Several years ago I was at a real estate event in San Francisco. A lady approached me after hearing my speech, in which I argued that people should not go overboard and set up more entities than are needed. I was shocked by her story.
Jane was looking to invest in her first duplex. She had previously attended a seminar on asset protection given by a self-styled asset protection guru. The seminar had been sponsored by a local real estate organization. She trusted that the group would provide her only with competent service providers.
The asset protection guy indicated that she needed the following structure for protection: (See Figure 6.14.)
Jane stated that the man convinced her that for the necessary protection she:
1. Needed the LP to hold her LLC. The LP was then, in turn, owned by the Nevada Asset Protection Trust and the Offshore Asset Protection Trust. These structures gave her extra layers of protection.
2.Needed an S corporation to manage the LP in order to achieve necessary asset protection.
3.Needed the C corporation to manage the LLC in order to achieve significant tax savings.
The cost of this structure was $20,000. The annual fees were more than $5,000 to maintain all the entities. Jane was in tears because after spending such a large sum of money for asset protection, she no longer had enough money for the down payment on her duplex.
I told her the truth. She had spent way too much money. The asset protection man's arguments were false. Extra layers of entities do not necessarily provide extra layers of protection. If you aren't making any money yet, you don't really need a C corporation to save on taxes. The structure they created was designed for their profit, not her needs. Jane asked me to give her a chart of what she needed to protect her duplex. It took five seconds to chart her strategy:
Jane was in shock. She asked how the local real estate group promoter, a person she trusted, could let such a snake in the door to present to them. I told her something that was an open secret in that business. The local promoter in many cases receives 50 percent of what the service provider sells. As such, there is a powerful economic incentive for local promoters to tout the value, integrity, and importance of the service provider, as well as the urgent need for the services offered. In Jane's case, the local promoter may have made as much as $10,000 for doing so.
Jane calculated that fifteen people had signed up for all this and figured the promoter must have cleared a total of $150,000 at the one asset protection event. She was furious and sickened by what had happened. She vowed never to invest in real estate. I tried to counsel her but could not. She had gone through a horrible experience and was adamant that her decision was final.
Do not let Jane's experience be yours. Real estate is an excellent way to build wealth, but at some points during your journey you will need to be able to navigate through shark-infested waters.
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