Guests: Scott Smith, Daniel Ramsey
Recorded: January 5, 2020
Excerpt
Scott Smith is a real estate investor and an asset protection attorney based in Austin, Texas. He graduated from Albany Law School and began his career in high-stakes corporate litigation. Scott learned the key secret he now uses to defeat lawsuits that they are a business.
Through his defense work, he targets defeating lawsuits before they are even filed by making sure the business part of a lawsuit no longer makes financial sense for a plaintiff to proceed. In addition, Scott founded Royal Legal Solutions to offer tax, business, and legal strategies to real estate investors.
Transcript
00:00:08:06 – 00:00:28:19
Daniel Ramsey
Hey, everyone. Daniel Ramsey here with my out desk. I’m excited because I’ve got my good friend Scott Royal Smith here. And today we’re going to talk taxes. It’s the end of the year. And as you know, it’s time to save money on taxes, plan for income and asset preservation. And we got the guy to do it. He’s a longtime real estate attorney and investor.
00:00:28:19 – 00:00:39:07
Daniel Ramsey
So what I love about this guy is he melds legal and tax strategy together to help people save money and save and preserve your assets. Scott, thanks for being here today.
00:00:39:24 – 00:01:02:11
Scott Smith
Awesome. Daniel, Thanks so much for having me on the show. It’s always such a pleasure to be able to come on to a show like yours where we get to really dove deep into the subject matter, which is one of my favorite things, right? So I’m going to tell everybody, as are grabbing, listening to this show, pause for a second and grab a pen and a piece of paper because we’re going to be quick through a bunch of really hardcore strategies that aren’t going to be necessarily just like the tax components.
00:01:02:11 – 00:01:18:05
Scott Smith
But we’re going to talk about like, so if we went to a self-directed IRA how to maximize your tax deductions, especially if you’re a real estate investor, but also how do you need to combine that with the right entity structuring where you can compartmentalize and anonymous is all of your asset holdings to make it look like you qualify for food stamps.
00:01:18:10 – 00:01:24:22
Scott Smith
I’m going to get that all on today’s episode. So grab a paper right now and I’ll start laying down some knowledge on you guys.
00:01:24:22 – 00:01:43:17
Daniel Ramsey
There you go, man. I’m excited you just broke down what we’re going to learn today, why I think it’s important for everybody to be listening is that you’re likely like me. I have a business. You’re like, they like me. I own real estate, and you’re like, they like me. And you have income and assets that you want to protect and taxes you don’t want to pay.
00:01:43:17 – 00:02:08:19
Daniel Ramsey
So we’ve got Scott here. Let’s start with something that I’ve recently done to protect my company and our real estate holdings is a series LLC. So let’s talk about that real quick. Scott, you’re I’m one of your clients, so that’s also a good endorsement for anybody listening. It’s definitely a good thing to kind of wrap. I mean, the way you’re your entity structure is just kind of so unique.
00:02:08:19 – 00:02:16:01
Daniel Ramsey
So let’s start there and talk. How do you structure real estate holdings to protect your long term investments?
00:02:16:16 – 00:02:34:14
Scott Smith
Yeah. So no, Series LLC is the best tool that has ever been invented. It’s been around for about 20 years now, right? I actually found out about the series LLC through my own business and real estate investing. I’ve been doing that full time for probably about eight years now. I mean, I got my first property while I was in law school.
00:02:34:21 – 00:02:52:05
Scott Smith
It was a transaction, an auto repair shop that I had bought the building and the business for the back taxes. So I figured you can’t lose on this baby. Well, it turns out to be a ton of work while you’re trying to go to law school full time to be able to do that. Right. So not a whole lot of sleep happened for those couple of years, but big payoff.
00:02:52:05 – 00:03:07:17
Scott Smith
And that’s where it fell in love with real estate is because when I graduated law school, I flipped the business and the building to be the only person in my class to graduate from school with no debt. And I loved it. And it gave me the flexibility to go in and try something that I always want to do, which was being a hardcore litigation attorney.
00:03:07:17 – 00:03:25:24
Scott Smith
I mean, I worked for the district attorney at both the trial court and the appellate court, and I also worked in private practice and suing insurance companies because come to find out that these profit seeking corporation calls, insurance companies are really great at collecting premiums, not so great at paying out on the coverage when the rubber hits the road, especially when it comes to pay claims.
00:03:25:24 – 00:03:39:09
Scott Smith
Right. So I was I was working and doing my legal work. I was still doing real estate until I found out I was making more money doing real estate than I was doing the law. So I just quit the law. I was like, Nah, I’m out of here. I’m going back to real estate because I love the passive income.
00:03:39:09 – 00:03:56:10
Scott Smith
I love the fact that I can build wealth with leveraged structures. I love the time, free time I’m able to create for myself because I can see how my passive income is going to be able to create the time frame for me to be able to focus on the things that I love to do. I mean, I love jumping out of airplanes, being able to have a great time all around.
00:03:56:19 – 00:04:17:14
Scott Smith
And the most important piece for me was that it couldn’t get taken away from me. Everything else I had seen in life, it can get taken away from you in a snap, right? Won that lawsuit. One bad decision, one change in the market. Everything gets wiped out. Right. When I found out the real estate investing is that the energy that I was putting in built like a machine.
00:04:17:14 – 00:04:34:23
Scott Smith
It was a juggernaut that was going to eventually get me to financial freedom, which is where I head now, a long time ago. Right? And now my life is dedicated to helping other people get there. But at the time when I started it was rough because I was accumulating all of these assets. So I said, What the heck am I supposed to do?
00:04:35:03 – 00:04:55:22
Scott Smith
I’m an attorney and I can’t figure this out. I need help with my legal, the tax, the insurance, the banking, the accounting, all of the pieces that come into play as we’re stealing a real estate investment company. So what I do is I read all the books and because I was a colleague and not a client, all of the authors would actually talk to me and share with me their secrets of what how they are able to get these things to work.
00:04:56:06 – 00:05:10:10
Scott Smith
What I did is I put that all in place myself. And when I go to the meetup groups and the other types of networking groups that I was into at the time, people ask me, Scott, what are you doing? How does everything that you’re doing work? And so I would tell them, I say, Hey, this is what it is.
00:05:10:14 – 00:05:41:10
Scott Smith
You know, I’m a huge proponent of sharing everything I know with people, and that still continues as a fundamental value from wild legal solutions and come to find out that just by looking to share all of the information from people, I said, Hey, can you help me set that up? And so eventually I accidentally started this law firm because it ended up being that I needed so many people needed my help that I was kind of I found my niche of my way to have my big impact was being able to help other people lock up not just one small aspect of their life, but everything together.
00:05:41:16 – 00:05:56:11
Scott Smith
And that turns where we use the series LLC structure we’re using in an empty trust. We’re combining the estate planning, we’re combining operating companies in conjunction with these series LLC entities. And I have to admit that I actually forgot your question by the time that I got this.
00:05:57:06 – 00:06:16:20
Daniel Ramsey
Well, let’s talk about the problem that you solve with a series LLC. I mean, as a real estate investor, I had so many different entities because this bank wanted it structured a particular way. This partner wanted to put in 20% of the equity. I put cash in this one, but not in that one. And this one was leveraged differently.
00:06:16:20 – 00:06:31:08
Daniel Ramsey
So I ended up with like seven different LLC to hold 29 different properties. And I think your solution gets just gets rid of all that complexity. So let’s talk about the problem that the series LLC solves for people.
00:06:31:21 – 00:06:53:04
Scott Smith
Yeah. So that there’s two fundamental problems that comes in when you’re starting to scale and real estate, which happens up at that two plus property mark where it makes sense to start using a series LLC. Or if you’re located in California, you can use a Delaware statutory trust to be able to avoid franchise taxes. Another great way and a little twist for those California people out there that are tired of getting hammered by the taxes.
00:06:53:12 – 00:07:14:22
Scott Smith
But the net effect is, is that with the series LLC or the DST and for the purposes of this conversation, let’s just talk about Series LLC. So for the Series LLC is that you’re able to do one entity, one entity that you have to create and maintain that’s filed with the state that you can create in four different states that have strong asset protection either Delaware, Texas, Nevada or Wyoming.
00:07:14:22 – 00:07:19:12
Scott Smith
Those are the ones that have strong charging water protection for the LLC. Now what we look for.
00:07:19:23 – 00:07:41:21
Daniel Ramsey
Whoa, whoa, whoa, whoa, whoa. Let’s define charging orders. Because not all of us are attorneys. We get that. Those are the four most friendly states. I mean, you said Texas and Nevada, Wyoming, Delaware. That makes sense to anybody who’s a businessperson. But what does it mean? Why why are those four states the most important to set up your entity structure in?
00:07:42:06 – 00:08:00:12
Scott Smith
Yeah, because the questions become as a couple of two different things that I look at. One, how is well, will these losses actually work if they’re challenged? States like California LLC, these are almost worthless, right? Florida, same thing. Right? So it matters where we form that LLC. That’s why initially everybody was forming in Delaware and using everywhere else.
00:08:00:18 – 00:08:17:05
Scott Smith
Delaware was the first out into the market space, was saying, we’re going to have the most aggressive laws come to find out that these other states. Right. They followed suit because they want some of that business, too. Right. So they entered into the marketplace. Right. So that’s where it comes in. Now, what you the legal terms, you define how strong an LLC is.
00:08:17:05 – 00:08:33:23
Scott Smith
It’s what’s called charging order protection. So if you want to research that on your own, that would be to say, hey, what are the charging order protections in each of these different states? And you’ll be able to find out why asset protection attorneys and real estate attorneys like myself work for only these four states. Right. So it’s a pretty inquiry into it.
00:08:33:23 – 00:08:55:05
Scott Smith
Right. The other thing that I look for is what is my ongoing costs, right? So out of those four states, Delaware, Nevada and Wyoming, all have ongoing costs. Texas is the only state that doesn’t. Right. So you can have the best protection with no ongoing costs if you form in the state of Texas, not just because I live here in Austin, Texas, I can form these up anywhere.
00:08:55:05 – 00:09:25:04
Scott Smith
Right. But I just choose to use Texas because it allows us that extra ability to be able to form for an LLC, having strong protections, be able to make sure that it’s going to be cost effective. And a what a lot of people don’t know is that when you’re in Texas, you can also create the series of losses anonymously if you do them appropriately through a law firm, which means all of the entity structuring is not only anonymous on the paper, but because it’s all structured through a law firm and it all ties back to a law firm, then it’s all protected by the attorney client privilege.
00:09:25:05 – 00:09:29:11
Scott Smith
So it’s actually the strongest level of anonymity you can have if you structure these through a law firm as well.
00:09:29:11 – 00:09:37:02
Daniel Ramsey
So people just couldn’t find you to do a lawsuit, is what you’re saying. Or if they did, they’d come up to Scott and Scott would tell them to go away.
00:09:37:18 – 00:09:57:09
Scott Smith
Yeah. So this is the way it works, right? Is because because everything is hidden at every level. All of my clients and assets are hidden behind trust structures, both at the entity level and the individual asset level. So if anybody ever that were looking into say, Hey, what is Daniel Ramsey? Alan Right. Yeah, we get stopped by trust structures in a blind trust.
00:09:57:09 – 00:10:23:06
Scott Smith
They can’t find anything else about him that it looks like it all ties to a law firm. So what this means is if anybody is looking to sue, they have to spend tons of money and resources and start taking big guesses about what can we get out of this lawsuit. So now it makes their job incredibly difficult and makes the lawsuit itself less appealing as a business venture right now, there’s more risk associated with will they ever be able to collect anything at all if they pursue it also.
00:10:23:24 – 00:10:29:19
Daniel Ramsey
And and that barrier is enough to stop people from going on a fishing expedition, basically.
00:10:29:19 – 00:10:49:14
Scott Smith
Exactly. Yeah. We talk about anonymity. Is anonymity is how you stop lawsuits before they ever start. Right. And the reason that we use the series LLC structure is because with a series LLC, we can compartmentalize every single asset for free. You’re essentially able to create LLC is on your desktop at zero costs and with zero upfront cost and ongoing costs.
00:10:49:14 – 00:11:04:06
Scott Smith
So you get this infinitely scalable structure that doesn’t get more complex as you grow and it doesn’t cost you anything as it grows. So if they do ever decide to sue because just because somebody is anonymous doesn’t mean they can’t actually file a lawsuit in some way. Right? It just becomes really difficult for them to do all right.
00:11:04:12 – 00:11:21:11
Scott Smith
But if they do, they get little to nothing. So it makes it where the disincentive advise the lawsuit by shrinking the pool of assets that they come after. So not only was it a pain and they had to spend a ton of money to be able to find out the information. And once they started the lawsuit, then they got really bad news that there’s not much there to recover after.
00:11:21:18 – 00:11:41:11
Scott Smith
So what do you think they do? They either become very reasonable with their settlement amounts or if I’m actually representing you in that litigation, which I do for clients all over the country in combination with whatever the local council is, we get those people to walk away, right by using the type of aggressive strategies I learned from the district attorney’s office and also fighting with insurance companies.
00:11:41:20 – 00:12:01:02
Daniel Ramsey
I love it. I love it. So what you’re saying is you used to do you have to file an LLC for every property, but now with the series, your LLC is there. You create your operating doc on your laptop and doesn’t cost you anything and it’s infinitely you can do ten at a time for ten different properties. No problem.
00:12:01:14 – 00:12:21:24
Scott Smith
No problem at all. Right. And you can you can all do anything in these series, all your your stocks, your cash, intellectual property, really. At the end of the day, when I found out, Daniel from my podcast, real estate nerds and and being a part of groups of people that have networks, you know, that go into that nine figure range is a real people don’t own stuff and they don’t pay taxes.
00:12:22:07 – 00:12:41:16
Scott Smith
And there’s a really good reason for that is because rich people don’t own things. They have companies that control things for them. The reason why is because a rich person understands that if I ever get sued, I want to not have to care about it. And that’s ultimately, at the end of the day, is a kind of peace of mind that we deliver as the you don’t have to care about lawsuits anymore, kind of peace of mind.
00:12:41:16 – 00:12:58:18
Scott Smith
Nobody can touch you, right? You do. And so we’re trying to get there in a couple of different ways. Right. We’re getting there with the anonymity. We’re getting there with the series LLC structure because we can maintain everything out of one bank account as long as we have accurate accounting where we tag the income and expenses for each individual property.
00:12:58:18 – 00:13:21:04
Scott Smith
And that’s the requirement that we have to have. But that’s way easier than having 12 different bank accounts for all your losses and checkbooks that that comes into play. Likely you’re able to screw that up too, if you have too many losses, which means you create a chink in the armor. So simplifying your operations not only means that it’s saving you time and money, but also means better protection for you as you go because less opportunities to make mistakes.
00:13:22:01 – 00:13:41:12
Scott Smith
And we’ve combine that with the ownership of individual pieces of real estate, with incorporation of land trusts. So each property that we we advise our clients, I say most of the time close on the property inside of your personal name because that’s how you’re going to get best financing, right? Right. I’m closing transfer the property into the land trust that’s owned by your series LLC.
00:13:41:16 – 00:13:58:16
Scott Smith
That’s how we’re going to create the anonymity that you used to own it, but that you don’t own it anymore. And by transferring it to the land trust, we avoid the transfer fees and taxes, which becomes exceptionally important for people that live in Pennsylvania, in Massachusetts, and if done correctly, we’re the only firm that I know that knows how to do that correctly, by the way.
00:13:59:01 – 00:14:13:02
Scott Smith
And the other thing that we do is we’re able to avoid the due on sale clause because the transfer to a trust avoids that. You want a sale clause per the Saint-Germain Germain Act so you don’t have to worry about the condition mortgage keeping you from being able to transfer over and we’re able to do it all in-house.
00:14:13:05 – 00:14:16:06
Scott Smith
So they have one person to contact to be able to do everything for you.
00:14:16:16 – 00:14:31:14
Daniel Ramsey
When when do you think that this becomes important for a real estate investor? Like at what stage or net worth or business sized? You you typically find your clients saying, wow, this is amazing, or this really works, or this has been very valuable for me.
00:14:32:17 – 00:14:51:18
Scott Smith
We typically we find and here’s my my advice. If everybody’s if you’re just getting started, right, and you have less than that $50,000 of total net worth, don’t set anything up any of this stuff up. Yeah. Just use your insurance policies if you want to be extra careful, incorporate ambarella policy on top of just your normal liability policy.
00:14:51:24 – 00:15:11:23
Scott Smith
And with that it’s not the greatest protection, but it’s going to help you in most circumstances that are going to pop up. Right? When you start getting above that 5000 thousand dollar net worth, then that’s when it’s going to make sense to go ahead and push to have the expense, to be able to create all the entity structuring that’s here in place.
00:15:12:05 – 00:15:33:10
Scott Smith
And the reason why is because at that place, at that 50 to $100000 mark, now you’re in the sweet spot for attorneys thinking that they can get paid if you have all the assets in your personal name. There’s tools like Data Tree that we can use to find any identifying piece of information that somebody has about you. We can find every asset you own, right, as well as what the mortgages are with the total equity is going to be.
00:15:33:17 – 00:15:35:19
Scott Smith
We’re able to easily find out how big of a target you.
00:15:35:19 – 00:15:38:19
Daniel Ramsey
Are with a push of a button. It’s like as simple as.
00:15:39:07 – 00:15:55:12
Scott Smith
45 seconds is what it takes me a little to find that out. And when I when I do the searches so literally was able to happen is that people will come into the office to say, hey, I want to go do Joe Blow. We might you might not even ask him, like what happened. The first thing you might do is actually say, let’s just go ahead, look at the assets.
00:15:55:12 – 00:16:13:13
Scott Smith
What can we go after? And the attorneys will work in reverse to find that claim when they know somebody is vulnerable. Right. And this is a shady business, right? These are the frivolous lawsuit attorneys out there that I got to see. And now that I work hard against to make sure that people stay protected into it. Right. But it’s so easy if you don’t have it.
00:16:13:13 – 00:16:30:01
Scott Smith
So once you start having that net worth, you got to start thinking about anonymity and protection and place. Because I have a friend of mine who lost over $3 million in real estate and he was very well insured because he was operating under the assumption that insurance is enough to protect you and that insurance covers most of the claims.
00:16:30:01 – 00:16:48:24
Scott Smith
So don’t have to worry about an independent policy in place. But he didn’t understand is that insurance companies only protect you against negligence. They don’t protect you against any other type of legal liability. So if you’re making by email, those are fraud claims, not protected by insurance, any agreements, are you ready to contract? Those are breach of contract claims, not protected by insurance.
00:16:48:24 – 00:17:08:06
Scott Smith
And you’re probably doing these things every single day. Right. And if you have assets in your personal name, you’re making those emails, communications person sign those contracts in your personal name, every single one of those things. And this country has enough to have a lawsuit that could completely wipe out your assets. Right. So for me, that’s too much risk from the very get go.
00:17:08:12 – 00:17:25:23
Scott Smith
So if you can afford to do more than insurance and you can’t do like these complicated structures with the series LLC and the Anonymity Trust by just creating an LLC, do something right. There’s stages that you can build this stuff like Lego blocks that’s going to be affordable for you no matter what level you’re at, that you won’t have to go back and redo.
00:17:25:24 – 00:17:43:05
Scott Smith
So if you’re anybody’s other thing like me, I wonder if this stuff is complicated or it’s too expensive or whatever. Those are the issues that I’ve had to work through of where it is. This stuff makes sense for different people. So that’s why I say you just reach out to us. We’re going to help you figure out where that point is going to be for you and what’s going to make sense for you both the short term and long term.
00:17:43:11 – 00:17:57:10
Daniel Ramsey
I love it. Scott, thank you for joining us today. Real quick, what does it typically cost? And then we’re going to we’re going to end for the day. But what does it typically cost to create a series LLC? And what can I expect in terms of how long it would take to actually get it done?
00:17:57:24 – 00:18:18:00
Scott Smith
Yeah. So the whole what we typically see is it costs people way less than $10,000 for real estate investors to get everything set up, everything protected with everything that I talked about here today. Now, what we do in conjunction with that a lot of times is usually solar for one case, structures and self-directed IRAs to be able to save people up to $62,000 a year on their taxes.
00:18:18:08 – 00:18:33:13
Scott Smith
And they can use that money to then go make more investments and be able to use in all kinds of ways to increase their net worth. So every single client that I’ve had come into our roles, we’ve been able to use tax structures that offset all of the upfront costs to be able to create all of the entities that they need.
00:18:33:13 – 00:18:42:20
Scott Smith
So end up being a cost neutral solution for almost everybody at the front end and year one. And every other year people are making money by working with us.
00:18:43:02 – 00:18:52:02
Daniel Ramsey
I love that. What is and where would somebody find out how to get more information and kind of go through that process with you? What how would somebody get a hold of you.
00:18:52:15 – 00:19:11:10
Scott Smith
Yeah. If you just go to Royal Legal Solutions dot com that’s where all the information Royal Eagle Solutions dot com. We have the e-book of the top ten things You Need to Do to Protect Your Assets on the Home Page. You’re also going to find big buttons there that are saying, what type of investor are you? And that’s targeted content for specific types of investors.
00:19:11:16 – 00:19:26:18
Scott Smith
So you’re going to what they’re saying. What were these guys tell me when I go through this journey with them, the best the best thing to do. If you want to have a meaningful conversation of how we can help, is to take the quiz to the very top of Royal Eagle so that I can say, hey, what’s your are you on the path to financial freedom?
00:19:26:18 – 00:19:46:20
Scott Smith
Take the quiz. Right. That process about 20 questions long. But what that does, it means in the very first conversation that we have with you, we’re going to be able to start telling you about what strategies you need to be looking into and what resources we have on our list. Now have a curated, personalized experiences of what exactly you need to be targeting from all of the investors we look at.
00:19:46:23 – 00:19:55:19
Scott Smith
We can look at your members and say, Hey, this is where you’re missing it. You’re missing out on taxes. You’re missing it over here. You’re missing it over here. Here’s the resources here to looking at. Let’s go ahead and start that conversation.
00:19:56:05 – 00:20:07:15
Daniel Ramsey
Perfect. And if you’re listening right now in the show notes, we’ll have a link to that spot so you can actually take the assessment. Scott, thank you so much for joining us today and talking about how to save our assets. That’s a big deal.
00:20:08:07 – 00:20:11:21
Scott Smith
Awesome, Dana, great to be here. Thanks so much.
