All Forum Posts by: John Hyre

@Brian Bradley,

That is not what the case or the commentator said. It is merely your attempt to distract from the ultimate holding: Alaska trust law does not apply in Montana. Nor, in 99.9% of cases, does TX law apply in AZ with regard to LLC's, series or otherwise. Do you seriously deny that?

Did you miss this part of the case?  

"  The Supreme Court found that “Full Faith and Credit” does not require states to go quite so far. Instead, “jurisdiction is to be determined by the law of the court’s creation, and cannot be defeated by the extraterritorial operation of a statute of another state..."

"But comity is not a legal rule; rather it is “a principle under which the courts of one state give effect to the laws of another state . . . out of deference or respect.”31 In other words, while courts may elect to follow a statute like AS 34.40.110 out of comity, they are not compelled to do so.32 Furthermore, AS 34.40.110 is more than a “limitation[] [Alaska’s] legislature place[d] on its own laws”33 — it purports to deprive other states of jurisdiction over all fraudulent transfer actions concerning Alaska trusts, even those based on causes of action arising under that state’s own law."

The fraudulent transfer statutes happened to be the laws in play - but the result would be the same with other laws as well.  Your attempt to use the word "fraud" to ignore all the other words in case fools no one.  

Have you some case law showing how TX (or NV, etc.) LLC law applies in AZ in any way that has some chance of mattering to a small real estate investor? Or just gonna blow some more smoke in hopes of confusing the laymen? Might work on (a very few of) them. Won't work on me.

How to spot an Asset Protection Salesman, as distinct from an asset protection attorney?

1)  The attorney asks specific questions about your situation to see what really fits and customizes the answer.  The Salesman has lots of templates, one of which will surely fit you.

2)  The attorney honestly addresses issues and presents both weaknesses and strengths of a structure.  The Salesmen minimizes or ignores weaknesses, emphasizes strengths, ignores data he does not like, and substitutes bad temper and clownish insults for measured & substantive responses.

3)  The Salesman if often, but not always, located in NV or UT.

4)  The attorney explains things in a clear manner with citations and evidence.  The Salesman spews mumbo-jumbo.

5)  The Salesman sells fear.  The attorney balances risk and reward in a sober manner.

I'm sure I've missed a few.  But I'll bet the Reader can sort the one from the other.......

@Joseph Lucas Jr,

I am mostly a tax attorney. But have done a good deal of asset protection work for the last 23 years because taxation, asset protection, and especially entities go hand-in-hand.

I think getting out of state series LLC's in AZ will provide you little benefit. Certainly not enough to justify the costs. The costs would arise in the form of money (paying someone like Brian or me) but also hassle, time, etc. In other words, the nice attorney is saying "don't pay me to do this work". Now when a professional is honest enough to tell me that, I tend to listen (and return when I need an honest professional).

At best AZ would treat TX (or DE or NV) series like AZ LLC's. They certainly will not treat them any better than an AZ LLC. AZ would almost certainly be looking to see the TX LLC's registered in AZ – meaning that you'd pay both TX and AZ fees, file reports in both states, etc. There are plenty of Asset Protection Salesmen who would advise not to register the TX entities to do business in AZ. As a legal matter, that approach only works if the TX series LLC’s are so passive as to fall below AZ’s definition of “doing business”…..someone would have to know what you intend to do in the LLC’s and know or research AZ law to give an honest answer. Most Asset Protection Salesmen never bother to do that research or even to mention the need for it. The next paragraph explains why that is.

Another approach is very common with Asset Protection Salesmen: Just don't tell AZ. My issue with that: If local law requires a thing, I think we should follow the law. Goes with having a law license. Don't get me wrong, when the law is grey, my job is to advocate for the best interpretation for my client. But when it's black & white, I should advise the client to follow the law. Further: Most judges & bureaucrats do not take very kindly to people ignoring the law (e.g. – registration requirements) and then later trying to claim protection of the law (e.g. – liability shield). Indeed, such an approach often bites one in the butt later – it's the nature of dealing with bureaucrats and judges. They remember. They judge you – and if they think you are sleazy or deceptive, they will generally find a way to get you. Add to it: Some states are serious about registering to do business with out-of-state entities and penalizing failure to do so. For example, CA denies you access to the courts if you are doing business there and do not register your foreign LLC. OH treats failure to register as a "deceptive business practice" and levies a fine, often of circa $10k. Bottom line: You want the protection of the law, you probably ought to follow the law.

Some Asset Protection Salesmen offer to use trusts to help you hide your foreign LLC from the state where it does business – especially if the state is California (they have insane annual fees for LLC's). But here's the thing: If the target state (e.g. – CA) knew all the facts (e.g. – the trust is a front for an LLC) would they impose a cost (e.g. – CA LLC fee)? If the answer is yes, then you are deliberately trying to mislead the state by hiding behind a trust. Sounds like "deceptive business practice" to me. Not a good idea – even if "you won't get caught". Further: My direct experience with the IRS and with attorneys general is that word has gotten around as to how trusts are misused. Far from preserving privacy, they often attract extra attention. I had one AG put a stack of "trust/asset protection" courses in front of me, state that she had read them, knew that the trusts were used to hide things, and wanted to know what my client was hiding with her many trusts. Ouch.

Not saying one shouldn't use trusts – in an appropriate way and circumstance. But they have so often been abused to hide things…..I'd be wary of using them to hide a foreign LLC from a state where one is in fact "doing business", as defined by that state.

Do out of state entities provide superior asset protection to local LLC's? Rarely, especially if real estate is concerned. With very few exceptions, AZ is not going to follow TX law, regardless of where your LLC came to be. And the few exceptions are very unlikely to apply to you. For example: Derivative lawsuits are often decided in the jurisdiction where the LLC was formed. OK, great. What's a derivative lawsuit? Essentially, it is when the owners of a company sue the managers. Well……for most people on this forum, those are the same people. Gonna sue yourself? Probably not. Bottom line, TX law (assuming that it is better than AZ law) is very, very unlikely to apply in AZ, especially for RE-related endeavors.

Now Brian keeps mentioning the Constitution and the Full Faith and Credit Clause. He seems to think that means that AZ has to follow TX (or NV or whatever) law. Not so. I cited a specific case, which he of course ignored.

In Toni 1 Trust v Wacker, an Alaska Domestic Asset Protection Trust (“DAPT”) was used to try and protect assets from creditors in Montana. The case went to the Alaska (not Montana!) Supreme Court. And the Alaska court ruled (quite unsurprisingly) that Alaska law does not apply in Montana. Who knew? Here’s a link to an excellent, if rather long and somewhat technical, discussion of that case: https://www.forbes.com/sites/jayadkisson/2018/03/05/alaska-supreme-court-hammers-last-nail-in-dapt-coffin-for-use-in-non-dapt-states-in-toni-1-trust/#337a197e62a7. That is how the US Constitution applies – I challenge Brian to show me case law that goes the other way. I have not seen it. Bottom line: AZ does not have to follow TX law, even if one screams “US Constitution Full Faith and Protection Clause” over a Ouija Board at midnight on Friday the 13th. AZ will recognize a TX LLC – on AZ's terms and under AZ's rules.

I don’t see much benefit, and I do see some costs. I’d pass.

There’s more, but this should be enough to guide your decision.

And Rob K. (an actual litigator) nails it.  When someone blows so much smoke and is so quick to get nasty & personal instead of addressing the substance of the discussion.....well, such tawdry behavior reflects poorly on that person's judgment & credibility. 

Back in a bit with some actual substance.

Jay Adkisson is a well-known asset protection attorney. He is thoughtful, thorough, and sharp. He is an expert on Series LLC's, more on that in a later post. According to his website, there is one Series LLC case.  Hmmmm.  Doesn't sound like a lot of authority.  

https://protectedseriesact.com/series-llc-list-of-...

More later.  Gotta bill some hours & get some work done before coming back here to play.

@Jon Holdman and @Carl Fischer.  I must respond with a hearty "it depends".

Benefiting the IRA is not a per se PT. It can be, depends what you did, as I discussed above. Likewise, benefiting the IRA may or may not be an excess contribution. The facts matter a lot.

I'd agree that if you "benefit the IRA" with services or property, that is a PT. If you benefit it with direct or indirect cash, then it's probably an excess contribution unless the IRS has a good case for it being a loan (unlikely). There is no direct case law. However there is a lot of case law in other contexts that distinguishes equity (contributions) from loans, with the default being "equity/contribution". Loans do tend not to happen by accident under tax law - the courts like to see notes, collateral, and a list of other "bank-like" arrangements for a vague transaction to be viewed as a loan.

Contribution via a personal credit card buying something for the IRA.....muddies things up a bit. But the indicia of a loan from the IRA owner or other DP to the IRA are still absent.

We've seen some pretty abusive situations (most of the time the IRA owner's company paying an IRA owned company for "services") classified as excess contributions in court - this is the Summa Holdings case, among others.  PS:  Taxpayers won Summa on appeal in two circuits.

A better case - and an important one - to see where the Tax Court is headed on SDIRA "stuffing" is Mazzei.  I'll post my thoughts on that case (a pretty recent one) this weekend.  And perhaps discuss with Carl on webinar next week.

Good stuff!

@Brian Bradley, what is the difference between a having two "regular" LLC's and two series?

Comparing 5 Series to 1 regular LLC strikes me as a loaded comparison. A better comparison would be "how do series a - e" compare to 5 regular LLC's. Apples to apples.

If the best case for Series is that the asset protection is the same as for "regular" LLC's (tell me if I'm mistaken - do two Series somehow provide better protection than two regular LLC's?), then the sole reason to have a Series is cost savings when compared to regular LLC's - right? Or am I missing something?

If I am correct (Series asset protection is at best the same as for equivalent number of regular LLC's and sole advantage of Series over regular is cost), then it's a question of "Are the cost savings worth the risk that the newish Series may not function as planned?". That strikes me as both an open and subjective question.

I have read a number of articles as to attorneys' doubts about how Series LLC's will fare in various states.....is there a place where I can find this plenitude of law you mention? I have not seen it (doesn't mean it's not out there, I just haven't seen it), nor have I seen credible articles that lay out the history, much less the pattern of victories for Series LLC's. I'd be especially interested in how states without Series statutes are treating foreign Series. Reciprocity is not a cut & dried thing....as a recent Alaska trust case (Toni 1 Trust v. Wacker) demonstrates.

I would agree with Michael as to foreign LLC's: In 99.9% of cases, issues will be tried under the law of the state where the issue occurred, and not the state where the LLC was created. For example, a trip & fall in an Ohio rental owned by a NV LLC would be tried under OH law for almost all issues. Do you disagree?

I think Michael asked some legitimate questions.  I do not see why you got so defensive.

@Carl Fischer, and @Brian Eastman, I like thinking through what the law really is or could be based on interpretation.  Such thoughts are sometimes useful when fighting the IRS (which no one wants to have to do) or when planning (which everyone should do).  Some of the thoughts are not practical - but lead to a certain way of thinking, of questioning things, of not necessarily accepting conventional wisdom or "the way things are".

I often hear that "you cannot benefit from your IRA, nor can you benefit it". The first half is clear. The second half.....not so much. Indeed - I'd be interested to see if someone could refute my take on 4975.  Right now I'm hearing "well that's not how we advise", and I understand why.  But it still misses the point - what does the Code say as far as benefiting one's IRA is concerned?  I do not see a broad prohibition against doing that, just specific things one should not do.

Of course, I view this sort of thinking & analysis as fun.  It's hard to do it publicly in the modern world.  So many people are "sensitive" & take offense where none was offered.  Sometimes I throw out an idea and someone shows me that it is mistaken or misplaced.  I do not mind being "wrong", and I do not get "offended" because I simply absorb information and corrections and am then a better person for it.  That spirit of honest intellectual inquiry and back & forth discussion is sadly waning.

I understand why, as a custodian or TPA, one would give the conservative, belt & suspenders advice.  Given your audience, your role, and your potential liability, I'd do the same in your shoes.

But I do so enjoy questioning things, analyzing, looking for flaws, and having my own exposed and corrected.  Which is probably why I'm a lawyer! 

@Carl Fischer, I appreciate your response.  As a matter of policy, you advise clients to stay well in the black and away from the grey.  And given that the penalty for being wrong is disastrous, that makes sense.

For the general reader: My perspective is different, with reason. First, my job is to defend clients who ended up near the line, whether by accident or on purpose. So these fine distinctions matter quite a lot to me. Second, my job is to help clients plan on making the most of the IRA. Part of that involves reading the client - how do they view risk? How aggressive are they? For the more aggressive clients, fine distinctions matter and open up some opportunities.....and risks.

I would point out that Carl's examples of "how to screw up your IRA" involved specific actions, such as "providing a service" or "extension of credit". I'd agree - don't go there. For example, we do not know what the definition of a "service" is.....let's not find out with our own IRA! Let others run the risk of a PT by managing their IRA's properties, rehab projects, or "checkbook" LLC's until we get clear guidance.

But as to providing your IRA a benefit.....if that were a PT, then there would be no excess-contribution statute (IRC 4973) and no excess-contribution case law (such as Summa Holdings).   Because excess contributions provide a benefit, and yet are treated very differently than PT's.  My meaning:  Providing the IRA a benefit is not necessarily a PT.  It can be - if for example, the "benefit" provided is in the form of a "service" or an "extension of credit".

Food for thought, I think.

Carl, looking forward to the webinar.  It'll be fun.

@Brian EastmanYou have focused on the word "between".  But take a look at the words before and after "between" in Sections 4975(c)(1)(A - C) that you posted above.  Those words do not include "provision of a benefit".  Rather, the words used in the statute are much more specific.

A DP, for example, cannot provide "services" to an IRA, per 4975(c)(1)(C) that you posted above. That's why I agreed with the recommendations against the OP doing work for the IRA - he'd have erred not by providing a "benefit" to the IRA, but by providing a "service", which is specifically prohibited.  But if you look at 4975(c)(1)(A), (B), and (C), none of those provisions prohibit "benefits between the plan and a DP".  Rather, they prohibit the transfer of specific things, such as "services" or "extension of credit".  That's not the same as "providing a benefit", the latter being far more broad.

For example: My IRA owns a Dairy Queen. I tell people "eat at the DQ" and they do so. Benefit to the IRA from a DP? Sure. PT? I do not see it. Very unlikely that we have a "service", a "transfer of property", etc.

As to valuing a benefit to an IRA and the IRS's "interest" in doing so......I have seen them quite interested in exactly that, both in case law and personally in Tax Court.

If you look at some of the over-contribution cases (such as Summa Holdings) the IRS attached a value to what they viewed as over-contributions (payments by the IRA owner/affiliated entities for "services" provided by an IRA-owned entity in the case of Summa).  Those over-contributions benefited the IRA, were from DP's, and yet were not PT's.  

I have seen the same in person. We had a situation where a rehab in a client's IRA could not be finished since the IRA ran out of money. The client's outside-of-the-IRA rehab company finished the work. The IRS attorney agreed that it was an over-contribution and we then worked on figuring out the worth of the over-contribution in order to apply the 6% per year penalty.

My point is based on the very same Code you posted above: Not all benefits to an IRA from a DP are PT's. Some are mere over-contributions.

Again, I understand why, as a matter of policy & preference, you might advise the layman that a benefit either way is a bad idea. But lacking a violation of 4975(c)(1)(A) - (C) [such as provision of a service, extension of credit, etc.], a DP providing a benefit to an IRA does not strike me as a PT. Just an excess-contribution.