I often get questions that point to a very important distinction within asset protection. They basically go like this:

“Doug I heard you describe why you consider real estate assets as different from cash or liquid assets because a local judge could order those properties sold no matter who they are titled too. What use is an LLC or an LP if the judge can disregard it?”

This is a great question and points to one of the most important concepts of assets protection, which is the difference between LEGAL AUTHORITY and PRACTICAL AUTHORITY.

LEGAL AUTHORITY

Our legal system is built around the concept that the enforcement arm (Courts and judges) are bound and limited by the legal authority which surrounds any particular issue.  The legal authority consists of statutes, which are enacted by State and Federal legislation, and cases which make precedent which occur also both at the State and Federal level.  Statutes are typically considered better than case law, since they are theoretically more clear and trump case law when in conflict.

In the case of the Limited Liability Company (LLC) and the Limited Partnership (LP) these are governed by the Statutes of the State in which the LLC or LP was created.  And in the case of a plan that includes an Arizona Asset Management Limited Partnership , which owns an LLC in any state, which in turn owns a piece of property, the statute is clear.  The EXCLUSIVE remedy against an AZ LP is a Charging Order.  This means that a judge, even in California, by statute may not issue a remedy other than a charge against the partnership interest (in theory).

So again, theoretically, the AMLP and the LLC does protect U.S. based real estate, at least to a degree.  But this is not the end of the story, we need to move on to practical authority to understand how that protection can be broken.

PRACTICAL AUTHORITY

By practical authority, I mean what power a judge actually holds to make decisions which affect the status of your assets.  In order for a judge to be able to enforce decisions which are reached via their legal authority, a judge has very broad practical powers with respect to reaching your assets.  This includes the ability to order a detailed investigation of all your assets, wherever held.  Once he has the picture of where your assets are, then he (or she) has the ability to seize your assets, place a lien on your property, foreclose on your property, order a sheriff to sell such property, clear title to such property to enable a clean sale and even garnish your wages.

The problem comes when a judge without the legal authority to do those things, nevertheless chooses to exercise his practical authority power and do them anyway.  This could be done in direct contravention of establish statutes and case law, or it could be done with some ‘rationale’ like saying that your LP or LLC is invalid, or is considered your ‘alter-ego’.  In any case, the result is that the practical authority of the court is used to take assets with a questionable (or no) legal authority.  While this may leave you with an appeal-able argument, it still means your out the assets.  And appeals are difficult at best and you are unlikely to win.

THE SOLUTION

The solution is to remove or vastly hinder a judges practical authority over your assets, so that he cannot usurp the legal process and if forced to rely on legal authority.  In the case of liquid assets this is relatively straightforward.  Once we create the asset protection structure, particularly the Bridge Trust®, we can physically move liquid assets to a bank, within a trust, which is outside of the authority of the U.S. courts.  This means you, or more accurately your trustee, has control over your assets and not a judge.

However, when it comes to domestically local real estate we have a particular challenge.  We cannot just move the real estate. We can properly structure the legal protections, but in order to still protect against a misuse of judicial ‘practical authority’ we need to do more.  This involves one of two options:  1) We can sell the real estate when the time comes and convert it into liquid assets and move them away from the courts, or 2) we can leverage the property and transfer the proceeds from the loans away from court authority, leaving a lesser amount of equity in the properties.

What this means is that practically we need to get the ownership of the properties ‘legally’ into the AZ Limited Partnership which in turn is owned by the Bridge Trust®.  This leaves us the option to get the equity of the real estate practically removed at a later date if it appears that a judge may abuse their authority.

PRIVACY vs. SECRECY

None of the planning I am discussing relies on secrecy.  The courts can and will discover where all of your assets are in the end through the debtors exam process, if not sooner.  That is why opening offshore accounts in your own name, or using International Business Companies (IBC) or other devices which seem to remove practical authority don’t work in the end. As long as you remain the primary controller of the company, the account or even the people, the judge can force you to bring the assets back yourself.

For asset protection based on removing practical authority to work, you must use a trust structure that removes the power from you to act regarding the assets when you are in the risk position.  And for I know of no better way to do this than the Bridge Trust®

 

About the Author: Doug

Douglass S. Lodmell is an expert in estate planning, taxation and strategic asset protection for domestic and international clients. Douglass is the founder of Asset Protection Council & Lodmell & Lodmell Law Firm.

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