One of Ralph ’ s first pieces of advice from years ago illustrates the need for asset protection :
“ We live in a highly litigious society .”
“ Even doing everything perfectly with honorable intentions can still result in a lawsuit against . Real Estate investors have a much higher chance of being sued , so it ’ s worth spending money now to protect what you have with LLCs . However there are two downsides you should know : paying annual state fees and the cost and time of filing annual tax returns for each LLC .”
Ralph continued : “ Another significant cost is taxation . Tax avoidance is legal and allowable by the IRS ; tax evasion is illegal . Using the 27 ½ year depreciation schedules and 1031 exchanges will help .”
“ I don ’ t like using 1031s as they require extreme diligence and close adherence to very restrictive guidelines . For now , they provide helpful tax benefits : deferring capital gains taxes from whatever property we ’ re selling , which frees up cash for more investments . But 1031s also create a tax snowball : each exchange adds to the accrued tax liability . If a deal doesn ’ t close within the tight timelines and restrictions … well , just hope that never happens . I advise saving up a ‘ tax war chest ’ if it does occur .”
I found out through a discussion with a highly reputable 1031 facilitator that roughly 40 % to 60 % of all attempted 1031s fail .
I spoke to a Tax Attorney
Significant tax mitigation is a very compelling part of Bruce ’ s Trust , so I wanted extra assurance that everything was fully legal and beyond reproach with the IRS . Suggesting passive income tax deferral in perpetuity and 100 % exclusion of capital gains is a big claim that demands vetting .
I was introduced through a friend of a friend to a prominent tax attorney who has intimate familiarity with IRS Code and regulations .
She quickly discussed several IRS Code sections that supported all aspects of Platinum Trust ’ s beneficial tax treatment . She was very confident that Bruce ’ s Trust would safely provide the tax mitigation benefits I was looking for .
Everything I learned contradicted what Ralph told me in our previous discussions : use LLCs to protect yourself , carefully track available deductions with receipts , and use 1031s to defer capital gains burdens .
At the time , Ralph didn ’ t know that 1031s were not needed , and LLCs were the best solution for tax mitigation . It turns out there are better options .
Ralph also mentioned the importance of getting a Living Will or Living Trust to prevent my heirs from experiencing probate , which is costly and can take years . As an invincible 20 something with no wife or children , I promptly ignored this advice . “ Those are for old people planning on dying soon ,” I thought …
At this point , I operated the same as most investors : multiple LLCs , depreciation schedules , 1031 exchanges . I didn ’ t research more exotic solutions like offshore Trusts or domestic Trusts used by the Rockefellers , Kennedys , etc . I wasn ’ t born into a wealthy family and hadn ’ t yet made my own millions , so those didn ’ t make sense to me . I had assumed those systems were for the ultraelite , not just an everyday real estate investor like me . That ’ s where I was wrong .
Rockefellers
It turns out one doesn ’ t need to be a Rockefeller or Kennedy to benefit from one of these trusts .
Kennedys
26