Overview
This guide is designed to give you clear instructions on how to use and maintain your Asset Protection Plan. Your plan has been designed to be as simple as reasonable and still be the strongest plan we can create to protect your assets. While the design is incredibly efficient, with minimal additional tax returns or compliance filings, there are important steps that you must do to ensure your plan is current and maintained.
This guide will cover the 3 most common tools which we use in our Asset Protection Plan:
- The Bridge Trust®
- The Asset Management Limited Partnership™
- The Limited Liability Company
#1 The Bridge Trust:®
The Bridge Trust is the key to your entire Asset Protection Plan. This trust sits on the top of your planning and holds all of the assets within the AMLP and the LLCs below it. The Bridge Trust gives you the ability to literally move your assets out of the jurisdiction of a U.S. Judge, Jury and Court if a serious threat ever arises and provides unparalleled protection with a minimum or maintenance requirements. This means that The Bridge Trust is very easy to maintain and keep ready for use, and has the following features and requirements:
TAX REPORTING: The Bridge Trust is considered a U.S. Domestic Grantor Trust and therefore does not have any tax reporting requirements. As a simple Domestic Grantor Trust, you do not need to apply for an EIN or file a Trust tax return. This will remain the case unless we are required to trigger your trust and “cross the bridge” in the event your assets are ever threatened.
REGISTRATION: The Bridge Trust is considered by the IRS a “domestic” trust; however, it is also registered offshore and as such does have a required annual renewal requirement. This requirement is part of your annual fee and is maintained directly by Lodmell & Lodmell on your behalf each year.
BANKING: The Bridge Trust does not usually necessitate a domestic bank account. Banking is typically all done through the Asset Management Limited Partnership. However, you may want to consider opening an offshore account which would be held directly by the Bridge Trust. This is the best practice, and we can make the appropriate introductions upon request.
FUNDING: The Bridge Trust is funded with 2 (sometimes three) primary assets; The majority interest in the Asset Management Limited Partnership, and your Primary Residence. You can be assured that the AMLP interest is already in your Bridge Trust, as this is done by Lodmell & Lodmell during initial setup. Your home; however, must be deeded over by you into your trust directly by you. This can be accomplished with a local title company or by using a U.S. Deeds, which is a national deed drafting and filing service we recommend. The third potential asset that may be directly placed in The Bridge Trust, would be a second home which is not rented out. I mention it here because in some cases, we will advise that the second home be placed directly in the Bridge Trust. However, not always, and in many cases, we will recommend the second home be placed in an LLC. If you are not sure, please contact us support@lodmell.com.
#2 The Asset Management Limited Partnership™ (AMLP):
The AMLP is your family holding company and as such is where most of your assets will live. Your AMLP is a distinct legal entity and therefore is required to have apply for its own EIN and file an annual tax return. This is important and is the way in which the AMLP helps protect your assets. The AMLP is also fairly simple to maintain and has the following features and requirements:
TAX REPORTING: The AMLP will file a separate Federal Tax Return called a 1065. As such is will need to apply for an EIN. This was likely done for you when we created your entity. Your first return will be due in the year following your AMLP registration at your filing deadline and should be completed by your CPA or tax preparer. We strongly recommend that you inform them of the creation of this entity now, so they will not miss filing the return next year.
The 1065 will then generate Form K-1s for each of the partners. This will pass-through any gains or losses to the individual partners. For the partnership interest held by The Bridge Trust, since it is a “grantor” trust, the K-1 will actually flow directly through to the Grantor, which is you.
The AMLP does not require an Arizona Tax return or any reporting to Arizona if you are not a resident of Arizona. In most instances you will also have no reporting requirements in your State of residency; however, there are a few States (like California) which do have state requirements. These vary greatly, and it is advisable to consult your accountant as to any local requirements.
It is also important to note that any wholly owned single-member LLCs which are owned by the AMLP as the single member will not require separate returns. The accounting will be consolidated on the AMLP return. This is a benefit and reduces the number of total tax returns you will need to file. (See LLC section below for details).
REGISTRATION: The AMLP is set up and registered in Arizona. This is done for several reasons related to the strength and uniqueness of the jurisdiction. As such, your AMLP is required to have a registered agent in Arizona, and Lodmell & Lodmell serves in that role for you. An additional benefit is that Arizona is one of the very few states which does not require an annual fee or statement to be filed with the State. We consider this a significant benefit as it greatly reduces the chances that your primary holding company will be administratively dissolved and reduces your maintenance requirements.
BANKING: The AMLP is your primary holding company and as such will need bank and brokerage/investment accounts. We recommend that you open at least one primary bank account for your AMLP and at least one Brokerage/Investment account. Often it is easiest to use the same bank you use as your business or personal banking for the bank account, thus allowing for easy online transfers between accounts. For the Brokerage account, you may use your existing broker or relationship. We recommend you contact them and advise them that you have set up a holding company and need to open a new account. If you do not have a primary brokerage relationship, we strongly suggest you develop one. Please contact us directly if you need a referral.
Your AMLP is treated as a business, and you should avoid running personal expenses through any of the AMLP bank accounts. If you are using your AMLP to manage your LLC rental income and expenses, we suggest that you open a separate account just for those activities. This will assist your accountant in preparing the consolidated tax returns.
You may, however, use the assets held in the AMLP for personal expenses at any time. The AMLP holds your money and you are free to use it. To do this, we recommend you transfer any money you wish to use for a personal expense first to your personal account. This should be classified as a ‘distribution’ and will not have any tax consequences. Once in your personal account, you are free to use it however you wish.
FUNDING: The AMLP holds two classes of asset: “Safe” and “Risky”. Your Safe assets will be held directly in the accounts of the AMLP. These include your stocks, bonds, cryptocurrency, and other assets which cannot injure anyone or otherwise create liability.
To fund your safe asset holding accounts you will need to open new accounts at your bank and brokerage institutions in the name of your AMLP. These accounts will use the EIN of the AMLP and be titled directly to the AMLP. These should include any accounts with significant assets. You should not transfer over your daily bank account where you buy gas and groceries as this will remain personal.
Your Risky assets include real estate, boats, airplanes and business, and will be held first in a Limited Liability Company, which is then, in turn, held by your AMLP. This concept of separating your safe and risky assets is important and one of the key concepts of protecting your assets. It is critical that you not mistakenly put a risky asset directly into your AMLP, unless specifically advised to do so by your attorney. See below for funding procedures for your LLCs.
#3 The Limited Liability Company (LLC):
The Limited Liability Company (LLC) is part of your front-line defense. The LLC is perfect for holding risky assets like real estate. If you have an LLC as part of your plan, likely it is holding a piece of investment real estate, or another risky asset. Depending on your asset holdings, you may need many more than a single LLC. By employing multiple LLCs you can separate risky assets from each other. Be careful not to put more than you are comfortable losing in any one LLC. While this does not necessarily mean you will need a separate LLC for each asset, you will want to divide your assets into groups of value. For example, you may want no more than $500K of equity in any single LLC. This could represent one rental house, or five. LLCs are similar to the AMLP in both protection and tax reporting; however, there are some significant distinctions. The LLC is also simple to maintain and has the following features and requirements:
TAX REPORTING: The LLC may be created as a Single-Member LLC (SMLLC) or as a Multi-Member LLC (MMLLC). How it is created will determine if the LLC will need a separate Tax Return and/or be required to apply for an EIN.
Single-Member LLCs, are considered “disregarded entities” by the IRS and as such are not required to file a separate federal tax return. All accounting and tax reporting for SMLLCs is done on the return of the single member. In most cases, this will be your AMLP, and thus no additional action beyond good recordkeeping is required. Also, a SMLLC is not required to apply for a separate EIN; however, if you do need to set up a bank account in the name of the LLC, then likely the bank will require that you do apply for one.
Multi-Member LLCs, on the other hand, must always file a separate tax return and apply for an EIN. They have the same reporting requirements as the AMLP and file a Federal 1065 return. Additionally, they will likely have to file in the State in which they are doing business. Your accountant should be consulted on any State requirements.
REGISTRATION: The LLC is normally set up and registered in the State in which it will be doing business. For real estate, this means the State in which the real estate is located. Most States do have annual filing requirements for LLCs. These are typically completed online, and also have a minimal associated filing fee. Management of your LLCs is done by you and your team or your CPA. We suggest that whomever is doing your bookkeeping for your LLC also set a reminder and ensure that your State filings are done on time each year. Most States will email you with a reminder. You will also need a registered agent for your LLC in the State in which it was established. This can be you, or in some cases, a service can be engaged to serve as your registered agent.
BANKING: The LLC may or may not require a bank account. For Multi-Member LLCs it is definitely recommended that a separate bank account is established. This will give your accountant a clear tracking of your income and expenses.
For Single-Member LLCs it will depend on how you are using it. In many cases, a separate account is not required. This would be the case for a SMLLC which holds a rental property where all of the rents and expenses are run through the holding AMLP or a separate management company. In that case, the LLC does not need a separate account and your bookkeeper can simply keep track in your accounting software.
For Single-Member LLCs which will have significant separate transactions, or which are used as a management company themselves, then it would be best practice to open a separate account for the purpose of tracking.
FUNDING: The LLC is designed to hold risky assets such as real estate. Most risky assets do have “titles” or “deeds”, and in the case where the asset does have one, they you must change the title or deed to reflect the LLC as the owner of the asset. This is done at the State level and will normally be required to be recorded or filed. For assets which are risky, but don’t necessarily have an official record of ownership, then an assignment for can be used to assign the asset into the LLC.
Transferring real estate into you LLC can be done with a local title company or real estate attorney. Alternatively, we have had good success working with U.S. Deeds. You may contact them directly and they can both create and record your deeds for you.
CAUTION: Certain states do have certain costs and or restrictions on transferring real estate. For example, in California you must be very careful when transferring property. If you inadvertently change the ownership of the property to a different set of owners then your property will be reassessed for tax purposes. Other states such as New Jersey and Florida have transfer taxes which may be based on the property value, or just based on the loan amount. Be sure to confirm the full effect of transferring property BEFORE you record any deeds.
Summary
Asset Protection can be one of the most liberating steps clients can take to increase confidence in their financial future. This is most true when clients spend the time in the beginning as you are funding and establishing your plan to set up clear systems based on the above guidelines and the support of our team here at Lodmell & Lodmell. Not only will your planning give you peace of mind but will be simple to use and maintain.
If you have any questions about funding, using or maintaining your planning, please contact us directly at support@lodmell.com or call 602-230-2014. Also please see the attached Funding sheet for an asset-by asset checklist for funding your plan.
Lodmell & Lodmell, PC is one of the nations leading Asset Protection Law Firms and the creators of The Bridge Trust®. L&L serves clients nationwide and may be reached at support@lodmell.com or 602-230-2014.
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