The Everyday Millionaire Show
The Everyday Millionaire Show
Mastering Asset Protection - Brian Bradley (Full Podcast)
Unlock the secrets to safeguarding your real estate investments with insights from our expert guest, attorney and financial advisor Brian Bradley. Discover why relying solely on LLCs might leave you exposed to risks you hadn't anticipated. Brian shares his seasoned perspective on why a layered approach to asset protection is crucial, and how strategic planning can shield your growing portfolio from legal pitfalls. Whether you're just starting out or expanding your investments, this episode equips you with the knowledge to build a robust defense for your assets.
Welcome to the Everyday Millionaire Show with Ryan Greenberg and Nick Kalkas. Alright, guys, welcome back to another episode of the Everyday Millionaire Show. We are here with Brian Bradley, coming from Oregon. Bradley is an attorney and financial advisor. Brian, thanks for joining the show today.
Speaker 2:Thanks, guys for having me on, and it's going to be a lot of fun. I'm excited about this. A lot of people who are familiar with my name are probably used to hearing me talk on other shows about high-end asset protection, which we'll break in here, and then maybe a little bit about some other financial things that I like doing as well on the insurance side, and even one of my favorite ones right now is Medicaid annuities. We're taking care of our grandparents and parents as they get older.
Speaker 1:But I think it's going to be a lot of fun today. Yeah, it definitely will be. So I see you've appeared on several different shows and some common ones like BiggerPockets and Simple Passive Cashflow. That's cool, so we'll definitely have some stuff to talk about. So first let's talk about what we do and what I think our audience is here listening is real estate investing particularly.
Speaker 1:I think selfishly, nick and I probably have questions about that, since that's both what we do. A little bit of background I'm also a contractor, general contractor and home builder and property manager, so I deal with, deal with unfortunately have to deal with attorneys and tenant issues a lot, so we'd definitely be interested in learning more about that asset protection so we could protect ourselves against, you know, frivolous lawsuits and stuff like that. First question what is one of the most? Um? First question what is one of the most common or overlooked things that people that are starting to accumulate wealth Like, let's just say, a new real estate investor, they just bought their first couple of buildings or their first building. What's one of the most common mistakes that you see people making?
Speaker 2:I think the one thing is that they don't have the right, I think two one they don't have the right team in place and then they accumulate too much too fast without creating their base layer foundation to protect themselves. Meaning I'll give an example like my ex-brother-in-law, like I'm divorced now, like he went from a guy who couldn't rub like two pennies together to accumulating over a couple million worth of real estate in like a year and a half, because if you do it right and cash flow recycle yourself, you can accumulate a lot of real estate really fast. But then the issue is you're doing it all in your personal name and then if you get sued, it can go away just as fast. So as you're accumulating real estate and investing, you really have to keep the eye on what happens if the deal goes belly up. What happens if somebody gets injured, what happens if I get sued? And we got to plan for that as you grow.
Speaker 2:And the reason is. An example of this is every month I get a call from someone who accumulated a lot of real estate for, let's say, 10 years and they have 5, 10 million worth of real estate all in their personal name. And then they come to me and like, hey, I want to protect my assets. The amount of work and protection that we have to set up for that is then going to become very expensive, probably like 40, 50,000 with that much real estate that they have. So the idea is plan and scale as you grow. So accumulate and grow, but don't kick the can so far down the road that it becomes too expensive to do anything. You're just a complete walking target.
Speaker 1:Yeah, that's a good point. So, to give you a background, nick has scaled a massive real estate portfolio over the last what? Five years or so yeah, about six years now and I've bought several properties not as many as Nick, but we've been buying them in LLCs and I think there's a common kind of misconception that an LLC will protect you against all things. But that's not true, as we've found out before speaking to other lawyers and just kind of common knowledge. Is there a structure that you would like to see somebody starting out as if they were going to buy their first property? Is the LLC route the right way to go if they don't have a lot of money to start and they may be just buying one or two properties?
Speaker 2:Yeah, that's a great question because we got to start somewhere, right, and I think starting off with the Taj Mahal is the wrong step, right, it's way overkill for you if you're just starting out. So I would think about creating an asset protection structure. Like we're going out on a winter skiing trip, right, we wear layers of clothing when we go out skiing, and so if you're just starting out, we're starting with the base layer, right, that thin piece of fabric that sits on our skin, directly on our skin. That's an LLC and insurance for you. If you're like zero unit, zero doors, or probably below like $200,000 of exposed equity, all right, that's where we want to start out. The issue, like you mentioned, which I can break down, why LLCs are the lowest on the totem pole, we can go over that, but when we're starting out, you're a greenhorn. This is where we want to be. And then just realize, as you grow and scale and add more real estate and more assets, you're changing your picture, right, just like as you change your picture for taxes, you're going to get different benefits and write-offs.
Speaker 2:Same thing in the asset protection world. We're going to start adding more elements like limited partnerships and asset protection trust. So those are the next layers. Layer two would be like a sweatshirt, a cardigan for you, ladies. That's a limited partnership or a management company. All right, that's the second layer. Third layer your outer shell, waterproof layer. Right, it's really cold, stormy outside. We have that third layer of protection. Those are asset protection trusts, and particularly like hybrid trusts for high risk, high net worth individuals. And then by layering, we can be more flexible and we want the same thing flexibility with our asset protection trust, I mean with our asset protection systems.
Speaker 3:So I recently went to BiggerPockets the conference last week and they say that you know, create a holding company in Wyoming and I know you are against that. Can you explain a little bit why creating a holding company in Wyoming and doing business out of Maryland, for example, is not a good protection?
Speaker 2:Yeah, so creating LLCs are good, and it's again that first layer, that entry layer, and what you're getting to is called, you know, charging, order protections and jurisdictional shoppings. Like do we go to Wyoming, texas, nevada, and then we're really looking at corporate bail piercing, and so to break this down I'll need a few minutes because there's a lot of case law which I can summarize like without getting geeky on it. But we have to remember that LLCs began in the 70s with the goal of blending the elements of corporations and partnerships without the downside of double taxation. Asset protection was never the end goal of LLCs, so by nature they're not the strongest strategy. Doesn't matter if it's Wyoming or Delaware, you know, they tell us straight up in their name limited. So they offer limited veils of protection.
Speaker 2:Now, something's better than nothing, but it's fragile and it can be pure. So just think of an LLC, no matter what state it's in, like that thin, flimsy piece of fabric that goes over the face of a bride on her wedding day. And to get to your point right, we're saying let's say, for example, it's California real estate that you own and you're a California resident, and then you set up a Wyoming LLC and then you go and you hold a key piece of California real estate in this Wyoming out-of-state LLC, and now you're paying California franchise tax on this out-of-state Wyoming LLC. What you've done is actually convert your Wyoming LLC to a California LLC. Because you're doing business in the state of California, you're paying the franchise tax in California, but if you ever have a liability issue in California meaning like a lawsuit, you're getting sued in that state the judge in California, or whatever state it is, is going to apply California law or that state law that you're getting sued in, not Wyoming law, because you have no legal nexus to Wyoming legal fancy word. And so this is demonstrated in a recent 2023 Supreme Court case named Mallory v Norfolk, where the Supreme Court upheld a Pennsylvania statute that forces companies to face litigation with the borders that it's registered to do business in. So I want to repeat that because it's actually really important it forces companies to face litigation within the borders that it's registered to do business in, right, and we're registering those LLCs in California because you legally have to. So state courts are permitted to exercise jurisdiction over registered foreign corporations that, let's say, are holding your real estate just as if they're domestic corporations in that state. So you don't just take Wyoming or Delaware tort and damage and personal injury laws with you to other states. You can't just go and purchase another state's more beneficial laws. And this next distinction is really important and kind of hits the head on the nail point blank.
Speaker 2:The second problem is the distinction between business law and tort law. You see, sadly people confuse business law and contract law with tort law and personal injury liabilities. So when we're setting up a business and we're creating contracts, we can and we should include choice of law clauses and venue provisions. We see them in every contract we ever sign. You know of what state is going to. You know manage this dispute. You know what state the lawsuit is going to become. You know filed through.
Speaker 2:That's fine when we're talking about business contracts, right. But when we're setting up a business to sell widgets or a product in a different state, like those, those are good charging order states like texas, nevada, delaware, wyoming, because they're going to govern the internal disputes and affairs of the business. And so I'm going to say that part of it again, we're governing internal disputes and affairs of the business. But when it comes to, specifically, real estate and investments in LLCs acting as holding companies, that's not a business. When a person gets injured on your property and sues your LLC or sues you for damages due to wrongful doings and a big legal fancy word negligence, that's not a business dispute, that's a tort liability. So we're talking about wrongful acts and infringements on rights. So cases like tort liabilities don't relate to internal affairs or corporate governance matters and so they're seen outside the entity. So you really don't have corporate bail protection in those situations.
Speaker 3:So that just brings me to my next question what if it's not somebody who's living in one of your properties who gets injured and you're not protected by having that LLC holding company in another state? But what if it's somebody, maybe, that you hit in a car accident and your insurance doesn't do anything or you don't have insurance? Can they still come after your LLC, or does that LLC and that holding company in another state give you a greater shield?
Speaker 2:That's a good question. We're talking about inside versus outside liability and so it really you're going to be getting sued in that situation because it's personal, you know, damage that you're doing. Like I mowed somebody down in my car so I'm getting state sued to, let's say, like we're in Oregon right now I'm in Oregon so I hit somebody and caused damage from driving my car in Oregon. I'm going to get sued through Oregon state law. Wyoming law is going to have nothing to do with that.
Speaker 2:Now the way you're protected in that situation is because there's nothing internal related to the business. So they're going to have to try to argue and pierce through that veil and saying maybe you're doing some sort of business activities driving around or going around, so they'll have to pierce into that LLC and connect the business to your activities of what you are doing. So that's a big distinction between inside versus outside liability. In the realms of utilizing an out-of-state LLC, it makes no functional purpose of why because again, if you're getting sued from a damage on that property you can't go buy another state's more beneficial loss. So it always makes more sense to just use the state that the asset is in and then when we layer, that management company is where we can use Wyoming or a better charging order. State at the second layer of protection, not at the base layer.
Speaker 1:So, to break it into simpler terms, we have two different ways that we're looking at these LLCs One as an active business, like a property management company, and then the other one is just an asset holding company that will hold the asset, so there might be equity in that company based on whatever the real estate's worth and whatever your debt is worth, but there's no active job, there's no besides holding that real estate, there's nothing, there's no employees that are transacting or anything like that. So those are the two different situations, right?
Speaker 2:Two different situations and so if I don't know very many attorneys that do asset protection, that would say, utilize an out of state LLC as the holding company. Now it's it's fine to say, use the LLC at the base layer as the holding company where it's at, like California, if it's California property, and then as the management company we can utilize Wyoming LLCs because it is a business. We personally use limited partnerships because we're adding asset protection trusts and more layers later on. It just depends on where the client's profile is at that point of what we're utilizing.
Speaker 1:Got it. Okay, that makes sense. And now to talk about the different holding companies, specifically to get away from management and active businesses, is there a number or an equity amount or a value amount that you should be like? Let's just say I have 25 houses right Somewhere in the $8 million range. Should I be having them in 25 different LLCs or should I have them in an LLC for every million? I've heard a million different ways to answer this question and that's why I'm asking some people like oh well, you should only have at least you know, at most $500,000 in equity and then move on to another LLC and start buying in that one. Is there, you know, a number that you recommend people stick with?
Speaker 2:Yeah, that's a great question and it's going to come down to one like the client's risk profile personally themselves. Generally we would say we don't want to see more than 500,000 to 600,000 in exposed equity in one LLC or no more than four doors. So like sometimes you can have a fourplex, well, that's four doors, that's a lot of risk and we don't want to have like, ok, I got a single family and a duplex and a fourplex, let's just stuff them all in the one LLC. Well, now you got a potential single family affecting a fourplex or a duplex affecting this. Right, it's just too much risk in one LLC. So we want to look at how many units we're talking about, what's the risk of that, and then how much exposed equity are we potentially putting at risk? And so in that situation I would say generally 500,000 of exposed equity and then no more than four doors.
Speaker 2:It comes to an exception when we're dealing with like West Coast and East Coast properties, because generally there's a lot of equity in those properties, because they're just like a California property is worth more than something in the Midwest. So you generally will have more equity. A lot of clients will have like 800 or a million in equity in one property, and so that's where we would try to say let's try to put it at 1.2 million and then keep the number of units in each LLC down. That's where the management company comes into play, because I have some clients with 50 LLCs, like five zero, but because they're all disregarded and flow up into our limited partnership or management company. It's just one tax filing at the end of the year. So it simplifies everything. So it's just one K one issue to them with a one page attachment called a 10 65.
Speaker 3:So if a tenant's in your property and they injure themselves and you own 10 properties under 10 separate LLCs and that tenant falls into one property under one LLC, what prevents them from suing you individually to access the other nine LLCs?
Speaker 2:Yeah, great question. So if the injury happened in the LLC like that property? So if the injury happened in the LLC like that property, you have to start the lawsuit. I was one of the top plaintiff trial lawyers in the nation for a while. So we have to start the lawsuit with the entity that owns that property, so that would be the LLC. So when I file my pleading in court I have to name the owner of the property, which would be the LLC, and then I'd have to start filing motions to then get the owner's personal name on it as well. And so that's a whole other argument that we have to go through there. But it's just because that's where the lawsuit started is the LLC owns it. So I have to pierce through to try to say, all right, this is just an extension of yourself.
Speaker 3:Now I want to get into all 10 of those properties and start piercing the veil to get in, so it's just more complicated for them to pierce through when it's like so many different entities they would have to go after.
Speaker 2:Essentially, it's not that it's so much complicated, it just adds more time. And when there's more time and more motions that have to be argued, that means more costs upfront that the attorney has to spend. And so it goes into the argument of okay, now we're creating more smoke and screen for the attorney to spend more money in law firms or businesses. It depends on the degree of the damage. Right, if it's just grandma slipped and fell and broke her hip, would I, as the attorney representing that, like you know, throw half a million dollars at that case? No, because it's not going to be the profit margin I'm looking at. Now. If I'm talking about you, talking about a wrongful death, multimillion dollar lawsuit, or a massive deal that fell apart, or mold issues, something like that, well then, yeah, I can care less about how many motions I have to file to pierce through the veils. It's just me appearing in court one more time and making an argument that I'll probably win 90% of the time.
Speaker 1:Okay Now, part of the benefit to investing in real estate is the appreciation and the principal pay down. So let's just say, to start out, I have an LLC that only has exposed equity of $500,000. But in 10 years from now, with appreciation and my principal pay down on the debt, I have $1.5 million worth of equity. Am I then going to start breaking off, even though this one property has been in this LLC for 10 years? Am I then going to start breaking off even though this one property has been in this LLC for 10 years? Am I going to now start breaking them off into further LLCs because there's more equity created?
Speaker 2:It depends. A lot of times I would keep that one in that LLC and then we'd be talking with maybe you and your CPA or financial advisor and saying what's the plan for this property? And then, as you're accumulating more, we just have to look down the road a little bit further and saying what are you doing? How fast are you doing it? Maybe then we need to add this next LLC sooner than when you buy it. That way the next property can go on that new LLC and keep the one that you put in there in the original LLC, just so we don't have to keep transferring title and moving things around.
Speaker 3:Why is insurance not true asset protection?
Speaker 2:Yeah, because it's not designed to be. First of all, what insurance does is it really just provides capital to fight, and then that capital gets eaten up in court and then insurance doesn't cover for intentional wrongdoings and fraud, and nowadays almost every single lawsuit has some sort of allegation of intentional wrongdoing and fraud. And it doesn't have to be like, hey, ryan, I hate you and I punch you in the face. It's just as simple as picking my hands up, typing an email that says yes, the plumbing was done, send, and the next thing you know there was like a massive plumbing explosion on one of the properties and mold issues. And the next thing you know, there was like a massive plumbing explosion on one of the properties and mold issues. The intent of typing and clicking send is an intent and that's an allegation of intentional wrongdoings. That's where the legal wriggle room from insurance companies comes into play and saying we're not going to cover this because there's an allegation of intentional wrongdoing. And if you think we're wrong, go ahead and sue us while you're being sued. And so insurance is good for the little things. The same argument and principle applies for umbrella policies is it just provides more capital to fight?
Speaker 2:I had a medical. I had a doctor who got sued for medical malpractice and it was 4 million for the lawsuit. He had 2 million in medical malpractice coverage, 2 million in an umbrella policy. The medical malpractice insurance provider covered the $2 million. So there's left $2 million right that still had to be covered. The umbrella policy provider covered the $2 million, then countersued the doctor and asked for the $2 million back, and so these are the things that we're starting to see happen all the time. So insurance is good and it's good for the little things. When you get into like million dollar lawsuits or wrongful deaths, negligent, like things that are like gross torts as well, that's where insurance releases their attorneys and they don't want to cover those.
Speaker 3:So why would they fund it if they knew they were going to go back or that they find more evidence indicating that they should have never have released that $2 million?
Speaker 2:It's a great question. I don't work in that. I'm not an insurance defense attorney, so I couldn't tell you. It's just the way that the game is, unfortunately, played.
Speaker 1:Yeah, awesome, so the ultimate. So my attorney just set us up, my wife and I, with trusts. Yeah, so we have a family trust and then a personal trust, and she has got a personal trust. Is that like the creme de la creme? Or is that like the final layer you were saying is the is the trust?
Speaker 2:Yeah, kind of. But not all trusts are created equal. So it seems like you did you create like an estate plan, like revocable living trust. Yes, ok, yeah, so, no. So you would eventually, depending on where you're at, like, if you have that million dollar exposed equity, we would utilize an asset protection trust, but then I would keep your estate plan and connect it to it. Because this is a big misconception about trust, like they think that all trusts are the same and people don't realize, like, think about trust like Baskin Robbins.
Speaker 2:Okay, trust comes in lots of different flavors and types. We have to remember that not all trusts are created Just like ice cream, right, like we got chocolate and vanilla. Same thing in the world of trust. And so, if I break this down real quick, we have the standard 101 trust that you kind of mentioned, that everybody's familiar with from the 60s. It's the family, revocable living trust, and so trusts don't die. So when you do and you actually funded your trust by transferring ownership and title into it, you don't have to go through the court process and probate when you die.
Speaker 2:And it changed the landscape of estate planning and we have to have these right, like they're really important, especially for medical directives, financial directives, what happens if you're unconscious state, if you have kids? So this is really important, you have to have it. We just don't own assets inside of them because they have no strength and power to actually protect you because they're not designed to. That's where asset protection trusts come into play. And so what asset protection trusts are is they're called self-settled spendthrift trusts, and so they're created for you by you as your own beneficiary, and they have very important spendthrift provisions in them that revocable living trust or estate plans just don't have. And what spendthrift provisions are is they are the provisions that allow you to protect your assets from creditors, the people trying to sue you, and so they're the actual teeth behind it.
Speaker 2:And for those to work, the trust has to be not revocable but irrevocable. So they're just very different types of trust. And then from there, the world of asset protection trust. We can split off into two directions. We can create them domestically, here in the US, or we can create them offshore and like the famous Cook Islands. That's when you get into high net worth or high risk, like if you have, you know, five, six properties plus and you have a million dollars of exposed equity maybe you're a doctor and investing in real estate. That's when the hybrid trust comes into play, which combines the foreign and domestic asset protection trust together.
Speaker 3:Okay, so is that the biggest benefit for having an asset protection trust versus, or having an in-state in the States versus offshore? It's you have more protection for someone to come after you.
Speaker 2:You have more protection, but it's better to have it bridged together like a hybrid car. Think about it. So the difference between offshore and domestic. Offshore is the strongest that you can get, like the famous Cook Islands statutory non-recognition right. Like if any court orders or judgments, including the US one-year statute of limitations, they have to prove their case beyond the reasonable doubt. Like the murder standard right. Like it's just impossible to do and they have to front the entire court costs and if you lose you pay. So that's the strength of actually going offshore to the Cook Islands.
Speaker 2:But for most people, like 99.9% of society, that's way overkill and they're very expensive, generally like $50,000 to set up legitimately and then we tell people $12,000 in annual fees to maintain. And so the other option that came 10 years later domestically here in the US. And so people are like, well, why are we doing these offshore, let's try to do them here in the US. And so people are like, well, why are we doing these offshore, let's try to do them here in the US. So states started creating domestic spendthrift legislation. The pros of that they're cheaper about $10,000, $12,000 to start.
Speaker 2:No IRS disclosures that you have to do because they're US-based grant or trust. The problem with that? They're just not very effective. We started seeing a lot of case law come around in the early 2000s and they've just been pierced through completely complete loss of the trust. And so we have one option where it's just way overkill and expensive, and then the next option which is cheaper but not very effective.
Speaker 2:And so what came about 30 years ago? We were called hybrid trust. We call it a bridge trust. My partner invented it 30 years ago, so it's not like it's a new kid on the block, it's just people are just learning about them. Now it combines the strength of the offshore trust and then we domesticate it in the US for ease of tax simplicity and then if you ever do get sued, we just break the bridge and we are foreign. Lawsuit goes away, it's re-domesticated and that's kind of the sweet spot right there is hybriding it together because it's more cost-effective no IRS tax filings but we keep the strength of the foreign option our back pocket. God forbid we ever need to utilize it.
Speaker 3:And you store all of the LLCs into that trust and that protects you from the outside world of people trying to pierce it.
Speaker 2:Yes, but not directly into the trust. So if you think about it like layering up like I mentioned about with their clothing right Risky assets, real estate, things that have keys, we need to get insurance on things that can go boom, goes into LLCs. Those LLCs funnel up and into your management company like a limited partnership. You manage the limited partnership and then your trust owns the limited partnership and then your trust owns the limited partnership. And then what happens during an event of duress, like a lawsuit, the trust can say, hey, limited partnership, I own you, I demand my assets from you now and then legally disconnect from it. And that's actually a statute that's established in Arizona. That's why we use Arizona limited partnerships to do that.
Speaker 3:Unilateral withdrawal on demand, okay, and by limited partnerships that's notilateral withdrawal on demand, okay, and by limited partnerships. That's not an LLC, correct? Is that like an S-corp?
Speaker 2:No, it's not. You never want to put real estate or assets directly into an S-corp first, and so limited partnerships are completely different. But to go off of what you said, with the S-corp it's a great question. You don't want to hold assets directly in the LLCs taxed as S-Corps. Or S-Corps is because they're great for taxation right, Mitigating taxes but when it comes to asset protection, it's horrible, because you get all the tax benefits right Deeper taxation through S-Corps. But if I have to move assets out of an S-Corp, like real estate or truck beds or hospital equipment right I owe all that deeper taxation back to the IRS. And so if you're accumulating I actually get this a couple of times a month and a CPA will create an S-corp for a client 10 years ago and they'll amass 10 million worth of real estate or some asset in that S-corp and they realize, oh my God, I have too much stuff in this S-corp. I need to take it out and protect myself. We can't do that for most people because they don't have the amount of liquid cash sitting around to pay the IRS back all the deferred taxation. So what you want to do in that situation is hold the assets, like real estate and LLCs. You know, or the truck beds or your medical equipment, whatever it is in LLCs create an S-corp for money coming in and money coming out for taxes. Just lease the equipment or the rentals back to the S-corp and that way the assets are separated.
Speaker 2:Regarding the distinction between limited partnerships and LLCs, limited partnerships are considered the next level up from LLCs because of the way they're structurally designed. Limited partnerships have two classes of ownership. So think of it like a circle with a line down the middle, and I think of it like schizophrenics, like split brains. The left side of the brain would be the general partner, the managing member, that would be you. And then the right side of the brain is what owns the assets in the limited partnership. That would be your trust.
Speaker 2:And so limited partnerships, by statute, are designed to split management and ownership by law, by statute. You cannot create them any other way. But you cannot do that without LLCs and the only way you can try to do it is through the operating agreements. And then the sad thing with those is, once you get sued, you have to submit those to a judge and a judge will determine if he agrees with them or not. And most of the time judges will not, because that's not how LLCs are designed and most of the time those LLCs will just get pierced through.
Speaker 1:Got it Okay.
Speaker 2:Well, that clears up a lot of things, the case law, and so that was the reason why clients were coming in, like you just said, like you break this down, like the whole picture of it, but you can't find a horn book or a book to breaking these worlds down and explaining the laws and the cases and and how to layer it, and so for more detail, like just pick up the book and this will break down the actual law to it.
Speaker 1:Awesome. So, getting away from the real estate specific questions and more into life insurance, when do you think is a good time for somebody, an individual, to obtain life insurance and as somebody that let's just call it you know I don't know what you say a high net worth individual, but let's just say somebody is you know they have't know what you say a high net worth individual, but let's just say somebody is you know they have a couple million dollars in equity and whatever else cash, whatever, not super high worth, but you know, got a little bit of money. When should they look into getting life insurance?
Speaker 2:I think it's important to get life insurance, especially if you're getting married and you have kids. Right, that's the number one. It's part of adulting. We own a home, we get married, we have a kid, we need to get an estate plan and we should probably get some form of life insurance. Most people will start with term life insurance to their employer, which is a great start. But as we want to accumulate wealth and more things and more money, we want cash value out of it and unfortunately, term life insurance doesn't provide cash value.
Speaker 2:You, you know, get your term life insurance. You know for like five, 20 bucks. You know a month, and after like that term, that 10 years is gone. It's so if you didn't hopefully nothing catastrophic happened and you didn't need to get the payout because that means you're dead, that would be horrible Then what did I get out of this? So that's where whole or universal come into play. Is you create, you know it's going to be a little bit more money. You know generally, you know like a thousand. You know 1200 a month you're paying into and then you're going to be accumulating cash value during that phase.
Speaker 2:And then the idea is that I look at the distinction between whole and universal is do I want the money up front sooner or do I want the money later on? I personally use IULs in myself because I want the money later on and then I connect long term care writers to that so that then when I'm old and I need my Medicare and my living expenses and all that covered, I'm good to go. My living expenses and all that covered, I'm good to go Now. If you want the money up front for cash value sooner, that's probably where whole life insurance will come into play and you can start utilizing that as your own banking system. Utilize the infinite banking strategy, go buy more real estate through that, perfectly fine.
Speaker 2:There's certain points where you're going to want the money later on down the road. That's what I look for and that's where index universal life insurance comes into play. And I like that because it's just a safer hedge on my bet, you know, on my money and it will grow substantially higher over the long haul because it's linked and measured through the stock account with no downside risk. So they set the floor at zero Generally, you know they set the cap at 13% and on average you're earning 10% to 12% on zero risk and then it's just going to keep growing. And so I personally like IULs because my strategy is I want no risk and I want the upside and I'm utilizing it for later on down the road.
Speaker 1:Okay, so we just talked about three different types of life insurance. We have whole life, we have term.
Speaker 1:Term whole and universal and universal, okay, so the term would be the bottom of the barrel, where you're paying each month. It's pretty cheap and that just is catastrophic. If you die, none of the money that you paid in comes back. But you get the policy, whether it's a million dollars, 500,000, whatever, and that goes to whoever you've named as your next of kin, right, okay, and then the next one up there, cause you said a lot of things really fast and I just want to make sure I got it and that people can, can take it in piece by piece. So so then, whole life insurance is, you said, a little bit more expensive, bit more expensive. And what's the caveat with the whole?
Speaker 2:life. Yeah, so whole life insurance and index life insurance are basically what's considered like permanent life insurance policies. Right, they're not set to a term limit and then the benefit of them is one that's going to keep going. Right, they're not done at 10 years and you're going to generate the cash value that you want. It's going to compound and grow at a substantially larger rate.
Speaker 2:And so that's where, if you set, you know, like an IUL, up an index universal life insurance policy up in your like 30s or 40s and you pay into that for you know, 20 years, you're just going to compound into you know millions of dollars later on and then you can start utilizing that money, as it's compounding and growing, to go buy real estate or do whatever you want with it. You can create childhood, start plans with it for your kids and have them become millionaires when they're 40. Or you can use whole life insurance and, same principle, utilize that cash value to go buy real estate. A lot of real estate investors will use insurance policies and whole life insurance policies and utilize that infinite banking strategy that you hear people talk about to go be their own bankers and then go buy real estate, and that's a big strategy for real estate investors.
Speaker 1:So let me break that down real quick, though, because I do have a question on the whole life policy. So let's just say it is a thousand dollars a month, which is about what you said, right. Let's just say it is a thousand dollars a month, which is about what you said right. And I start it now. I'm 33 years old and I pay into it for a year and then, unfortunately, I die.
Speaker 2:Yeah.
Speaker 1:Do I only have the worth of $12,000 that I'm going to get paid out because that's not going to do very much, or is there another number tied to that saying that if you do die, you're going to get a million dollars on top?
Speaker 2:of another number, the death benefit that's tied to, and so the death benefit only goes down if you start drawing it against the death benefit.
Speaker 1:Okay, so you pay into it each month. There becomes a value of that, whatever you're paying into, and then on top of it there's a number that if you do die, that number is paid out to your next of kin. Correct, that's called the death benefit.
Speaker 2:Now that number is paid out to your next of kin, correct, that's called the death benefit. Now you can have cash value, right, like you're paying in your thousand a month, and then that's going to accumulate and compound and grow. And then I can take that cash value that's compounding and growing and utilize that money to go buy other investments. And then you have your death benefit. That's there in case you die, right? And then that's what's going to be paid out to your beneficiaries.
Speaker 3:Got it. Do you have to pay that money back? Ideally you do?
Speaker 2:That's a great question. Ideally you do, because if you're withdrawing against your death benefit, then you die and you don't pay it back, then the death benefit's gone. So me personally I would say use it as like cash value recycling. Like you would with rental properties. I personally would draw against my you know cash value, go purchase whatever investment that I want and then pay back into it. So that way I'm still generating a higher compounding interest.
Speaker 3:So using it as like a line of credit.
Speaker 2:Right, but for myself, like I'm my own banker.
Speaker 1:Okay, and then there was one more, so that's the indexed life insurance.
Speaker 2:Yeah. And so what indexed is? It's different than whole like with whole, it's fixed, right Like the premiums don't change, it is what it is and if you skip a couple of payments then it can lapse. Now I like indexed because that you know premium insurance that you're paying is more flexible and so life happens right Like sometimes we're rolling in and we can hit that max number that we want.
Speaker 2:Sometimes life has a hiccup, the economy or inflation is just ripping us apart and we need to pay a little bit lower rate. That's why I like index and IULs is because I have more flexibility in the premium. I like index and IULs is because I have more flexibility in the premium and then it's actually linked to the performance of the stock market so that that cash value then has a potential to grow, based off of the index that I chose to use as the measuring stick and with the floors that are set at zero, meaning if the market completely tanked it doesn't go below zero. So as I'm paying into it, I have the ability, as the market goes up right, to capsulize those gains. But then if the market crashes, I can't go below zero but I lock in those gains. So for me I like that safety net of it on which I can't get withhold.
Speaker 3:Right. So is the main difference from investing or putting your money or buying a whole life policy, the death benefit, versus just putting that money in the stock market for it to grow?
Speaker 2:So the big difference is, especially with the indexed, is there's no risk on the downside, like I put it, in the stock market and the stock market goes down, I just lost everything, right? Well, if it's in an indexed insurance account, because it's only linked to it and they set the floor at zero, if the markets crash and go down and let's say that goes down 20 points right, not 20 points, but 20%, like you're negative 20. I didn't realize any of that loss. And so you see that, through all these stock market crashes and people pulling out their hair, watching the 401ks and their stock markets go down, losing all this money, and saying, oh my God, a 20% loss means I'm going to have to work five more years past my retirement.
Speaker 2:Well, if you were in an indexed account, you don't have those losses. You stop at zero. And then when the market rebounds and grows, your growth is locked in and it resets every year. So, while your friends are in, like, let's just say, a 401k, and the market crashes and goes down, you know, 12%, negative, 12%, you're at zero. Then, let's say the next year the market goes up to 13%. Well, you get that full gain at 13%. They have to come back from negative 12, all the way up to 13. So they really aren't. So they're only realizing what like 3% gain. So that's why I personally like indexed IULs is because it's not sexy, it's just conservative, and it protects me from the downside and gives me long-term protection for growth.
Speaker 3:And are there certain companies that you would recommend to buy these types of insurance policies?
Speaker 2:I like Pacific's the best, and then you got companies like Transamerica. They have them. Those are my two main ones that I use. I have our company that I set up on the side of my law firm, which is a financial planning company. We work with the top insurance financial providers there are, and my favorite one is Pacific Life Insurance.
Speaker 1:So, speaking of the Transamerica one, one of my business partners in a brokerage that I own is a lawyer. Before she started her own law firm she worked for Transamerica and I don't want to speak too much into it because I know she said it on my podcast before but it could be a little bit wrong. But basically her job was to try to not pay out the death benefits, like her job was as a lawyer, and she was tired of it, which has made her start her own uh law firm. But her job was to try to go into these policies and figure out how not to pay out these families for their death benefits and that that's apparently a common job for a young attorney to get. Are those companies all kind of like? Seems like a little dirty, like not. You know they should be paying out. What are they trying to?
Speaker 2:I agree, and I think it's just like in any insurance they don't want to pay out as much as they can. But then at the end of the day, let's just say, like a normal situation, like you have a catastrophic accident, you're driving in your car and you get sideswiped by what is the word I'm looking for Like a trash.
Speaker 1:An 18 wheel or Mack truck or something like that.
Speaker 2:The likelihood of them, you know, finding it some sort of like intentional wrongdoing or negative. You know, gross tort, negligence or fraud is going to be really, really low on the scale of that Um. And then it's also a matter of the way they look at. It is like, and that's not my area of law, so I don't know how they go about like underwriting or like reviewing it, but it's also, you know, did they miss, mislead, lie, misrepresent on their application form and things like that? So I do think that they would review all of that before they pay out, um, because obviously insurance companies aren't for the money. It's not because they like you, you know like, but at the end of the day, after they do the review and the application was truthful and you weren't shown to be like fraudulent, you know, or you know drinking and driving and doing something crazy, I don't see any issue why you would not be paid out.
Speaker 1:Okay, good to know. Now, talking about setting your kids up the next generation, and you know if you're somebody that is starting to have a family or has a family, what are some ways that you can set your kids up to for future financial stability?
Speaker 2:Yeah, I actually set these up for my own kids and I have a six-year-old and eight-year-old daughters and these are one of my favorite ones for that, and they're the alternative to the 529 plans. Right, the 529 plans? They're the most popular and well-known college saving plans in the US. They are tax advantage saving plans that are designed to encourage saving for the future educational expenses of our kids. So they can be used for things for, like education for tuition K through college. People don't realize it's for. Like education for tuition K through college. People don't realize it's not just a college, it's K through college. They can also be used for fees and books, room and board. So they're pretty good advantages.
Speaker 2:But they have drawbacks and so the funds can be counted against financial aid eligibility. They have to be used for education. So, like, what happens if your kid just decides not to go to college, like, or they decide to go in the military, or like life leads them somewhere else? Then what happens with that money? And if the funds are used for something other than specifically educational purposes? You have zero flexibility and you're going to be penalized 10%. So it is not my favorite situation. So the question is is there a more flexible solution that gives us a better results for our children? The answer is actually yes. We can create index life head start plans for our children and they are the alternative to 529 plans and they're more flexible. And you don't get penalized if you don't use these funds for educational purposes, and you don't get penalized if you don't use these funds for educational purposes. And the strategy utilizes permanent life insurance policies. But it's really going to act like a wealth building strategy and so what you're doing is investing a certain amount every single month for your child up to a certain amount of age.
Speaker 2:I pick the age 25. And then at 25, it stops, they get control of it and then that's going to keep compounding until like age 65. But during that timeframe, if they don't touch it, it's going to keep compounding and they can pull off of it, like that can be for college. That can be like I have two daughters. That's their wedding right. Like weddings are crazy expensive. That's the down payment on their first house and if they don't touch, their life is going well. It can keep compounding.
Speaker 2:Generally, you see it, if you max fund it, it turns into 1 million around age 40, which then they can use for whatever they want or start utilizing it for pre-funding retirement down the line. And so I like it because of its flexibility and that it can be used throughout life. And I take it as my job, as my kids you know parents to then teach them how to utilize the system and the tool. And I'm like I'm not just giving you, you know, 300,000 at age 25 to go blow off on traveling Europe. We're going to explain throughout the years of how to utilize this money and keep the system going so they know how to use it throughout their whole life.
Speaker 1:So that is the alternative to the college savings plan.
Speaker 2:Yeah, correct, it's the alternative to the 529 plan. They're called child head start plans and it's just utilizing index insurance policies for your kids.
Speaker 1:Got it Awesome, no-transcript, little biased when it comes to we're heavy in real estate, whereas some financial advisors wouldn't get paid out if we just go and buy real estate. If they just said suggested, oh why don't you go buy a bunch of rental?
Speaker 2:properties. Well, some just push the strategy they use and that's what they know, and then they're not really giving you the menu that's available for you.
Speaker 1:Yeah. So a lot of, I guess, for our listeners sake. Like if they were to go meet with a financial advisor. To get to my actual question, what are some questions that they should be asking that person, that financial advisor, like, for example? Like, if I was to get a personal trainer, I wouldn't want one that's fat, right, I would want a personal trainer that's in good shape, better shape than I'm in. So what are some questions that you would ask somebody if you were trying to hire them as your financial advisor?
Speaker 2:Yeah, one. I would look at what companies do they work with and affiliate with. What are they doing themselves investing? If you're pushing a specific strategy on me, is this a strategy you're utilizing yourself and why? What's your rate of return? If you're doing this, are you successful and how's it benefited you? So those are certain things I want, and I want to also know who they work with, because maybe they don't have a strategy that works for me, but they affiliate with other companies or they just jamming something down my throat to where I personally look at it as because I'm a lawyer, right, I practice. I look at the financial side the same way I give legal advice. Here's the pros, here's the cons. Here, where I see, I see your risk and your liability is here's the solutions for each stage, here's the pros and cons. The decision is yours, the solutions for each stage. Here's the pros and cons. The decision is yours.
Speaker 2:When I'm looking at somebody's financial situation, I can say, all right, maybe you have some term insurance in place. And what stage are you in your life Now? How far is the gap right? We have a gap now of protection that we need to fill. Or maybe you want to utilize insurance for cash value, or you're a business owner, or we need to add some insurance in for your business and key employees in case something happens and your business doesn't go under. So I try to fill those gaps and then present the solutions for each gap and not say like we got to do them all at one time. Here's different issues and problems we have. We can piecemeal which ones we identify as most critical. Let's just start taking a bite of the apple, one at a time, and then here's the menu of solutions that we have and let's go about it.
Speaker 2:You know, over over time but I'm not one to you know, like some people like whole value, infinite banking strategies, because that's what they do. And then they, you know, talk BS about everything else in the world versus just playing it out as do you want the money more up front or do you want something more down the line. And so I look at it like that and I look at what's your age? Do you have kids? Do you have long-term care riders? What's your plan 20 years from now, when we're going to run out of money? If we're relying only on our 401k and retiring at 65? What's going to happen when we're 80 and have to go into a nursing home Like what are we going to do then and how do we keep our estate plan safe? And, you know, have a legacy to pass on to our kids. So I look at that through those vectors and start creating a plan down the line.
Speaker 3:Okay. So I have a question going back to the whole life policy just got me thinking. So let's say you're paying a1,000 a month and you have the ability to withdraw that money, to use it and pay it back to receive those benefits when you die. Let's say you're paying $1,000 a month. Where does the money come from for them to pay you out?
Speaker 2:So that's the insurance company themselves, right? That's where the death benefits come from is the accumulation and they all link together in the insurance industry and rely off of each other. And at the end of the day, that's a great question. I personally don't know where like billions and trillions of dollars in the insurance company comes from. I just know that it's like the banking industry they all rely off of each other and play off of each other, but the companies do pay out. I know that because just in the realms of like the law side of things and I do a lot of estate planning, like we have to deal with this all the time I've never actually saw what you were saying. Like the lady attorney who worked for the insurance company, I've actually never seen an insurance company not pay out someone's death benefits, and that's with like over 15 years of practicing law.
Speaker 1:Yeah, I think. One of the things, though, is that the insurance company will gain all of the like. Just like a homeowner's insurance, they take in all your premiums and they reinvest that money, so they have this like holding, because I know. The only reason I know this is because one of the lending companies that I use they.
Speaker 2:They basically sell the loans through an insurance fund, so that insurance fund is is the one that's banking in insurance companies, because insurance is like the backbone of almost the entire financial institution. So if you look at where banks put most of their money, it's inside insurance companies.
Speaker 3:So I understand that perspective in that regard. But when it comes to the whole life and policy, let's say we go into a recession and everybody that has a whole life and policy withdraws their money that they need. Maybe they lose their job and a lot of them withdraw their money and then people start dying. And if all the money is being taken out, I guess is there a regulation.
Speaker 3:I guess there's enough money in there to where everybody would have to withdraw it at once and everyone have. A lot of people have to die for them.
Speaker 2:You're saying, like, if there's like a like a run on the banks, what if there's a run on the insurance?
Speaker 3:So I'm saying so and, generally speaking, unless you have car insurance and you pay monthly, you're not getting that money back. But like, if I pay a thousand dollars into this whole life term and I have the ability in 12 months, to borrow that 12,000, um, and let's say we hit a recession like we're anticipated to have in 2030. And a lot of people pull their money out of it that they've been just putting into it, and then people start dying their money out of it that they've been putting into it and then people start dying. I guess what I'm saying is like, if the majority of them pull money out of it, I guess there's enough policy to cover, you know, if people start passing away the I mean the last recessions, what oh eight, oh nine, ten.
Speaker 2:And then you know the earlier ones. You know like what? Five years back and then now you know the earlier ones. You know like what? Five years back and then now you haven't. You have never heard of the insurance companies restricting you from pulling your cash value out, but I get part of that solvency fund too.
Speaker 1:So all insurance companies are part of this like greater, and that's why, like you see insurance companies that are pulling out of places like Florida and California where the wildfires are happening and stuff like that Like, if they get hit, they have to. Every insurance company puts money into this like solvency fund that they have to kind of bail each other out to make sure they don't leave us, the people, screwed.
Speaker 3:But I guess I think you also mentioned that if you do pull that money out and you do pass away, that you don't get that death benefit at that time right, right, yeah, and that's why you pay it back Like you don't have to right, it's your money.
Speaker 2:But if you take out from the death benefit, then unless you put it back in, then the death benefit is going down because you're using it.
Speaker 1:Right, yeah, and I think that solvency fund is the reason. Like banks are regulated, they can leverage. If you put in a dollar they can lend out $10, but they can't. You know, there's a I guess there's a regulation there. I'm sure with insurance companies it's the same same thing.
Speaker 2:And we're like with a lot of the banks, the banks bail each other out because of, you know, was the great depression and we were all the banks were going insol it. Then, you know, the federal reserve came in and then changed the banking system to save the banks, because now it's really hard, like one or two or five banks can fail, but it's unlikely for the whole entire banking system to collapse now because they have built in protection systems. Same thing with the insurance industry.
Speaker 1:Yeah, got it All right, we? I think that's all the questions I have, brian. I appreciate that that was a lot of good information for especially new um, new end season people, uh, that are listening. So thank you for that insight, thank you.
Speaker 2:Yeah, absolutely. Thanks for having me on.
Speaker 1:All right guys, until next time. Thanks, brian, we'll uh, we'll talk soon.
