Why So Complicated?

After now practicing law exclusively in the area of Asset Protection for the past 25 years, I have had the opportunity review a lot of legal structures and have seen how those structures were managed (and not managed).  I have also had the opportunity to evolve my own planning over those years based on hard-earned, real world experience, and what I have come to see is that simplicity is almost always better than complication.

Bruce Lee said it well:

"Simplicity is the key to brilliance."

When it comes to Asset Protection, it is very easy to make things complicated. In fact, there is a tendency in the profession to see complexity as a sign of quality, or at least of competence.  I would suggest that it is quite the opposite.  The best asset protection plans are simple to understand, simple to use and simple the manage. Let me give an example of a plan I recently reviewed.

This plan was for a doctor who had an estate of about $5 Million.  He had his medical practice, several rental properties and his brokerage portfolio, plus some cash.  Let's start with the statement that this doctor is an excellent candidate for Asset Protection.  He has risk as well as significant assets, yet not so many assets that a lawsuit would not be impactful to his financial wellbeing.  So what type of asset protection plan should he consider?

When he came to me he had no less than 12 different companies and entities, as well as a complicated lien structure in and between some of these companies, all of which needed to be maintained and documented each year. He did have an asset protection trust, but it was purely domestic (DAPT) and to keep in him control he had a separate 'private trust company' which he was responsible for. Finally, in an apparent attempt to provide some 'reasonableness' to the structure, only half the assets where actually under the DAPT.

He could barely give me a general idea of why he had so many structures, much less actually explain why he had them or how they worked together.  His CPA was confused and seemed to be relying on the doctor to explain it.

From my perspective there were several significant drawbacks to his approach:

1. Overall much too complicated.
2. Required an additional 6 tax returns.
3. Required the payment of interest payments to himself to validate his liens.
4. Utilized a domestic APT, while also setting up a complicated private trust company which had the effect of actually making his DAPT less likely to be effective.
5. Covered only 50% of his assets directly and attempting to cover the rest though the 'friendly liens,' which I consider both overcomplicated and ineffective.
6. Used separate holding companies for 'safe' assets like brokerage accounts and cash, which was simply unnecessary.

After reviewing the structure, I said "Well I have good news and bad news Doc.  The good news is that I can dramatically simplify you plan and increase the level of protection at the same time." 

He said, "that's great, what the bad news?"

I said "Well we need to get rid of most of what you already created and paid for and you will basically be paying twice to get it right."

To his credit he said he understood and gave me the go ahead to restructure his plan. 

What we ended up with was a total of 4 entities.  One holding company in the form of the Asset Management Limited Partnership (AMLP), 2 Limited Liability Companies (LLCs) for his investment properties and The Bridge Trust, which sat at the top of his structure and provided the ultimate asset protection.

His tax return count went down from 6 to just a single additional return which was for the AMLP. 

I believe the law firm who set up his structure was sincere.  They in fact tried to give him a solid plan.  The problem was that the plan they created was more like a law student designing a final exam answer than an experienced asset protection firm who understands working in the real world with real clients and practical considerations. Their attempt did have some logic to it, but the basic flaw was that they didn't really believe in the DAPT they set up.  To compensate for that they minimized what it held directly and added the complication as an attempt to add protection.

This is the exact opposite approach I take with my planning.  Because I have so much experience and know from that experience that The Bridge Trust can absolutely be counted on, I don't need to add the complication at the lower levels.  This keeps my plan simple where it matters (management and taxes) with sophistication reserved for the moments when it is actual needed.

As with so many things in life, they missed the forest for the trees.  By focusing on too much separation with layers and silos and inter-company transactions, what they actually accomplished was a confusing, complicated, and expensive to maintain plan. 

My advice is to keep most things in your life simple, and when it comes to financial and legal matters this is particularly true.  Bruce Lee did in fact have it right, "Simplicity is the Key to Brilliance".