Armando (0:00 – 1:07)
Hello founder, you’ve built a successful business and now it’s time to think about that once-in-a-lifetime exit from your business. You’ve come to the right place. Here, you will hear business exit professionals involved in the buying and selling of companies talk about what you should know before you exit.
If you’ve never sold a business before, this podcast can be super helpful to you. I’m Armando, host of the Founder’s Guidepost. Enjoy.
If you like this information, please subscribe and share. With that whole asset protection view. Ike Devji, as an attorney, what is it in your background that people should know about you as we begin this conversation about asset protection?
Ike (1:08 – 2:19)
Sure. Thank you, Armando. Thanks for having me and for sharing some time with me.
I’ll give you just sort of maybe a brief bio as an intro that might help your viewers put my comments and some of the things that I’m vehement about into context. So as you said, I am an attorney. The sole focus of my practice for 20 years with a national client base of thousands of clients has been asset protection planning, which basically means I am a bodyguard for their money, right?
I mean, that’s what it is. How do we protect the success that you have? How do we manage the risks that threaten that success?
And what are the legal tools that we can provide? In terms of the things I’m going to say, they are based on the perfect 2020 hindsight of having worked with thousands of people for these last couple of decades and seen the things that actually happened. And through that pattern, we recognize that there are predictable recurring risks and threats, and we see them over and over.
And so hopefully we can help identify some of those today, some of the big ones that will particularly be of interest to those exiting a business.
Armando (2:20 – 3:03)
Fantastic. And so most of our clientele are business owners. They’re the first in their family to knock it out of the park to make the kind of money that they are.
And they don’t know what they don’t know. They’re experts in the space. They built a fantastic company.
They live in a very good lifestyle, and they’re very blessed. They feel very fortunate, and they just don’t know what’s out there that could potentially harm them. And even more so as they go into that once-in-a-lifetime sale of the company, then they just don’t know what that landscape looks like.
So from your perspective, Ike, when you’re trying to protect that business owner, what are some of the basics that you educate your clientele about so they’re aware, and then you can help them protect some of those basic strategies they should really be aware of?
Ike (3:04 – 7:58)
Great question. So the first thing that we want to make sure is that they understand the difference between estate planning, which I refer to as death planning when I’m talking to a client to help make that clear, or at least traditional estate planning, and asset protection planning. And the difference between those two is sometimes blurry in the eyes and minds of both consumers and their other advisors, right?
Because a lot of the tools we use sound the same, look the same, but the intention is different, the level of detail on risk management in particular is different, and the level of attention to separating that client’s pre-existing wealth before the sale and what they get after the sale, and making sure all of those things are protected from the future, whatever may come, is a little different. The second thing that we make sure they understand is the importance of timing. Asset protection is one of those things that many people don’t address because they don’t feel a time pressure.
Many people that I talk to say, I have always meant to do this, or I have been meaning to do this for years, and unfortunately, as you and I have discussed, I turn away between four and eight people every month who call me looking for help after something bad has happened, after they’re being sued by the buyer of their business, after they’re being sued in a deal that went sideways by investors, after their spouse or their child has been in a serious car accident that puts the family’s wealth at risk, right?
And at that point, it’s too late, and things that we could have done in a cost-effective way, in a predictable way, that would have been very conventional, ethical, and legal, now fall somewhere after the problem, fall somewhere between unethical and illegal, fraudulent. So I think that those are the first two things that we make them understand, and I think that part of that first conversation in making sure that they understand the difference between conventional estate planning and asset protection planning is to enforce the idea that, look, estate planning is vitally important. You have pushed this rock uphill for however many decades to become who you are.
You’re at the point where you’re exiting a business that’s great. You’ve hit that business owner lottery, so to speak, and you probably have people who you have worked for, your family members, who you would like to benefit from that when you’re gone. So of course that’s a vital part of the plan, but that plan is moot if we don’t have the money to fund that plan with.
If that money doesn’t last your whole life and go into that fancy estate plan, then you have a problem. We also advise them on the vulnerability of their position. I think that it’s important to understand that when you sell a business, you are more vulnerable than ever before, and you’ve heard me say, look, I don’t care if you’ve made seven figures a year for 20 years, nobody’s ever handed you a 30 million dollar check on a Tuesday before, right?
And that is a very different problem, a very good problem to have, but a lot of things change. Your estate tax exposure changes, that estate tax exposure is going to go up on December 31st, 2025. Your target value has drastically changed.
You had money on paper before, you probably had other assets in the bank, and your net worth on paper included the value of your business, but now that net worth is cash. That makes you a good litigation target for former partners, for disgruntled employees, for disgruntled clients. Anybody who has ever had an issue now sees that there’s a little bit of blood in the water, and of course the biggest threat to every seller is the buyer, particularly for those who are selling to private equity groups or other large corporations or who are being absorbed in M&A deals.
If the person who is buying your company, the person, the entity, the corporation, whatever it is, is bigger than you, and that is often the case, and there is a disparity in the spending power in terms of legal spending power, then you should be prepared to protect the proceeds of the sale which are replacing your recurring high income stream and giving you a lump sum that’s going to last you the rest of your life. So these folks are talking to you and saying, hey Armando, how do we manage this money in a way that is safe and prudent that makes us good stewards of this wealth?
How do we make sure that we don’t lose it to bad investments is one example, but then how do we protect that for more active threats? That’s where I work with folks like you and your clients.
Armando (7:58 – 9:04)
Yep, yep, and that makes sense that they’ve had an income say maybe a million plus a year from the company, that’s been great, but then what also happens when it comes time to sell and they get that once in a lifetime big fat check, say 30 million dollars, and people know that you’ve sold, maybe they see a change in your lifestyle, you bought a new house, new cars, new vacations, etc. Or even worse, it’s in the newspapers how much you sold for, then that anonymity that they’ve had where they could go into a restaurant, go about their day, go to little league games, whatever, and kind of just blend in with the crowd, that all goes away. And so it always surprises me when you see in the newspaper when a big company buys a small company and the price is in the newspaper, it always makes me feel a little bit bad for the seller because now everybody knows how much they sold for and how much cash they got versus stock.
It just does not help that seller keep that lifestyle and keep that anonymity that they used to have. Nobody knew what they really had before.
Ike (9:05 – 11:04)
You’re absolutely correct and I’ve had clients tell me, hey, I went to my son’s little league game and the guy next to me who is my kid’s baseball teammate’s father who has never said more than hello to me for the last three years sat down next to me and said, hey, I heard you sold your company. Or as you said, there are lifestyle changes that become visible. And look, Armando, even if it’s not in the newspaper, we all like in the process of these deals during the transaction, there are lots of NDAs and the non-disclosure agreements, privacy agreements, and all those things go back and forth.
And we all like to pretend that it’s a secret, that you’re selling your business, how much you got for your business, so on and so forth. But somebody knows, somebody always knows, and somebody always talks. And in most industries, it’s a small pool, right?
So if you are in Scottsdale and you’re a major construction company owner, and you are selling your construction company, believe me, the other construction company owners are going to hear about that one way or the other. The other way that we also see people sometimes who are surprised by the exposure that has happened when they start enjoying that wealth is when they go out and purchase a big new house. And they get their name published in the newspaper, and it says, Mr. And Mrs. Smith purchased this home in Paradise Valley for $8 million cash. And it’s this 12,000-square-foot Mediterranean with these details. And I’ve had clients call me and freaked out and saying, oh my God, everybody knows where our house is, how much we paid for it, et cetera, et cetera. And I said, look, we told you we could have done that privately if you had asked for our help in advance.
But now that it’s out there, the horse is out of the barn, there’s nothing we can do about it. So that is an interesting comment you make and one that absolutely reflects the feedback from my own clients.
Armando (11:05 – 11:33)
Wow. So then what are some of the surprises? As you’re talking with the client for the first time, they’re brand new to you, they’ve never spoken with somebody like you before, Ike.
And you’re talking about asset protection, protecting the value of the business, planning ahead of time for that sale. What are some of the surprises to them as you talk with them? And then what are some of the things that you help educate them on and then you’re actually doing for them to help keep their assets theirs and to protect them?
Ike (11:33 – 16:52)
Sure, sure. A couple of different good questions you’ve got wrapped up together there. So what is surprising to clients?
I think that was the first part of your question. What is surprising to them, I think, is the amount of wealth that they have exposed because nobody has ever sat down with them and had them list what they own, what’s in the bank. And look, they may have done it from the of a personal financial statement to obtain credit or banking or anything, but they haven’t looked at it through my lens, so to speak.
To look at, okay, great, you’ve got all these assets, which of them would be available to anyone for any reason if something bad happens in the future? And when we start explaining things like the fact that, hey, your multimillion-dollar home is not adequately protected by Arizona’s homestead law, it’s almost completely exposed. Hey, all of your taxable savings and investments, if held in your own name or in the name of your living trust, are exposed.
Hey, the five income streams that you get from these four or five LLCs that you have in place that are investment properties or investments in business and that check that comes to you every month from those five sources, those are exposed, right? And so when we start adding those things up and show somebody their target value, that is often a big surprise. So one of the things that is on my website that I’ve taught people is know your target value.
You should know that. You should know if you are worth suing and for how much. The next thing that surprises people, Armando, is the number of risks they have.
You and I talked about this recently. I talked about that many clients have what I call risk myopia, right? Every construction company owner is worried about a building defect claim.
Every trucking company owner is worried about an accident claim. Every physician is worried about a medical malpractice claim. But when we put up a list of risk factors, which I have shown you and which I’ll send you in case you want to post it with this, I have it broken down into a simple 12 or 13 item list that is just some of the most common risks.
And I start saying, hey, do you own a business? Yes. Do you drive a car?
Yes. Do you have a home? Yes.
Do you have employees? Yes. Do you serve as the officer, member, director of a public or private corporation?
Are you a board member at a hospital or a church or another business or anywhere else? Or a lot of the folks that we deal with are fortunate enough to be civically involved, involved in their community, involved with their educational institutions, involved with their churches and synagogues and whatever else they may be doing. A lot of these folks have those entanglements.
A lot of these folks have liability generating assets. Great. You’ve got three rental properties.
The internal liability of those three tenants is yours if we’re not holding those the right way. So when we go down this list and say, hey, do your kids or family members drive your cars, use your RV, your jet skis in your cabin? Lots of these different risk factors that are not exotic.
People say, oh my God, I was only worried about the construction defect claim. And I have 14 other risks that I haven’t been properly managing with something as simple as a high level of umbrella insurance. So when we show them that, I think that’s shocking to people as well, where they see these things that they never thought about and the fact that they haven’t been adequately addressed.
In terms of what do we do for those folks? I think that was the next part of your question. We show them which of their assets can be made legally distinct from their personal and professional liability.
And we show them the well-proven legal tools that they can use to put wrappers around certain assets. And we use different tools for different assets. So we use personal tools for personal assets and business tools for business assets.
And then those things all have to link together in a way that allows the money and the income and the profit to flow between them the right way. And then it has to point at their estate plan, the death plan that we began our conversation talking about. So that is what we do.
And in that process, we look at a bunch of different detail, including what the status of their estate planning is, what the status of their estate tax exposure is, so that they are very clearly aware of that. We look at what tools they have in place and if any of those tools need to be reviewed or updated. Many people come into me, they may have a revocable trust and we say, great, that’s a necessary part of the plan.
And then they say, oh, but it’s 14 years old and it’s never been updated. I know you see that a lot. So a lot of that comes out in the wash.
And what we do is sort of try and create a before and after where we have distanced that person from title, but not from the use and enjoyment of those assets in a predictable way. So does that help as a good start?
Armando (16:53 – 17:35)
Yeah, that does. And I’m glad you mentioned about the revocable living trust versus irrevocable because people will often get the estate planning done, as you said, years and years ago, and they know they have a trust set up, but they think that that trust, they incorrectly believe that that trust is going to help them from an asset protection standpoint, when that is not at all what it does. So can you talk about that distinction, that normal trust that people get, that living will, living trust, revocable trust versus asset protection trust?
Because that distinction, I see that a lot. People misconstrue, they believe they have a trust for asset protection when they don’t have that at all, but they think they do.
Ike (17:36 – 22:29)
I hear that a lot. And what I often hear is, hey, my advisor, let’s say Armando wouldn’t stop nagging me until I came to see you. And I don’t know why, because I already have this covered.
I have a trust. That is something that I hear very often as well. And the trust that they have, as you said, is a revocable living trust.
And look, we need to use the right tool for the right job. A revocable living trust is a great estate planning tool, and we want it to be revocable. And people say, why is it revocable?
Why isn’t it irrevocable? We want it to be revocable because we want the client to be able to make changes in who’s in charge, who gets the money, when they get it, how they get it, which assets are divided, what tax efficiency is built into the plan, all of those details. I want clients to be able to make changes in that until the day they take their last breath.
So that is why the revocable living trust is a great estate planning tool. Unfortunately, because it is revocable, and because it has that flexibility, and because you are the trustee of your own living trust, in most cases, while you’re alive, it does not provide any creditor protection against your risks and liabilities for your assets during your life. So that is the thing that that is exactly how I explain it to every client I talk to, and make sure that they understand that, hey, it’s a great tool, but a saw is not a hammer.
You’ve got a saw, we also need a hammer, right, to build this vault, so to speak, to build your wealth, or to help protect your wealth, we need more than one tool. So it’s a question of using the right tool for the job. We like irrevocable trust, because once property has been put in that trust, if it’s executed and drafted the right way, it is trust property and no longer belongs to the grantor, the person who set it up.
So that provides some degree of asset protection and creditor protection right there. We also use other tools. We use LLCs, we use limited partnerships, we use many different kinds of irrevocable trusts.
So we might use offshore trusts, we might use bridge trusts, we might use a Cupert qualified personal residence trust to convey a family vacation home that they want to put outside their taxable estate, but keep in the family as a legacy property, right? So not every piece of real estate you own is something that you cherish and want your children and grandchildren to enjoy, and you have all this emotional attachment to it. But some of them might be, right?
We create special needs trusts for those who have children who cannot or should not receive large amounts of wealth at their passing because of whatever difficulties they’re facing personally, physically, emotionally. So lots of different detail, and it needs to be fact-specific to the person that we’re talking to. So when we explain that, hey, one trust, no matter who sells it to you, no matter how much they charge you for it, is never a solution.
Almost never. It needs to be a series of the right tools. Now, does that mean you need to have a dozen different entities?
Probably not. Most people don’t, right? But they do need one entity to protect their personal residences, they need one to protect their taxable income and receive their taxable investments and savings and receive distributions.
We make sure that their notes are protected. If you’re selling a business and getting a big chunk of it in cash and also carrying a substantial note, I don’t want those payments made to you, my client, your client, the seller. I want those payments to go to a protected entity that is legally distinct from whatever bad things may happen to our client in the future, so that that payment stream goes to a protected cell no matter what happens to our guy in the future, right?
So those are some of the specific things we do and some of the layers that we try and educate people on and show them, hey, first, look, we are not denigrating the revocable living trust you have in place. If you didn’t have it, it would be on the list of things to do. That said, there are other things you need to make this car run.
So simply having tires without an engine or a steering wheel is an incomplete assembly, right? And so it takes a team, it takes guys like me, it takes guys like you, it takes a CPA team, it takes top-notch insurance advisors on the P&C side, on the property casualty side. It takes a team to make sure these people stay successful for the rest of their life.
Armando (22:30 – 23:20)
Right. And you made a, I liked a point you made a moment ago that the different types of trust for different purposes, but it also made me think that there are lots of attorneys can specialize in any number of things, but it gets to the point that you really need to have somebody who understands and has this asset protection as a core of the practice, because if it’s one of 10 things that the lawyer does for you, in my view, I’m not getting the specialist. And what I always want to have on board is the specialist so that when we’re having a conversation with you, for example, I’m feeling very confident that the end result for the client is really what it needs to be, because the specialist, Ike in this case for asset protection, was engaged in his expertise was what created this.
Ike (23:22 – 27:19)
Absolutely. Look on a good day, I’m good at one thing. My practice area is about an inch wide, but about a mile deep, right.
In terms of all the things that we look at. And so, yes, an estate planner, for instance, who has a master estate planner, who knows every detail about how to transfer your wealth and what the estate tax minimization strategies are that are the most cutting edge and still the most legally compliant. That’s an important detail that we should talk about some more is the tax fraud that targets many of our sellers.
But those folks have a different area of concentration, and that is not a complaint or a criticism, right? There are many kinds of lawyer that I am not. I am not a divorce lawyer.
I am not a bankruptcy lawyer. I am not an admiralty and equine lawyer, right? Those are some of the specialties out there.
Right. So there are many things that I don’t do well. And I know that.
And I know what I’m good at. And I have built and surrounded myself with a team of experts in other areas of the law that can help in the areas where they are better practitioner than I am. And there is nothing wrong with that.
And yes, I do think that having somebody who has a specialized knowledge of the tools, of the law, of your risks, and of the risk mitigation, it’s not just about selling somebody legal tools and saying, OK, here’s a trust and a partnership and three LLCs. And here’s where your note goes. And here’s where your intellectual property goes.
And here’s where the licensing fees for that will go. What are we doing to keep this person out of trouble in the first place? What risk management have we looked at for them personally and professionally before the sale of the business?
Did somebody suggest to them that they go through all of their contracts and corporate documents before the sale to make sure there’s no latent exposure to the buyer that then causes the buyer to come back and sue the seller or withhold the payment stream? Right. Make sure that you’re not leaving any landmines, especially if that buyer owes you money.
That, too, is asset protection planning. Let’s make sure we’ve updated all the business’s insurance coverage. Let’s make sure we’ve updated all the employment agreements.
Let’s make sure all the vendor contracts are in place. Let’s make sure all of our legal compliance on anything we might have to do in a particular business to be legally compliant with everything from data security to hazardous material exposure. If there’s something that we’re not 100% confident about, I tell my sellers, go through your business with a fine-toothed comb because the buyer is certainly going to discover this eventually.
And what happens then is they come back to you with their team of lawyers and with a complaint about some act, omission, concealment, whatever it is, however innocent it may be on your part as the seller, and they’re going to say it’s your fault that their business isn’t running as well as they hoped or as well as you promised it would or as well as you represented because of something you did. And in that situation, one of two things happens. Armando, I know you’ve seen this as well.
They either want their money back, and they want to give you back whatever’s left of your company at that point, or they want to pay you less than you agreed, meaning that if there’s a payment stream out there, they withhold it. And unfortunately for the least scrupulous buyers, we have seen a pattern where this is actually part of the business model. Great, you want $20 million for your company?
Great, we’re going to give you $15 million. We’re going to have $5 million in an earn-out over the next three years. And whoops, year one, end of year one, we’ve decided that we’re not really going to pay you that extra $5 million because A, B, and C.
Let’s not be in that position. And let’s eliminate those objections and that liability before the sale.
Armando (27:20 – 28:08)
Yeah, that makes a lot of sense. And having the planning ahead of time, having that conversation ahead of time before anything is signed and a done deal always makes a lot more sense for no matter what the transaction, no matter what is really happening. So some things that I see that from my perspective are fairly common, like you mentioned property and cash to insurance, the vacation home or their personal residence or the insurance in the cars, it really isn’t enough.
And you showed me a pyramid of had three levels on it that I really, really liked because it was just so simple. And the pyramid, and I’ll ask you to describe that if you would, but that top part was clean living, simple living. You know what I’m talking about, right?
Ike (28:08 – 28:13)
Absolutely. I’d be happy to go over that. And in fact, I’ll send it to you in case you want to post it.
Armando (28:14 – 28:14)
We’ll do that. Thank you.
Ike (28:15 – 28:31)
So, yeah, I talk about that there are three levels of asset protection and we’ve already discussed that asset protection is a series of layers, right? It’s not one trust or one LLC or one anything. It’s a series of different things.
Thinking of exiting your business?
Armando (28:31 – 28:48)
This may be your once in a lifetime opportunity to preserve your American success story. I invite you to come to the Scottsdale Founders Forum, a biannual live event for the founder considering exiting in the next five years. More information, it’s ScottsdaleFoundersForum.com.
Ike (28:48 – 35:51)
And from a 10,000 foot view, from a broader view, what I try and teach, whether I’m teaching doctors or teaching a study group, a WPO study group or something like that, is the three layers of asset protection, which is what you’re referring to. And this is how I get clients, try and get them to think about it. Number one, the first layer of defense is what you said, what I call clean living, which is a euphemism for compliance.
Let’s be legally compliant, ethically compliant, et cetera, with all of the regulations, standards, et cetera, that are particular to our business and to any business, right? So if I have a company that engages in a certain activity, well, there are always going to be things specific to that industry that we need to be compliant. Materials disposal, how much, how many, you know, what the weight of our trucks is, what we’re carrying, how are we carrying it, whatever that is, whatever those details are, let’s be compliant with all those standards.
And let’s make sure that we are not doing stupid things that get us sued in the first place. What that also means, and these are things that are hard to teach, right, or hard to sell as a provider. I can’t sell somebody leadership, right?
And so what this comes down to in many cases is that person’s leadership or how they are managing their company and how they’re managing their personal and professional relationships. So when I say let’s not do stupid things that get us sued, that also means controlling the behavior or limiting the risk that we have from the behavior and actions of others for whom we bear liability. That could be an employee, it could be a business partner, it could be a spouse, it could be a child, it could be an extended family member who’s a partner in your business or an investor who goes out and does things or says things that are inappropriate in the office or tells maybe one too many dirty jokes at the Christmas party.
Those are the kinds of little details that if not managed can often create big liability. And of course, you know, the big glaring ones like, you know, there shouldn’t be water spilt in the lobby where people can come in and slip on it, right? Those are the big glaring things, but it’s the smaller details that often slip through the cracks.
The second layer of asset protection that we talk about is insurance. And what I try and teach people is that insurance itself is also a system of layers. It works like a Kevlar vest, right?
It’s not just one policy. So we see a couple of different common mistakes. One, the most common mistake is being uninsured or underinsured, meaning that they are not covered or the amount of coverage they have in place for specific recurring predictable risks that we see over and over is grossly insufficient.
So I’ll give you a couple of examples. Many business owners do not have adequate levels of EPLI insurance, which is employment practices liability insurance, which covers you in the event that you have a dispute, a legal dispute with someone who works for you. And a lot of the folks that I talked to who have these big companies doing tens of millions of dollars a year in revenue with, in some cases, hundreds of employees aren’t aware or don’t have adequate limits to protect them from that risk.
When the average American business owner is five times more likely to be sued by an employee than for any other reason. And as one specific example, the average sexual harassment verdict is over half a million dollars and costs six figures to defend, right? So that’s a six, seven, $800,000 liability predictably that could have been covered for a couple thousand dollars a year in most cases with the right EPLI policy.
They don’t have coverage and good coverage for data breach. Many of these business operators don’t have DNO insurance at the right levels, directors and officers insurance to cover managerial malpractice. So there’s a whole slate of insurance issues we look at.
So like I said, the first thing is either uninsured or underinsured. That’s the mistake number one with insurance. The second mistake I see with insurance is relying on an umbrella policy to do things that it was not designed to do.
Your umbrella policy, your personal umbrella policy is a vital thing. And anyone who is listening to this, who’s qualified to be your candidate or mine, who has less than a two or $3 million personal liability umbrella policy on their home and automobiles is nuts. It is the cheapest, most predictable, most important, and most likely to be used asset protection measure that they can buy, right?
So before we get into anything fancy, like doing trust work with a guy like me, let’s make sure these basics are addressed. What do you mean you are worth $10 million and you have a $500,000 insurance policy on your cars? And surprisingly Armando, that is the number one reason that millionaires call me in a panic and that I turn people away is after a car accident.
As simple and basic as that seems, there are a lot of millionaires driving around with ridiculously low levels of insurance without proper umbrellas in place. And so I started this part of our conversation talking about the umbrella. It is a vital thing.
Okay. Number one, that everyone who owns a car, drives a home, leases a home, whatever it is, you should have a multi-million dollar umbrella policy in place. No, 1 million is not enough if you permanently injure or kill somebody, God forbid.
The second thing is if you have an umbrella policy, you have to realize that the umbrella policy is for something very specific. It is to protect you from home and auto liability in most cases. It will not protect you from the employee lawsuit.
It will not protect you from all of these other risks that we’ve been talking about. So while it again, like a revocable living trust is a phenomenal tool for a specific job, it is not a tool that does more than it says it’s going to do. And where it says that is very clearly defined in your policy.
So a lot of times we’ll say, well, I’ve got a $5 million umbrella policy. What could happen? Well, anything not related to your home or car.
The last layer of last asset protection, layer three is guys like me. It’s the legal tools that we use to make you legally and make your assets legally distinct from you and your personal and professional liability that do that in a legal way, in a tax compliant way, and in a way that is resistant to unrelated liability. That is the last line of defense is guys like me.
The first one is you. The second one is insurance. The third one is me.
Armando (35:51 – 36:32)
Yeah, that’s perfect. I love the simplicity of that because it does put the responsibility on that person, him or herself. Clean living, I think is the word that you use to describe that.
And really, then you talk about compliance with the basics. And then second, after that, the insurance, and that might be on the car, on the house, the umbrella, on the business, all kinds of layers of insurance there to protect. And then third layer is talk with Ike and get more into the weeds on what needs to be there to really adequately appropriately protect that family and the business itself.
Ike (36:32 – 36:36)
Perfect summary. I wish I had been that succinct when I said it.
Armando (36:37 – 37:29)
Well, the visual pyramid is just fantastic as well. And I do want to mention too, one of the things that I see quite a bit is I’ll get people in here who either have kids or grandkids who are teenagers, they’re young drivers, they’re the most likely to get into a car accident just statistically. And yet they might have that vehicle owned by the company because then the tax, it’s a tax, it’s a business expense and a tax write off for them.
And yeah, it is, but at what cost? And if you have the highest likely driver out there to get in a car crash, why would you put him on your company policy and put him in a company, him or her in a company car when the odds are very high that he’s going to, he or she’s going to have a car crash? It just doesn’t make any sense.
But things that people just don’t think about until like I said, after the fact, now there’s a car accident and now what do we do?
Ike (37:30 – 39:11)
And now the business is being sued because it’s the title holder or the leaseholder of the vehicle. And look, we get, certainly you and I both understand the tax advantage of a business leased or owned vehicle, especially at the end of last year with the bonus depreciation that was available on vehicles over 6,000 pounds, a whole bunch of people ran out and bought new Escalades, Range Rovers, G-wagons, Bentley Bentaygas. There were some other very large sedans than the ultra luxury class that qualified for that as well.
And so a whole bunch of people now have that liability linked directly to the golden goose that lays the eggs that have made them rich. And I explained it, sometimes people don’t get, there’s a disconnect. Why is that dangerous?
Here’s why. Pretend for the next 15 seconds that you’re a personal injury attorney. Would you rather have your client injured by John Smith, John Smith CEO, better, or Smith and Associates Construction of Scottsdale.
Where do the casino bells go off in the lawyer’s office with that pocketed corporate defendant? So yeah, we’re not big fans of having that liability there in the first place. And if you are going to do it and take that educated risk to have that vehicle or have that tax benefit, then certainly an indispensable part of that purchase or lease needs to be very high limits of insurance.
Armando (39:12 – 39:33)
Yeah. Okay. Good.
That makes sense. I do want to ask you Ike about some people are very, very conservative, very, very cautious and offshore. Anything scares them with asset protection, the work that you do.
Can you talk about when offshore anything is relevant or part of the picture versus it doesn’t need to be, if you can just touch on that place.
Ike (39:34 – 44:44)
You bet. So offshore planning is absolutely safe, legal, ethical, and tax compliant. If done the right way by the right people, just as with every other tool out there, it can be abused by amateurs.
Right. And we’ve seen everything from captive insurance to conservation easements and opportunity zones misused. Right.
We’ve seen private placement, life insurance used by the wrong guys and sold as a tax shelter. Right. So yes, there is a possibility of abuse.
The fact is that there are millions of people who are using offshore tools in an ethical and legal and fully tax compliant way. And the people who you see get in trouble almost to a person make the same mistake. Number one, they think that merely having money offshore in their own name, in the name of an LLC, in the name of some other entity is asset protection.
It’s not unless it’s structured in an irrevocable asset protection trust. Number one. Number two, they operate under the idea that secrecy is part of asset protection planning.
And it certainly is not. Do we like privacy where we can get it? Sure.
But I tell every person I talk to that any attorney that uses the word secret is an idiot or a liar, especially when you get deposed. If you get sued, if you’re given interrogatories, you will have to disclose every trust partnership corporation that you’re an officer member, director, or beneficiary of. And if I’m the guy who’s being brought in as a every offshore account, every insurance policy, every trip outside the country you’ve made in the last five years, every transfer of more than $5,000 you’ve made in the last five years, good attorneys who know what questions to ask will either get the truth out of you or get you to commit perjury, right?
One or the other. So there is no such thing as secret. So why are offshore tools valuable?
For people who have a significant amount of liquidity and who are willing to put some of that liquidity into an offshore account controlled by an offshore trust that is fully disclosed and reported to the US government and which pays all income taxes attributable to the grantor, the person setting it up, then I feel it’s one of the strongest forms of asset protection in the world because you have literally opted out of the US court system and it’s put these assets outside its reach in the hands of an irrevocable trust that is managed for your benefit by a professional trust company. So this shouldn’t be some guy sitting on a beach in Florida wearing a hat in Panama, wearing a straw hat and sipping a margarita. This should be a big, boring international trust company full of middle-aged guys in suits pushing paper around, right?
This is not exotic. It is not girls in bikinis on private jets with briefcases full of money. I wish that’s what I did for a living.
It is tax compliance. It is legal compliance. It is filling out 13 pages of know-your-client paperwork for the offshore trust company to get them to approve you and to prove who you are.
So yes, for some people who are financially qualified and probably emotionally qualified, it can be a good structure. And it’s a structure that we’ve used with thousands of people for decades with zero issue and incredible results in terms of asset protection. That being said, it is not for everybody.
Not everybody is emotionally or financially qualified to do that because like you said, there is a fear out there based on, oh, I heard these bad things and those bad things then overshadow all the good things. Like I said, there is no bread and butter financial tool out there that some guy somewhere hasn’t abused. You and I both knew that.
So that being said, does it have to be part of every person’s asset protection plan? No. Are there things that we can do domestically that provide very heavily layers of protection?
You bet. We’ve talked about some of those layers already, and we’re going to have all of those layers in place. Are there plans that we can set up domestically that can hold assets here and move assets offshore in the future if the person for whom we’ve done that planning ever decides that for whatever reason it is to the benefit of their estate and their heirs to have those assets offshore?
Yes. And that planning is something we very commonly do where we set everything up domestically, but reserve the right to transition it in the future if it’s ever a good idea to do so. So I think that caution is required and is well-placed, but you have to work with a professional and you simply have to understand that if you use offshore tools, they are neither secret nor are they tax-free.
You will do tax reporting. And if you do that tax reporting, you will not have a problem with the U.S. government.
Armando (44:45 – 45:22)
Yeah. Yeah. That makes a lot of sense.
And it is exactly just what you described that there are always bad operators out there who get themselves in the newspaper and get their client in trouble. And they’re the ones that we hear about. Those are the horror stories you hear about that cause fear and panic in others who really could and should use these tools.
They just aren’t aware. So let me ask you, Ike, every state, of course, is different. And you hear about people setting up trusts in maybe the Dakotas or maybe Nevada for anonymity or for their laws.
How does that come into play with asset protection planning that you do?
Ike (45:23 – 51:24)
Well, yes. So we use, as I said, a variety of trusts and some of those are domestic trusts. And those domestic trusts take many forms.
So I think what you’re specifically referring to is ADAPT, D-A-P-T, which stands for domestic asset protection trust. That’s the acronym lawyers use. And there are roughly 19 states right now that have domestic asset protection trust statutes that say, hey, if you are in this state and have assets in this state and comply with these details, we can, you can use a trust structure under our law, a specific trust structure.
And some of those domestic jurisdictions like Nevada and South Dakota and some of the others are very good and very strong. And some of the others at the bottom of that list are very bad in terms of the protection they actually offer, the limitations that they create on what you can put in the trust, when those assets are protected, so on and so forth. It is our opinion or my opinion and my partner’s opinion that domestic asset protection trusts are great for people who live in a DAPT state, if that state’s legislation is good enough and if they have assets and want protection from that state’s courts.
I think that if you have all those stars line up, then great. And as I said, that works much better in Nevada than it does, for instance, in Hawaii. Okay.
So that’s also a state law specific question, as you said. What if you’re not in one of those states, right? For instance, a lot of your clients and my clients are in Arizona and Arizona is not a DAPT state.
We don’t have that legislation. Well, can we use a trust founded in one of those other states? Yes, we can.
And the issue, however, is that there are a number of challenges that can be made to that, including the full faith and credit clause that says a judgment in any state is good and enforceable in any other state. There are a bunch of different issues with that. And people who are proponents of different strategies, lawyers in particular, go back and forth publicly and argue about, my strategy is better.
No, my strategy is better. No, my state’s the best. And some of that is based on their experience.
Some of it is based on some financial incentive. Some of it is based on just what they know. Hey, I’m in state X and therefore everything in state X is the best to me because it’s the closest and the most familiar to me.
And I know the most people and have the most resources, right? So a Nevada guy is going to sell you Nevada stuff. A Dakota guy is going to sell you Dakota stuff.
And that’s okay to a degree because as I said, if they’re very skilled practitioners, maybe they’re going to produce a great result for you. And hopefully it stands up. And hopefully you have enough layers in place to where the final determining factor on where that trust was doesn’t make or break you.
For those, for instance, of us who have clients in a state like Arizona, that’s not a DAPT state, we have a couple of different options. We can use conventional completed gift trusts where we put gifts into, we make transfers or make sales of assets to standard domestic irrevocable trusts with third party trustees. And so that is not a state specific thing in the same way.
The other thing we can do is set up a trust that does use a DAPT statute of another state, and which is also linked to also has that offshore ejector seat built in. So that yes, we do have a state, a trust that’s founded under the laws of another state. But if push comes to shove, we can also choose to recite us that trust, same trust, same assets, simply changing where a trust is administered, where the assets are held, and where the trustee is.
Is the trustee inside or outside the US courts jurisdiction? So again, it’s the planner’s skill in looking at this and saying to the client, hey, based on who you are, what your income is, what your liquidity needs are, what your comfort level is, here are two or three different options. This is the one that we think is the best, but if that one scares you, then here are the other options.
And there are things you give up. So if you’re not willing to do something like that, and you want to protect your $7 million home, then you’re going to have to put that home in a domestic irrevocable trust and give it to your spouse or your kids. And what if you want to use that home for collateral, for credit?
What if that’s not your dream home? What if you’re not ready to say today, yes, we want to keep that home for the rest of our life, right? So a lot of the planning I do is more flexible than using the conventional estate planning tools, although we have those and offer them, because a lot of the people that I work with, whether they are operating a business or whether they are selling a business, these aren’t guys that are going to spend the rest of their life fishing with their feet up.
These are entrepreneurial type A people who are, they’re going to get bored in a few months. They’re going to get back into another deal. They’re still going to need to have that shield up, and they’re going to need to be agile and have options and liquidity and control to make more money with the money that they’ve received.
And I know a lot of the people that you work with are like that as well. Some people are lucky enough to say, hey, great, I sold my business. I’m going to spend the rest of my life at the cabin on the boat.
If that’s your plan, fabulous. That doesn’t reflect the reality of a lot of the people that I deal with, even if that’s their plan. Like I said, six months in, they call me back and say, yeah, I’m fished out.
I’m golfed out. My buddy brought me a new project and I’m going to be an investor. I think you’ve probably heard that as well.
Armando (51:25 – 52:06)
Right, right. So flexibility can be extremely important, right? I’d say it’s rare that somebody says they’re going to go fishing the rest of their life and that’s the plan and that’s what they’re going to do because they get bored.
They get bored. So flexibility built in makes a lot of sense. So I do want to ask you about divorces and second and third marriages and prenups and estate planning, not estate planning, but asset protection around that.
And just in general, obviously prenups are out there, post-nups are out there as well, but can you talk about that? I know there’s a lot there, but just touch on that please.
Ike (52:06 – 55:53)
Absolutely. So marital defense planning, marital wealth defense planning is absolutely an important part of asset protection. One of the things that I talk to many of the people who I counsel about is the fact that I can’t protect you from the person you’re already married to, number one.
That person probably already has significant property rights, especially if you’ve been married for a long time and the business was built during the course of your marriage, which is most often the case. That being said, if I have a client that is fortunate enough to be both rich and single, what we talk to them about is the importance of doing a prenup, of executing that prenup professionally and well in advance of a wedding so that there is no claim of duress, of complying with all of the formality around that, the clean living, the compliance around that, making sure that the other person has their own counsel, making sure that they had months ahead of the actual wedding to review it and make a decision so that wasn’t a shotgun prenup, so to speak, that you present to them three days before the wedding and if they don’t sign it, they’re humiliated in front of their whole family and everyone they’ve ever known. Those are the kinds of things that make a prenup ineffective. That being said, if it’s done right and done by a professional, it can be very effective and very predictable and failing to have a prenup in place can cost you literally half of everything you own.
The most common feedback I get from wealthy people who come in to me and say, I lost a bunch of my wealth in a divorce or I’m going to lose a bunch of my wealth in a divorce. When I ask them why they don’t have a prenup or why they didn’t have a prenup, it’s one of two answers. One was it was a tough conversation and my partner, my spouse, he or she objected to it they would or they did or they would have taken offense to it so I didn’t do it.
The other thing I hear is we started out together young, we didn’t have anything and then we woke up rich 30 years later. We didn’t think we needed it because we didn’t have anything and for people like young professionals like two doctor couples and other folks like that that you and I both deal with, it is vital to do it before that wealth comes in and to have that prenup even when you don’t have anything because it can cover lots of vital issues including who’s responsible for student debt and lots of other details.
So yes, it absolutely is part of planning. Prenups work and if you combine prenups with my planning or planning like mine where we have taken assets, segregated them and put them into legal entities that are distinctly owned by one party, then the disclosures, the terms of the prenup, everything else is even stronger and is backed up by the fact that we’ve created this separation. There’s also another situation that we see increasingly demographically is that I have lots of wealthy people who are getting divorced or who are widowed or widowers who are married later in life where both parties come into a relationship with a significant amount of money and there are lots of old chauvinistic stereotypes about wealthy man marries woman with significantly less assets or older wealthy man marries younger woman with significantly less assets and look that stuff absolutely is out there but there are also a bunch of very well-settled wealthy women who should protect themselves against the man that they’re marrying, right? And Scottsdale certainly is full of guys like that that we need to protect our clients.
Armando (55:53 – 56:00)
Right, in Maricopa County where Scottsdale sits used to at one time have the highest divorce rate in the entire country.
Ike (56:01 – 58:10)
Yeah, so when one of my successful female business owners comes to me and says, hey, I think I’m going to get engaged and I’m like, is this the guy who always shows up in flip-flops who spends all his time riding your horses and driving your cars and has no visible means of support, you better believe I’m going to want a prenup in place forever, you know, and I’m being a little facetious but yeah, it is really important, it is part of the plan.
Post-nups are less effective but they can be done in a legally enforceable way and as I said, increasingly what we’re seeing is we have two people who both have something to lose and both of them should be thinking about this and especially our family business owners want to make sure that especially if they have children who have been part of the growth and success of that company, that those children, protecting those children is part of your prenup or premarital planning as well.
If we have the unfortunate event of a divorce, you cannot use asset protection planning to take assets that you don’t have a right to take and put them out of reach of your spouse and there are absolutely dishonest people with dishonest lawyers who have attempted that and those cases are among the landmark cases where even the best asset protection planning in the most aggressive jurisdictions in the world have failed because they should have.
Asset protection planning is not a license to commit fraud, theft, perjury, etc. It is not. It is designed for good people to take advantage of legal structures that the law allows just like setting up a trust, just like setting up an LLC for a new business.
These are things that we wouldn’t even think about. We wouldn’t question, well yeah, of course, we’re opening a new business, let’s have a corporate structure around it, right? And we just need to conceptualize asset protection the same way that we do as estate planning or financial planning or tax planning as a necessity that the law allows and that you should engage in as a good steward of your family’s wealth.
Armando (58:10 – 58:49)
Right, absolutely. I agree 100% that just what you said, they wake up 30 years later and now they’re rich. Well, that happens a lot but it happens over a long period of time with dedicated hard work and methodical systematic growth.
So, yeah, now they’re suddenly 30 years later rich and it’s helping them keep what they’ve worked so hard to build. So, nobody just comes along and tries to take it through whatever means possible. So, we’ve talked about a lot.
What have we not touched on in this conversation that you often talk about with that first meeting with that perspective or that new client?
Ike (58:50 – 1:03:57)
I think if we’re going to wrap up with something that we haven’t touched on at all yet, I think it would be advising them to use extreme caution and the advice of people like yourself, their tax lawyers and their CPAs when chasing the holy grail of capital gains tax avoidance on the sale of a business. I get that nobody wants to pay that tax or wants to pay the full amount of it, especially if you feel that this is, as you said, that hard-earned wealth that took decades to earn. And because everybody wants to avoid that, people are unfortunately willing and open to hearing bad stories of tax fraud because they desperately want it to be true.
And to give your viewers one specific caution, there are a group of promoters, attorneys, non-attorney promoters, advisors, CPAs out there who are selling products that have some combination of the following jumble of legal jargon, which is non-grantor, irrevocable, complex, discretionary spendthrift trust. So, they throw in all of these different terms, each of which are legitimate terms, each of which does describe a specific type of trust or legal entity or the attributes that it has. But it’s like stringing together a series of medical terms that have nothing to do with each other.
It’s like saying oncology, podiatry, diverticulosis, high blood pressure. It’s like just listing a bunch of stuff that doesn’t tell us anything. And so, what this scam is, is basically the people who are selling the trust with that complicated set of names are telling folks that if they put their assets in the trust and the trust then sells the business or whatever it is, that there is no capital gains tax due on that or that there is some other tax benefit to do that.
It’s not just at the sale of a business. There are lots of different types of tax scams out there. As I said, each of those terms is a legitimate term that applies to a legitimate kind of trust.
But the specific scam I want your viewers to be aware of is that people are saying that, and they’ll even show them a letter from the IRS that says, hey, if you have a, quote, complex trust with all of the rest of that nomenclature on it, that trust pays no income tax. So therefore, what they’re telling their marks, the people who are victimizing them, is that if they put their trust, their money into that trust, that trust will be forever be taxed. What they are failing to disclose is that because it is a grantor trust, all of the tax liability is attributed directly to the grantor, the person who established it.
So the trust does not pay tax. The person selling you that is absolutely correct. You pay that tax.
The simple, glaring, stupid detail is the basis of this fraud, right? So it’s like, hey, look, you put it in this trust. The trust never has to pay tax.
And they’re leaving out the big thing that the trust doesn’t pay tax because it’s treated as a grantor trust. And it means all of the taxable income that passes out of the trust is attributable to someone individually who pays it and records it on their own personal tax return. And to put it even more bluntly, my buddy Jay Adkisson, who I think you’ve heard of and know and have seen his work, he wrote an article on this for Forbes.
And the title of the article is the complex trust is simply the criminal tax evasion device known as the pure trust repackaged. It couldn’t be any more clear than that. One big badge of fraud that your client should look out for is if they are working with somebody who has something like this, and that person has a sales pitch that has any combination of the following statements, they should be very careful.
They should run away. And they should certainly get a second opinion from you or a tax lawyer, which is this is something that’s been used for decades by the richest people in America. And regular people, including your advisors, don’t know about it.
And they often name drop. This is what Bill Gates does. This is what the Rockefellers do.
So they’ll throw in some names. The next thing they’ll say is this is proprietary and your advisors are too stupid to know it or understand it. And the third one is we want you to sign a confidentiality agreement.
All right. There is nothing secret or proprietary about the tax code. If they are using legitimate elements in the tax code, they should be able to point to those, give you a list and have you have that list approved by your own tax counsel so that you know that you are not jeopardizing the proceeds of the sale by committing criminal tax fraud.
Armando (1:03:58 – 1:04:40)
Right. Right. Yeah.
And that makes a lot of sense. I can see how people could get caught up in the different legal terms and just not knowing and wanting to believe it and therefore doing it. But you mentioned the word scam and there are scams all over the place that try to take advantage of people and just take their money.
So it’s always important that if it doesn’t sound or smell right to get a second opinion. And just what you said, IRS, the tax code, it’s published, it’s out there, it’s in black and white. Everybody has access to it.
So I’m so glad that you brought that up so that people don’t put themselves in really bad situations just because they didn’t know any better.
Ike (1:04:42 – 1:04:43)
Absolutely. Absolutely.
Armando (1:04:43 – 1:08:13)
Yeah. Good. So let me just touch on a couple of areas here that a couple just a little bit of recap.
And I thank you so much. You’ve covered a lot in this conversation. I know we could talk for hours because there’s a lot here.
Happy to join you again. If there’s something specific we need to drill down. Yeah, we probably will.
You mentioned that basically, you know, as protection is you kind of function as a bodyguard for the client’s money. And that’s what asset protection is intended to do, be a bodyguard for money. You mentioned death planning is really often estate planning, as you call it.
Asset protection is something different. It’s life planning. Right.
Life planning. And you mentioned vulnerabilities. I like what you mentioned as well.
You said target value. What is your target value? We often use the term, what is your overall net worth, including your business?
If the number, say, is 20 million, 50 million, well, that’s that’s the overall net worth. I think in your view, that would be the target value that that you could be sued for or chased after if there were some kind of an incident and somebody went after you to try to get money in their own pocket. Target value.
I hadn’t thought about that before. You also mentioned painting a picture before and after somebody walks in your door for the first time. They already have something set up.
Hopefully, maybe they have nothing, but you give them a visual after. If they work with you, what will it look like and what will their vulnerabilities be after you’ve done your work? And that sounds excellent in that it gives them a view of how they are protected once you’ve helped them identify where they are vulnerable for any kind of suit that could cost them.
Now, you mentioned the pyramid that I so much like, the visual that you have where your first layer of protection is clean living, keeping things maybe not simple, but clean living and having being compliant with what needs to get done, but keeping things there where it’s clean and it’s your own behavior and watching things. Second layer of insurance, insurance for the business, the cars, the house, umbrella, etc. as another layer of protection.
And then a third layer is really your expertise and where you spend your days in the legal tools available to people to really help nail down and button up what needs to get done so that they are as protected as they can be. We touched on onshore and offshore and how that can be appropriate, not for everybody, but for some it is appropriate. You mentioned the DAPT in 19 states.
Some states have that, some states don’t. The Domestic Asset Protection Trust and you talked about scams that are out there. I like that you also talked about the umbrella policies, how critical those are and what I’ll often use as a general idea is if the client says he’s got a net worth of $10 million, well, then an umbrella shouldn’t be $2 million.
It should be something significantly more because what are you really protecting? It’s the overall net worth, but making sure that you have the right person to look over the property and cash insurance, the umbrella policies and all of that so that there aren’t some obvious gaps that could easily have been addressed. We’ve talked about a lot.
If somebody wants to get a hold of you, they liked what you said, like what you talked about and want to have a conversation with you, what’s the best way for them to reach you?
Ike (1:08:15 – 1:09:18)
They can find out more about me and contact me through my website, which is proassetprotection.com. There’s a ton of information there that has probably a couple hundred articles that I’ve written on different issues regarding asset protection, business law, wealth preservation, and risk management. There’s a ton of information there.
It’s all freely available. You don’t have to sign up or put in your email address. You can go on the website and read it.
The contact forms are there, the phone number, everything you need to reach me is there. I think that’s probably a great place to start. On that website, there’s a tab on the homepage that says Asset Protection 101.
That in particular provides, I believe, a decent introduction to some of the concepts that we talked about today and that anyone who’s thinking about protecting themselves this way should look at, including how to qualify the person you pick.
Armando (1:09:19 – 1:09:35)
Fantastic. Ike, thank you so much for the conversation. Really enjoyed it.
Learned a lot in this conversation with you and hoping that somebody who has not gone through all the asset protection work yet listens to this, hears what you had to say, and reaches out to get more information from you.
Ike (1:09:35 – 1:09:46)
Thank you so much for having me, for sharing your time with me, and I agree. If we help even one person maintain what they’ve spent a lifetime building, I think that our time together was more than justified.
Armando (1:09:47 – 1:10:16)
Agreed, agreed. Thinking of exiting your business? You may have only one chance to get this sale right.
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