Brian Chou from Barth Calderon Joins Us
The more wealth you have, the more you need to protect it. That is why for busy professionals, it is important to know how you can protect your assets when moving up to higher net worth levels. Brian Chou, Associate Attorney at Barth Calderon Attorneys, talks about building a money moat as he shares the ways we can create firewalls between our assets and liabilities. Specializing in asset protection, estate planning, and business succession planning, Brian discusses reducing risks to your personal wealth through smart planning by creating LLC’s. Take proactive steps and keep in mind that wealth building and protection go hand in hand because losing your assets and liabilities is not a matter of if, but a matter of when.
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How to Build a Money Moat with Brian Chou
Our guest is Brian Chou. Brian is an Associate Attorney at Barth Calderon LLP. He specializes in asset protection, estate planning and business succession planning. He works with clients ranging from young professional couples just starting to think about estate planning to wealthy successful real estate investors needing to protect their assets. Brian, welcome to the show.
Thanks for having me, Taylor.
Most of our investors out there are syndication investors and turnkey rental investors out of state. What are some top key first steps we can take to protect our assets, especially if we’re not investing in a self-directed IRA? We’re just investing out a cash account. How can we segregate our assets to protect them?
A big part of understanding asset protection is acknowledging that the need exists. Being that we live in the United States, which is the most litigious society in the history of mankind, it’s understanding that we are engaged in unusually risky activity. It’s the activity of owning a business or operating a rental property. It’s usually important to take proactive steps to create firewalls between our assets and our liabilities just because it’s not a matter of if, but a matter of when, especially as you move up into higher net worth levels. You can think of wealth as basic physics. The more mass you accumulate, the more gravity you have to attract liability to you. That liability takes a whole host of forms. Those potential creditors that are out there are not that concerned about who is right or who is wrong in any given transaction. It’s more, “Who can pay and how do we get them to pay?”
Even in situations where a client may not necessarily have done anything wrong in many cases because they can afford to pay, creditors will try to shake them down for money. Sometimes judges and juries are sympathetic to that if there isn’t a way to compensate someone who is hurt. A fault isn’t always necessarily the primary driver. That’s the starting point. When I’m meeting with clients and talking about asset protection specifically when we’re talking about real estate, it’s understanding the way that liability flows. The most common way that people take title to real estate is usually in their individual capacity. I buy a rental property and it’s just in my name or it’s held husband and wife as community property or as joint tenants. When we hold title in our individual name that says that there is no separation between the property and myself as a person.
If a creditor slips and falls on that property and they’re seriously injured, that liability can now spill across from that property to me as an individual. Then for me, as an individual, to all the other assets that I might own, my house, my bank accounts, my investment accounts, my other rental properties, my business, etc. That’s the starting point. Understanding that clients, if left to their own devices, usually have everything open-ended where liabilities can freely flow across the balance sheet without any restriction or direction. Acknowledging that is the first step. Most real estate investors are attuned to that risk. Acknowledging that formally is the first step in saying, “This is something that we want to address.” A very simple thing that clients can do from an asset protection standpoint and one of the first things that we’ll do is considering utilizing entities as a way to create firewalls between our assets and our liabilities.
A common way of doing this and a common entity that we use is something called a Limited Liability Company or otherwise known as an LLC. What we’re doing in utilizing an LLC is we’re creating a business that has its own assets and liabilities. What most people do when they utilize these entities is they want to say, “Instead of me owning assets or business directly, I would prefer instead to create a separate company that owns and manages these assets.” Think of it as a separate business. That entity has its own assets and that entity has its own liabilities. Whether I’m operating a coffee shop, whether I’m operating an entity that has buy and hold real estate, whether I’m doing fix and flips, I want to say that this business operates on its own and it is separate from me. The idea then being that as liabilities occur in that business or as liabilities occur in that entity, that liability can only attach to the assets of that business.
For example, I create an LLC and it holds a fourplex. I’m renting that out to a number of tenants and we have that same situation where a tenant gets injured on the property and decides that they’re out for blood. Assuming that I’ve set the LLC up correctly, I’ve maintained it correctly and I give it the respect of being its own entity and don’t treat it like my own piggy bank or as myself, the state will say, “We recognize that this is a separate entity and we will protect or limit the liability associated with that business to the assets of that business.” It’s a powerful way to prevent that liability from popping out of the LLC and attaching to my house, my bank accounts, my rental properties, etc. Instead, the only thing that they can go after are the assets of the LLC. For example, the equity in that fourplex. Maybe there’s a bank account that I used to collect rents and there’s not much else is there for them to go after.
You said you should set it up and then maintain it correctly. Can you clarify a bit what you mean by maintaining the LLC?
A common misperception about LLCs and about business entities generally is that there are not a lot of requirements to set one up and maintain it. I’m sure many of your clients have seen the commercials on LegalZoom or maybe they’ve filed and set up LLCs on their own. Some of the pushback that I see when I’m meeting with clients is instead of paying a couple of grand for an attorney to do it, they’ll say, “I can go on LegalZoom and do it for $500 or perhaps even less.” The rationale there is they say, “Anybody can just fill out the paperwork and file it with the secretary of state.” I agree in that regard. What clients are paying us for us to make sure that all the other things that come along with properly setting up and maintaining that LLC is done.
Take proactive steps to create firewalls between your assets and liabilities because it's not a matter of if, but a matter of when. Click To TweetThere are a number of variables that come into that. The first thing is the design. You can think about creating a series of entities if you have multiple properties or multiple assets. Think of it like building a house. You can start just slapping bricks down and slapping foundation down, but it helps to have a plan. It helps to have an architect figure out what is this thing that will look like, how are we going to accomplish the various goals that we may have for this asset protection structure or for this business structure. The first step is understanding what kind of entities would we be using. What would we be using an LLC? Would we be using a corporation? Would we be using a limited partnership? What are the pros and cons of that? Would that LLC be venued in the state where the asset is located? If I have a California property, should it be a California LLC? Would it be better if it was a Delaware LLC? Would it be better if it was a Wyoming LLC? It depends.
Understanding those things is important. Should that LLC be held in a trust? Should it be a revocable trust? Should it be an irrevocable trust? If so, what kind? All of those things depend on the client’s goals. Once we understand what the structure is supposed to look like, then we want to make sure that the plan is executed upon. Filing the paperwork is the easiest part of setting up the LLC. Deciding again who the managers of that LLC are going to be, who the agent for service of process is going to be, those things are also important in the design process. Also figuring out, “Now that we’ve decided, we know how to set all this stuff up, then we want to make sure that the operating agreements are properly drafted, the different partners’ specific rights are properly defined.” We want to make sure that there’s thought put together on how the internal operation of that LLC works to make sure that it runs smoothly. We also want to make sure that in the event that there is a lawsuit, the offering agreement works within our goals to limit that liability.
We also want to make sure that the assets are properly funded. If the property is designed to be held in this LLC, we want to make sure that we filed the various deeds or the various paperwork to make sure that the title reflects that the LLC is holding whatever it’s supposed to be holding. Whether it be for single-family residences in West Texas or whether it be one hotel in Times Square. We want to make sure that those things are properly structured and the paperwork reflects where those assets are supposed to be. Furthermore, I want to make sure that those entities are properly maintained and I mean that in two ways. Maintenance means providing whatever compliance is required by the states in which the LLC is registered to do business. We’ll just use California as an example. California requires that each LLC pay to the franchise tax board or the state version of the IRS a minimum tax of $800 a year.
Beyond that, there are some additional compliance requirements that that state imposes. If the LLC is also registered to do business in other states, let’s say Delaware or Nevada or Wyoming or Florida, each of those states will also impose ongoing requirements. We have to play by its rules in order to continue to do business. You can think of it almost like state-sponsored insurance. In order for the State of California to agree to provide these protections that I want, I have to play by the rules that California has set forth or whatever other states it is that the LLC is doing business in. To be a good actor means following those rules from a compliance standpoint, but then also respecting the entity as a separate business.
We’ve all heard of companies or business owners that treat their business like their own piggy bank. They just dip in and they use it to pay for personal expenses. There’s no difference between the business and themselves. They just use it as they will and they don’t respect or they don’t operate with that business at arm’s length. Another important aspect of the ongoing management of the LLC is making sure that you’re treating it like a separate business. That means you’re not just loaning money to yourself for a 0% interest rate. You want to pay a reasonable interest. You’re making sure the business is adequately capitalized. You’re making sure not to be abusive when taking business deductions. You’re not commingling business and personal deductions on your tax returns. You’re also not commingling funds. Your personal funds should be personal. Your business funds should be business.
When you’re acting in behalf of the business, you want to make sure that whatever paperwork you have reflects that you’re acting as the manager of your LLC or the president of the corporation as opposed to the guy sitting on the couch. Make sure that we’re respecting the differences between a separate entity and ourselves as individuals. That’s another important aspect of maintaining what’s called the corporate veil. Many of your clients may have heard that term, piercing the corporate veil. Each time we do something inappropriate, you’re going to go like a grain of sand that you’re putting on a scale. Each time that we do something appropriate, maintaining corporate minutes, doing the shareholder’s meetings, we’re putting a grain of sand on the other end of the scale, which is in our favor.
If for some reason there’s some liability within that LLC or that corporation, one of the first things that the creditor is going to try to figure out is, can we pierce the corporate veil? Can we bust through the packaging to come after all of Brian’s personal assets or all of Taylor’s personal assets? The more grains of sand you have stacked up in your favor and the fewer grains of sand you have stacked up in favor of the creditor, the more leverage you have to be able to negotiate a settlement for less time, less money, less headache and the less likely it is that they will be able to pop through the corporate veil.
In the single-family investing world, there are a number of people who will buy a property, get a mortgage in their own name, and then transfer the deed on the property over to an LLC that they create. The mortgage is still in their own name despite there being due on sale clause in the mortgage and they just get around it. Is that an area that could come up in terms of maintaining the LLC that they could look at the note and see Taylor’s name on the note while it’s not Taylor LLC on the note? It’s Taylor’s name on the note. Is that a cause for piercing a corporate veil?
Not likely. The note itself is a debt against the equity in the company or debt against the equity in the property itself. I don’t think it would be a compelling reason for a court to determine that the property was not a property of the LLC. It’s indicative of the fact that the lender agreed to lend money to the individual who is getting the loan, but it is not indicative of the fact that the integrity of the LLC has been compromised. That does bring up another question. This is another question that comes up rather frequently when dealing with real estate investors. If I transfer a property that has a loan on it into an LLC, is there a risk that a bank could trigger a due on sale clause? The answer to that question is it is a risk, but it’s a highly unlikely risk. Taylor, is that something that you’ve come across or that your audience has brought up from time to time?
Yeah, it’s something that people bring up. It’s a concern that’s there. The consensus generally is that they could do it, but they never do it in reality.
The more mass you accumulate, the more gravity you have to attract liability to you. Click To TweetLet me give you my perspective on this. That fits along with your interpretation as well. The idea behind the due on sale clause is in large part to give the bank recourse if you transfer property to somebody that they didn’t agree to loan money to. Let’s say I go and I get a loan from your bank X and bank X says, “We ran your credit, we looked at all of the due diligence that you provided, we deem you creditworthy and we hereby agree to give you this loan on this property.” Then I turn around and I give it to my second cousin who’s a total deadbeat. That person has terrible credit and the bank has no faith in this person’s ability to continue to service the loan. The bank, to protect themselves says, “We want the right to call this loan due if we discover that the person responsible for paying this loan is not somebody that we agreed to lend to or substantially the same person.”
Let’s say instead of giving that property to my deadbeat second cousin, I instead take that property and then I put it into an LLC wholly owned by myself. What happens at that point, although the title has technically changed, I am still the person responsible for paying off that loan. If I stop making those payments, I’m the one who’s going to be hurt because I’m the ultimate owner of that property. From a purely macro level, the bank is highly unlikely to call a loan due so long as they can assure themselves that the property is still substantially owned by you, even though the title has changed. There is another scenario that clients have brought up. What about now that we’re in a rising interest rate environment? What about a greedy bank decides, “Let’s shakedown our client because interest rates are rising? We see that they’ve transferred it into an LLC wholly owned by themselves, but here’s a good excuse for us to utilize that due on sale clause to force them to refinance so we can raise the interest rate.”
This is something that is highly unlikely to happen as well because banking, for the most part, is a relationship business. They want you to keep your money, keep your loans with them and keep paying them interest. If they’re going to do a shakedown like this, it opens them up to litigation for acting in bad faith. If you just think about all the bad press that certain banks have gotten throughout history, it’s terrible PR move and it will also lose them tons of clients because those clients will take that money and refinance elsewhere. As a very practical matter, it’s highly unlikely that a bank would utilize the due on sale clause for our transfer into an LLC, especially any bank that’s used to dealing with real estate investors because of the prevalence of these types of entities. Unless they have some indication that you’re abusing that or you’re using the entity improperly, it’s unlikely to happen.
In 40 some odd years of our firm being in existence, there’s only been a whiff of the bank even considering calling a loan due, but it’s never happened. Once we explain what’s been done and once their questions are answered, they’ll just go away or they’ll say, “Pay us a small fine and we’ll call it a day.” The risk of transferring property into an LLC and the risk of the loan being called due is very low. For those clients who are concerned, there are ways that you can work around that and you can utilize a land trust to assign a beneficial interest and the property into an LLC without the bank being notified that the interest in that property is held in the LLC. There are some ways to work around that for those clients who are that concerned. In my professional opinion, the likelihood of a due on sale clause is being triggered as a result of a transfer into an LLC substantially owned by the original owner is extremely low.
Brian, what is the best investment you ever made?
I’ll start by saying that the best investment that I ever made was my education and I mean that both formally and informally. My parents paid for undergrad, but having paid for law school and business school, those were money very well-spent to give me the knowledge to get to where I am. Also informally, the money that I’ve spent in getting involved with different professional networking organizations which also include real estate investment clubs. It shaped the way I view investing and the way that I approach life. The way that I view everything is through the lens of relationships. My entire existence is centered around the acquisition and the maintenance and growth of great relationships. I assume that your question about the best investment that I’ve ever made centers around the real estate so let me bring it all back full circle here.
I looked at everything through the lens of relationships. What’s been awesome as it pertains to real estate is that real estate is a people business. Whether it be finding the right deals, there are a lot of boots on the ground understanding what’s the appropriate property to buy, what’s the timing in the market, and analyzing cashflow projections. You have to make sure you have good contacts to either manage the property, to acquire the property or to maintain the property. All of those things are what I love about real estate investing. To give the audience a little bit of background, my wife and I dabble in real estate investing. We primarily buy single-family properties local to where we are that we can manage. The best property that we bought to this point has been a small condo near a university. We’ve been lucky to have great tenants. We bought it in 2012 and it’s almost doubled in value. Almost all of the properties we bought is at the very bottom, which has been great. So far, all of our investments have panned out well. Now it’s a little trickier with housing prices being what they are and with the interest rates rising so it’s a little more challenging.
We’re looking to buy our first multifamily property in Southern California. Waiting for the right deal is a little challenging. The margin for error is not as broad, but what’s been gratifying is through the relationships that I’ve built in getting involved with different real estate investment clubs and with other financial professionals. I have a great team of people to help advise me and to give me a big picture understanding of what will work and what won’t. In deciding whether or not to deploy funds, a big part of it is by running all the cashflow projections and making sure that we can cashflow from day one. We’re not exposing ourselves by taking on too much debt so that if there is a downturn or if we have tenants that are nonperforming or that are having risk in foreclosure or having to sell the property.
What is the worst investment you ever made?
This might be a little bit of a political answer, but I don’t know if there is a worst. A quote that I heard was attributed to Morgan Freeman, but I’m not sure if he said this. He said, “Either I’m successful or I learn but so long as I do it, it’s not bad.” The idea being is even if I make a bad investment, so long as I take the time to learn from it, it’s time and money well spent. I took a day trading stock investment course and I spent $1,000 on it for a weekend. It was instructive, but I never applied anything to it. Perhaps that might’ve been my worst investment. That’s a function of my mindset in not applying the lessons that I learned. One of the things I did take away from that is I don’t have the time or the inclination to actively manage a stock portfolio, which is why I have a financial adviser. I guess there is some value to that.
If you surround yourself with great people, you become those people. Click To TweetI wouldn’t call that a political answer. It’s a perfectly valid answer. What is the most important lesson you learned in investing?
I’m going to bring it back to the whole idea about relationships. Everything that I look at is a function of how it relates to the people involved. What is awesome about investing and what is awesome about success is if you surround yourself with great people, you become those people. In my investment philosophy, I’m looking at return on investment. To define return on investment solely in the framework or through the lens of monetary compensation is a little bit shortsighted. The way that I will look at how I invest my time and money encapsulates a whole lot of things and a lot of it is social equity. If I’m building trust, if I’m creating a situation where somebody else is benefiting, even though I may not be making the most amount of money given the opportunity costs, if I count on those things, it leads me to a place where I’m satisfied. I feel like I’m doing good in the world while also benefiting myself.
Brian, what is the best place for our audience to get in touch with you?
For those of you who are interested in connecting with me, you can connect with me on LinkedIn. My name is Brian Chou. If you look me up on LinkedIn, you’ll see a picture of a handsome Asian guy in a suit. That’s one way to connect with me. You can also find me online at www.BarthAttorneys.com if you want to learn a little bit more about my firm and my professional bio is also listed there as well. My email is [email protected]. For those of you in the audience who are interested in utilizing me as a resource, I’m happy to connect with you, learn a little bit about your situation and do what I can to point you in the right direction.
I appreciate your time and I’m sure the audience got something out of it.
Thank you for the opportunity, Taylor. If there are any other opportunities that I can do to contribute to the success of your show or otherwise, let me know. Collaboration is one of the things that I find most enjoyable about what I do.
I appreciate that. To all the audience out there, thank you. I hope you got a lot of value out of the interview. Please subscribe to Passive Wealth strategies wherever you get your podcast. Leave us a five-star rating on iTunes. It would be a big help. We’ll catch you on the next one.
Important Links:
- Brian Chou
- www.BarthAttorneys.com
- [email protected]
- iTunes – Passive Wealth Strategies for Busy Professionals
- Barth Calderon LLP
About Brian Chou
Brian Y. Chou is an Associate Attorney at the firm of Barth Calderon LLP and his practice focuses on asset protection, estate planning, and business succession planning. Mr. Chou assists clients in all stages of life, from the young professional couple that is concerned about estate planning for their minor children, to the wealthy real estate investor who wants to insulate himself and his properties from lawsuits, to the successful business owner who is agonizing about how to transition his company to the next generation. Mr. Chou understands that coming to grips with an impending lawsuit and confronting one’s mortality is typically not high on most clients’ list of things to do and his goal is to make the planning as accessible, digestible and (dare we say it?) enjoyable as possible. Mr. Chou seeks to build lifelong relationships with his clients to ensure that as their personal lives and legal situations evolve, their planning continues to accurately reflect their wishes.
In addition to working with clients to protect and transition their assets, Mr. Chou actively seeks to be a resource to his clients in all aspects of their lives. He encourages his clients to contact him with all manner of needs, whether it be a plumber to fix a clogged drain, qualified employment counsel to address a nasty workers compensation claim or anything in between. An avid public speaker, Mr. Chou has presented to numerous groups all over Southern California, including Pepperdine University, University of California Irvine, Cal State Long Beach, the Planned Giving Roundtable of Orange County, and the California Society of Tax Consultants. He is also especially proud of passing the California State Bar Certified Specialists Exam for Estate Planning, Trust & Probate Law.