords, not likely. You're going to get a jury full of tenants and landlords, excuse me, tenants and employees. And when they get into court for you, it's payback time, because a lot of people hate their boss and hate their landlord, so not a good place to be. You want to avoid being in court. So my motto is trust in God. But CYA. CYA does not mean call your attorney, means something else. I don't think I have to spell it out. I think most of you get, you know, there's spiritual warfare and there's spiritual courts in heaven, and of course, you want to pray for that, for your own protection of your business and your family and your finances. But also you have to take action to put that principle into protection for yourself. So first, we'll start by talking about some of the considerations for a choice of entity, because I think this is where a lot of people mess up. They say, well, should I do an LLC? Should I do a corporation? Should I do an S corporation? Should I do a partnership? I mean, a trust or some combination of that? So let's look at the considerations for that. The first thing is risk of exposure to lawsuit suits and or liability. That's one of the main reasons why people set up corporate entities. They want to insulate themselves from any potential liabilities of their business. Second is the cost of forming and maintaining your entities. So there's the sort of ideal world where it would look like this, and then there's the practical world where it may look something different because we don't want to be so expensive. For example, states like New York and Illinois and California and even Texas are fairly high filing fees. And California has this monster franchise tax they charge every year on entities where states like where I live, like Colorado, it's only $50 to file, and it's only $20 a year to register. And we don't have any kind of franchise tax. It would change the dynamics a little bit depending on where you are and where your assets are. Also the tax implications and tax reporting, that's a very big one, depending on the type of income you earn. So we have passive income, like rental income, and then we have earned income, like something that would come from services, a job, or if you're in real estate flipping houses, that's considered earned income. And that will determine in a lot of times the choice of entity that you pick. And then also we have the transition of ownership to your heirs. If you create a legacy in real estate or business, how do we pass this on to our heirs? Effectively using corporate entities? And then also there's bookkeeping and paperwork. I mean, how complex do you want your life to be? Some people want to go take it so far to the extreme that they'll be so busy having corporate meetings with themselves, they won't have time to go and do business. So you don't want to go crazy, but you don't want to do nothing. There's a balance of all these factors together. So the different entities choices, we have what's called a C corporation or a regular corporation, and all the public corporations, Google, Verizon, at and T, they're all C corporations. And the way they work is they pay corporate tax. So if they have a profit, the corporation pays corporate income tax, but the rate is only 21%, which was part of the Trump era tax cuts that was cut from the low 20s, which is a big deal. Now, c corporation, if you're just this sole owner or you and your spouse and you take a dividend, you're taxed again. So, you know, if you get a dividend from, let's say, Apple stock, you pay personal income tax on that dividend. But Apple also pays corporate tax to the government. So if you're the only shareholder or you and your spouse, and you pay corporate tax and personal tax, you're paying a monster amount of tax. So there are strategies for getting money out other than paying corporate tax and then paying, again, a dividend tax. Then we have what's called an S corporation, which structurally is pretty much the same thing as a corporation, a C corporation. But for taxes, there's only one level of taxation, and this is what is referred to as a pass through entity, which means that the corporation itself, the S Corp, doesn't pay federal corporate tax. What it does is it passes the profits through to the shareholders who pay personal rates on that income. Now, that could be good or bad, depending on what your other income looks like. So if you are a high earner already or have a business that produces a lot of income and you're in a high tax bracket, an S corporation might not be good because you're passing more income through a C corporation. Paying 21% corporate tax might actually be better. But there is no right answer for this. It's really up to you and your tax advisor. Then. We have a limited liability company, or LLC, which is sort of like a hybrid between a corporation and a partnership. But like a corporation, you have liability protection. As the owner, we call the owners in an LLC, members, and the people who run it managers, whereas in a corporation, the owner is shareholder, and then the people who run it are the officers, your president, secretary, et cetera. The thing about a limited liability company is it doesn't have a tax return. The IRS never came up with one. So S corporation has a tax return. C Corporation has a tax return, LLC. You elect how you want to be taxed. So there's four different ways you can do it. And I'm going to go too far into the weeds, but it could be what's called disregarded, which means you report the income on your personal return. So let's say you had a rental property and you or you and your spouse were the sole owners. You could just report the income and expenses of your rentals on your personal return. If you had a running business, you would be on schedule C as a self employed individual, which is probably not a good idea. You'd probably be better off with an S or a C corporation. But an LLC can also choose to be taxed as a C or S corporation, which is, a lot of people now are doing that choice because LLCs are a little easier on the paperwork annually than corporations are. So instead of forming a regular s corporation, they're forming an LLC, which chooses to be taxed as an S corporation, which means it files the same tax return and follows the same tax rules. And then we have what's called a family limited partnership. Family is just kind of a buzzword. There's no particular designation when you file with the state. And all of these entities file forms with the state to be birthed, to be formed, to be in business. And that is an entity which is taxed as a partnership, which is a pass through like an S corp, meaning it doesn't pay federal corporate tax or partnership tax. And the individuals pay the profits or losses if there are losses. But for example, in real estate, you can have losses because of tax depreciation. And then we have general partners and limited partners. And then limited partners in a limited partnership have no liability, but general partners run the show, so to speak. Okay. And then we have trusts. Trusts are not really an entity at all. For example, a living trust that you do for estate planning, it's not filed with the state, it's a contract. So it's not really in the same kind of category as the other four. But I wanted to mention it because people often think of a trust as an entity when it really isn't. It's a contract. So the rule of thumb is, first determine the nature of your income, be it real estate or whatever. And now is it passive or is it earned? So if it's rental income or you're loaning money, for example, and you're getting interest, or you buy, let's say, tax lien certificates and get a return, that's all passive income. Earned income is something that you do labor for. So if you have a business that sells something retail or a service business, if you're in real estate and you're flipping or wholesaling homes, that's all earned income. And so generally speaking, we do passive income like rentals in an LLC, or LLCs, as we'll discover, or limited partnership and then earned income activities in a CRS corporation, depending on your particular tax situation. So that's just a general rule of thumb. Of course, we're going to find exceptions to these in many cases. And it's important for you to discuss this with a competent tax professional. And trusts are mostly for anonymity purposes and for estate planning. They're not used as a liability shield or an asset protection shield. They're used for passing on your estate, and they're also used to hold assets in a way that is anonymous. So a common setup, what people do is they put everything in their own name because they don't know what to do. And it's easier because especially when you buy real estate, you usually buy it in your own name because a lender requires it that way. And then most people just leave it that way, which is bad for liability, bad for taxes, bad for reporting, and there's no transfer to a legacy for your children unless you have a living trust or will. So a better setup would be to put, let's say you have a bunch of real estate properties or businesses and you put them in an LLC. Well, that's better than in your name, because if the business gets sued, you're protected. Your personal house, your cars, your personal bank accounts, they're all protected, but the company's not protected. So if you own most of your wealth in your LLC, then your LLC gets sued and it can lose all it has. So it's better, but not great. Some people would do every asset in a separate LLC, and I think that's overkill, especially in a state where the cost of filing and reporting every year, filing tax returns, is very expensive. So that's probably overkill. If you own three apartment buildings, that would be appropriate in three separate LLCs, but not single family homes or condominiums and things like that. So the best, as I said earlier, is a compromise. In this scenario here, where every property or asset is in a separate LLC, in theory, you can march into court and argue, well, judge, they only get what that one company owns. If they fell on that one property and got injured, and the other lawyer is going to say, well, it's all them. Don't be fooled. So you're not leaving the judge a lot of leeway. If the one property they got injured on only has 100,000 in equity and they're permanently disfigured, you're not leaving the judge a lot of leeway there. So in the compromise scenario, maybe every two or three or four properties, depending on the value, the equity and the type of property it is, just break them up into more than one but less than one for every property. Unless, again, we're talking about commercial or multifamily properties. And then even better would be what we call layering by having a parent company own the different LLCs that own the assets, in this case, real estate. So a parent company, you have to think of like General Motors. General Motors is a parent company, and General Motors owns subsidiaries. And those subsidiary companies are Buick, Chevy, Cadillac, et cetera. There used to be a lot more of them, but now I think down to four. So the parent is the sole owner of the subsidiary. And the same thing here. The LLCs are what are called subsidiary companies that are wholly owned by the parent company. And usually I like to do the family limited partnership or LLC in Wyoming, which is one of the best states. Delaware is good, Nevada is good, but Nevada is very expensive. Delaware is a little tricky for filing, and it's got a franchise tax. And Wyoming is really one of the cheapest and best states to do. A parent entity. And the LLC subsidiaries, those would be formed in the states where the assets are owned. So, for example, if you own property in Texas, Florida and Nevada. You might have three separate LLCs there, all owned by a Wyoming LLC as a parent company. Okay. So in this case, in the parent company, the husband and wife would be general partners, and the husband and wife would also be the limited partners. And then they could, either by a will or through a trust, leave their shares of ownership in the parent company to their family, to their heirs and so forth. And instead of passing on the assets to the. To the. To the kids and the grandkids, what you're passing on is the keys to the parent company, and then everything flows down from there. So you don't have to. What a lot of attorneys will do with estate planning is that if you have five different assets, they'll put them all in a living trust, like five different properties. Well, that does estate planning, and it avoids probate, but it doesn't protect the properties because living trusts don't have liability protection. So the idea is you put them first in entities, and then the entities are owned by the parent and the parent is owned by the trust. And that way you're just passing the keys to the parent company over to your children and grandchildren and so forth. [00:17:38] Speaker A: Bill, super quick question on that. Yeah, this is amazing, by the way. Super helpful. When I'm looking at that with the parent company, where you're saying the LLC is rolling up to the parent company, does that also avoid probate? [00:17:54] Speaker B: No. What you would need is the parent company shares, instead of being owned individually by the husband and wife, would be owned by their living trust. [00:18:06] Speaker A: Okay. So that rolls out. [00:18:08] Speaker B: That rolls out. So what you're leaving to your heirs is not the assets, it's the keys to the parent company. [00:18:15] Speaker A: Awesome. Thank you. [00:18:17] Speaker B: That makes sense. And again, I have to give the attorney disclaimer, everybody has something a little different, depending on their situation, depending where you live, depending on your taxes, depending on how old you are and so forth, and how big your family is. But this is a kind of general schematic that I use a lot with clients. But you asked me earlier, are there any new things coming along? And the answer is yes, there's one new thing that came along. I mean, there's some minor tax change rules, but nothing significant. But the big thing is right now is the financial crimes enforcement unit, which is called fincen. F I n c e n, which is an arm of the. I think it's an arm of the Treasury Department. They're concerned about money laundering. So now that what they want everybody to do is. So if you have a corporate entity, LLC, corporation partnership that you formed prior to 2024. You have to go to Finsen's website. If the company is still active, if it was dissolved, you don't have to worry about it. But if it's still active, you have to go to every one of your companies, has to file a statement of information about all, who all the owners are. Now, before you panic and freak out, go, wait a minute. I don't want that. I don't want that information public. I have tenants and I don't customers. I don't want them to know who really owns everything, which is a valid concern. It's not a public database. This is a government data. And people go, well, it could be hacked. Well, sure, the IRS already has 95% of this information already, so they could be hacked, too. But the general public, like tenants and customers and people wanting to sue you, lawyers, can't access this database, but it's just an inconvenience. So every entity you formed prior to 2024 has to file the information thing with Finsend.com by the end of 2024. And if you don't, there are money penalties. How are they going to enforce this? I don't know. I imagine they probably have some kind of AI that could search through the state databases for corporate entities and then match them up with what they have. I really don't know. But if you form an entity this year, 2024 going forward, you have 90 days to file that statement of information. And it's pretty intrusive. I mean, they want, like, your home address, your phone number, copy of your driver's mean they want a lot of information, which is a little, again, you know, if you file tax returns or got a federal ID number for a company, the IRS already has this info, pretty much, so I'm not sure what the need for this is. What I want to know is, is Hunter Biden and Joe Biden going to disclose all their ownership in those 47 entities that they're funneling money? Very good question. Yeah. Are they going to have to do it, too? Because right now, I don't think they know. All they know is what's on public record, which is just the companies associated with the family, with money going back and forth. But if they have to disclose, like, who owns which one. Yeah, that's the sort of 40,000 foot view of it. [00:21:36] Speaker A: That's exactly right. I was just going to mention that we have a real estate workshop specific to real estate that's coming up in April, and this is really where we are. Diving into all of this in even more depth than what we did in the wealth builders conference. But I would encourage you to be a part of that. And to learn more, go to wealthbuilders.org events. And as you can see, I've got this amazing sunbeam coming, but I kind of look a little angelic, maybe I'm. [00:22:09] Speaker B: Not like you're like breaking up, like, know, ascending to heaven. [00:22:16] Speaker A: Yeah, there you go. But these workshops, bill, you're part of that. We have wealth builders coaching clients for people that, hey, if you really want to get into investing, or if you're in investing, you want to do it right. I think we have an amazing program and bill is a part of that. And they get a consult with you. If you want to learn more about that again, go to wealthbuilders.org and then you can go on the website. We actually have a place for coaching that you can learn more and have a 30 minutes free consultation. But you do not want to miss this upcoming real estate workshop. All right, so, Bill, this is really amazing information. And I think it's easy, at least what we've experienced. We're so excited to get into real estate. We're so excited to get these entities set up. But there's some real things that we need to put in place to kind of follow the law, but also just practically stay protected. And so you are the best out there. Can you let people know how they can reach out to you and how they can connect with you? [00:23:21] Speaker B: Yeah, my website is my last name Bronchick Bron, chicklaw.com. Bronchicklaw.com. Or my email is just [email protected]. And I do answer my own email. [00:23:34] Speaker A: You do. And you're very responsive. So you can connect with Bill. Certainly you can connect with them at the wealth builders events. And Bill, this is good information. It's information a lot of people don't know about. I think it can be a little scary for people because they're like, okay, I want to get into real estate, but they maybe aren't administrative. But that's why we have people like you and our CPAs, correct? [00:23:59] Speaker B: Yes, that's right. As I said to people, you want to build your business on a foundation, like you build a house on concrete, on a solid foundation. What a lot of people do is they start, I'll worry about this later. It's a lot harder to do once you've acquired a bunch of properties and then put it all together. I have clients who come to me in their sixty s and seventy s who own 30, 40, 5000 properties, residential, commercial, multifamily. And boy, it's a lot harder to do that. [00:24:25] Speaker A: Wow, that is so true. It is a lot. Even getting behind on Quickbooks is a little bit of a challenge. So imagine this. So here's the thing. This is also why a lot of people don't do what we do, because it is work. But we make it simple for you. At wealth builders, everything is based on the foundation of the word of God. So we just encourage you, don't be afraid of this, get involved with this, do the right thing and start building that legacy and that generational wealth to truly make a difference and pass on for generations. A way for your family to have an inheritance that just keeps on growing. So Bill, any final words before we finish up this podcast today? [00:25:11] Speaker B: Well, like I said earlier, cya does not mean call your attorney. Always better to do this earlier than later because frankly, if you wait until something goes wrong and then you do it, it's not as effective. It's hardly effective because courts are very suspicious of people moving things around at the last minute. [00:25:31] Speaker A: Wow, that's so good. All right, well, thank you so much, Bill Bronchek. We appreciate you and thank you all of you tuning in. You are part of the wealth builders family. We love and appreciate you and have an amazing rest of the day.

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