The Family Holding Company (How Smart Investors Protect Everything They've Built)

Today we're going to be talking about the family holding company, how smart investors protect everything they built. Toby Mathis with Anderson Business Advisors. And let me ask you a simple question. Say your landlord, if a tenant sued you today and I mean a real lawsuit, not just a threatening letter. What else could they reach beyond just that rental? Your other rentals, your brokerage account? Your savings? If the answer is, I don't know. Or worse, probably a lot. Then this video is for you because today I'm going to show you how to structure things like sophisticated investors do, so that a fire in one area of their life can't burn their whole house down. We call it a family holding company. And if it's built right, it does really three things. It isolates the risk. It protects your non risk assets. And for people who are over a certain net worth threshold it can dramatically reduce your estate tax bill. So I'm going to draw this out on a board so you can see exactly how it looks. And we're going to talk about two investors John and Sally with the same assets but totally different outcomes depending on the way they structure you. And I'll I'll kind of show you why the structure that Sally uses is the one that you want. So if it's John and Sally, you're going to want to be Sally. So let's get into it.

And I'm going to start with the risk reduction formula. All right. So we use something here at Andersen. And we call it the risk reduction formula. We use it on all of our clients. And I've talked about it before. But I want to walk you through it again because it's the foundation of everything we're going to build today. And here's how it works. We have quadrants. And on this side the left side for me we're going to call it. Active. On the right side we're going to call it. Passive. And for all you see is out there. Just bear with me. I know it's portfolio income and passive, but I'm just calling it like the way that things happen for people is they tend to go from the active side over to the passive side.

Now, on the active side, in the top left, this is you. This is you. This is your house, your car, maybe your checking account. You don't even give you a legs. This is your family. This is where your W2 is. Maybe I'll draw a house. Maybe I'll draw a car. That's all your stuff. This is. This is you walking around doing stuff. And here's the honest truth. I can't put you in a box. I can't put you in a limited liability entity. I can't put you in a corporation. And magically, there's nothing there. You're just going to be out there. You're living life. You're signing contracts, you're driving your car, your kids are driving cars. You're going to have exposure just because you're human being. In other words, there's risk no matter what. But what we can do is make sure that your other assets aren't dragged down with you if something happens.

So let me go down here on this active side and down in this bottom left. This is your active businesses. So I'm just going to write business. This is you your sweat of your brow. If you have an operating business, a contracting business, construction development, a pizza shop, you're a plumber. This is income that generated through your active efforts. What of your brow? Maybe your sole proprietor. Maybe you're operating as some other entity. But it's down here because of you, and you can absolutely put a box around that. It's called a limited liability entity, which there's different flavors, limited liability companies, they're all under state law, by the way. Anybody thinks there's a are some federal organizations. But for us normal folks, it's state law. We're doing a limited liability company, a corporation and limited partnership. But I'm just going to call it a box. And so I'm just going to say when you're putting a business, we want to isolate that business from you and you from that business. In other words, something happens inside of here. It stays inside of here. That's what you're paying the state for. I can't do that over here. So all I can do is create isolation between it.

Now let's go over to the passive side. There's really two categories over here. And in the top right we're going to say non risk in what's a non risk asset. That's things that don't cause you lawsuits by owning them stocks bonds brokerage accounts money markets. These assets don't cause you to get sued. They just sit there. I mean if I own Microsoft stock and Microsoft does something wrong, I don't get sued. My risk is my investment. But they are absolutely what a plaintiff's lawyer is hunting for. The moment they find out you have them, they want them because they're so easy to take, sell and turn into cash. So we want to put a box around these as well. I want to isolate this from this, from this I want to isolate your stocks and bonds from you. I want to isolate your business from you. And I want to isolate the the stocks and bonds from your business. For those of you guys who have cash intensive business, you know, I've done videos on this before. My partner, Clint Coons does a great job on this too. You want to get the cash out of that business and put it into a non risk LLC. This is a safe LLC that is critical so that you're creating that isolation. So if something happens down here they can't take your cash. If you just sit there with a bunch of cash in your business and somebody sues, you could be an employee, it could be a customer, it could be something that you've done wrong. You're driving, or you listen to somebody on the internet who said, buy your g wagon and in your business. And then you didn't realize that you brought all that liability right in your right into your business, and you get into a car accident. You say, but I was driving personally, they're going to sue your business and they're going to look for the cash. This is how you isolate it.

Then we go down here and this is our risk quadrant. This is rental real estate. This is passive real estate. If you're doing development construction flipping you're doing it over here. Over here. This is passive your rental properties. And I want to be clear about something. Rental properties always come with risk. Always somebody trips on your property. You get a mold claim an environmental issue. You got a neighbor dispute. You have liability just from owning that property, even if you never set foot on it. So we're going to put a box around each one. So let's say we have three rentals. We're putting a box around each one. That would be generally speaking it's going to be an LLC because if you put all of your rentals, if we just put one box around this thing, something goes wrong with one property. It takes everything in that box. So you want to stop the contamination right at the property where there's an issue so it does not spread. Think of it like a disease. I don't want something that happens on my little rental property in Indianapolis to come and take all my properties in Nevada or North Carolina, wherever you may have them.

And then this is the move that most people miss. I want to have one box that sits above all of this, and that is going to be. A holding entity, and it doesn't do everything. It doesn't necessarily collect all the rent, it doesn't run anything. It just it doesn't sign all the leases or higher contractor. It's only job is to own these LLCs. So think of it as a kind of a parent on an org chart. And that is the risk reduction formula. If you have an act of business you're using a box. If you have a non risk asset you're using a box rentals one box each and a holding company that holds it. And I'm going to throw in one thing. And we have a living trust over here. It's not a liability protection but it's going to own everything.

Now let me show you what it looks like in real life. I want to introduce you to John and Sally. So let's use John. Let's say that John has a pile. And so I'm just going to put John up here. What does John have. Let's see John has been investing for about 15 years and he's done well. He's got three rental properties. So we're just going to use kind of like what this whole formula is. He's got a contracting business that he runs with a partner, and he's got about $400,000 in a brokerage account. So here's how John is set is set up. So let's say that the rentals it's going to draw these up here. He's got two Nevada LLCs I think he has an Arizona property because his accountant said hey you need you need you know, you need to do whatever you can into a, into this state. In fact, I'm going to change this up. I'm just going to say let's just use John has two properties. And as accountant says, hey, John, let's make your life really easy. Let's just set up a one LLC. I'll just use that. So he has a Nevada LLC. He's got an Arizona LLC. He's got $400,000 sitting in a in his stocks. He's got a couple. He's got his active business, the contracting business. Let's just say that the contracting with his partner, he's smart. And he sets that up as an LLC with his partner. But the brokerage account, that's all sitting in his name. He's got his house. Basically everything is John. All of this. Ends up being with John. I'll even put that Arizona LLC up there with John. Arrows. Everything's just shooting up at John personally.

So let me ask you the same question I asked you at the top of the video. We have, you know, draw a house down here. We have a tenant that sues in Nevada and injury in Nevada. What can they reach? Well, they can absolutely sue that LLC. In this particular case, the way I just set it up is now there's two properties in it. So both properties are on the table. The Arizona LLC is isolated. So that's good. The business is isolated. So that's good. Except if they can get to John individually. So what if John is sued. What if his kids drive a car, cause an accident or he caused that act? Now everything here is for the pickings. Now we have charging order in Nevada, which is great because contracting let's put John in Nevada. So we're going to give them some protection there. But the stocks be able to get they would be able to get his Arizona LLC. They would get charging order against these others. So John's not like a hot mess from a liability standpoint. He's got some protections.

But what happens when John passes away if he owns everything? Well, now we have multiple LLCs in John's name. We have a brokerage account in John's name. So we have multiple LLCs, multiple states, brokerage account. What about the business with its partner who controls that? Who has signing authority. What access does his spouse get. And we see this all the time. One person in the family is running the investments. The other person is living their life. And when the active person, the person who's running everything is gone, this survivor is left picking up the pieces. And this gets even worse when both of them goes, because then the kids are calling up, trying to figure out what their parents owned and how to control it. So that's John. He has kind of a collection of assets. It's not a bad, horrible structure, but it's it's kind of a pile of stuff. And the problem is it all leads to John and we don't necessarily want that.

So we're going to contrast that with Sally. And let's say Sally is the exact asset mask mix mix. There we go. She has the same list of all the things that she has, but she still has three rentals, a business, a brokerage account. But she built it differently. And this is where we do it differently. With Sally, number one, we're going to create kind of an overall structure. Everything in here is going to be in a living trust. In addition, we're going to make sure that Sally has a family office. I'm just going to call it F0. And this could be an ink. This could be an LLC. And this is a management structure. This is usually going to be a Wyoming LLC that we elect to be treated as a corporation. Specifically it's going to be an corp depending on Sally situation. But a lot of times we're going with that C corporation because you can reimburse all your medical expenses. You have a accountable plan. There's a myriad of reasons. You can look at some other videos as to why, but this is the hub. This is where the family's financial life is really coordinated. The bookkeeping, the financial decisions, annual meeting, the strategy. And this is why this is so critical. And you're going to see this. It's because this one, if we can convey it easily, keep it out of court, get our family to know what it is and why we have it. Then if something happens to sell it so much easier. We'll get there in a second though. But below that family office is where we're going to have our holding companies, and we have a holding company for real estate, and we have a holding company that's safe. So remember, on our risk reduction formula, this would be our Holding Our Safe LLC. This would be our risk LLC. And both of these. I'm going to say would be in Y. And the reason being is because nobody can take that from you. And so this entities, this whole job of this guy and I'll just write holding. The whole job of this guy is to hold your investment assets. It does not manage anything. It doesn't operate anything. It only owns things. And so this this family office will usually be a part owner. It's actually going to have a percentage for tax purposes. There's a number of reasons we do that. Just check out one of my videos on On trading as a business or how to structure your your investment. The family office is managing both of these holding companies in this little holding company. Remember it has each of the properties in separate LLCs. And then for your active business. It's going to manage that to it's managing everything. So the investment LLC holds the brokerage account. Each rental property separate box holding company owns it. Family office manage it. So the rentals held by the holding company and sitting above the family office. Everything is that living trust. And the reason we use that living trust is because it avoids probate and it has the control of everything. If all we do is say we have a controlling entity, we have a family office that manages everything and that doesn't need to be probated. It's private. When Sallie dies or if you're in her husband, both go. It's just somebody steps in. The successor trustee steps in and decides, okay, who's going to manage the family office? It already has a succession plan built into it, so the kids don't have to scramble to go find accounts and everything. It's all being already run by that family office. They don't have to go to probate court in Nevada and Arizona or anywhere else. They just step into this structure that Sallie already built.

Now let's go back to our lawsuits scenario. Let's say same injury in Nevada. And there's an injury there. This is let's just say this is Nevada. This is Nevada and this is Arizona, all held by a Wyoming LLC. You guys are head spinning going, why are you doing that? Plenty of videos where we get into it, it's for protection and it's for anonymity. But let's say something happens in a Nevada LLC. Well, they can reach one LLC. Just one. Let's say it's this one property. That's all they're going to get. Everything else is walled off. They are in separate boxes. The business is walled off the brokerage account walled off the holding company that's holding the LLCs walled off. And it's all run by a family office, which is walled off. The plaintiff's attorney is looking at one box with one property in it. So what that does is that means for us in the legal profession, that means settling quick for insurance. They're not coming after Sally personally. But let's see that something. Sally runs over a busload of nuns, like she gets into a big car accident. Still, everything that has control or owns asset has charging order protections, which means they can't take the LLCs. They can't force a distribution. They just sit there and wait and hope that Sally is going to send herself a check, which maybe then they could take, which Sally is never going to do. She's in the driver's seat. She's still in control. Even they have a $10 million lawsuit. She's still in control. And what that happens, what happens when that is occurring is there's going to be settlement again. It's it's making sure that you force them into a position when you have a rabid plaintiff's lawyer is you force them into a position that the only way they're going to get paid is if you decide to pay them. So what are they going to get? They're going to take the insurance that is available. They take what's available in that one box. Insurance move on.

And that's the difference. Okay. John's wasn't horrible. Like there's plenty of people that don't have any boxes. Everything's just a big pile of stuff and it's easy to take. John still had some like he had decent what you would get with you went to a normal CPA or attorney maybe, and they said, hey, let's just isolate some of these things. Oh, hey, those those aren't risky. Hey, we're not too worried about it. He has a decent structure, but he would be imploded if he had personal liability. Or if, again, if something happened in one property, he's giving up more than he realized. A lot of people think it's just about the equity in the property. It's about the cash flow to. So he'd be giving up two cash flow sources because of one act, one accident. If there's a if there's an issue on one of those properties, when he could have just very easily divided it, and if he wants to protect himself, he could very easily add that on. He could very easily protect his stocks, and then he could put the whole thing into a living trust. John's structure is easy to fix, but that's the difference between when you start off and nothing. You just have a pile of assets versus you actually have a structure. So that's why we love having that family office LLC at the top. It's I love having an entity that controls everything. And by the way, let me explain why we put the Family Office LLC up top instead of just having the the trust manage everything. Because the Family Office LLC serves a very specific function. It's the brain of the whole structure. It's where you hold your board meetings. And yes, you should be holding them because they're deductible and they establish that this is a real entity with real governance. And it's a great way to train your kids. It's where you pay for legitimate family financial expenses, your CPA, your attorney, your investment advisor. We try to it's basically the operating brain. And by electing corporate tax treatment, that Family Office LLC, by the way, can be a vehicle for absolutely fantastic tax strategy in certain compensation strategies, retirement plans. You can do a 401 on it. You could do a DB plan. You get a bunch of different business deductions, the gusto rule, accountable plans. You cannot get that when you just have a pure you ignore this. You just have the holding LLC. No, you're not going to get those same things. You got to have that family office and you can't get that as an individual. So think of it this way. The holding companies own things. The the family office manages everything. And it could be managing your business. It could be managing your real estate, it could be managing your investments. But it's two different jobs. Remember how we have active and passive these things own these things do. And that family office I'll just put that over there. Let's just say that that's what it was. That's all you had and all it did is manage things. That's fantastic because we have two different jobs. We've broken them out into two different entities. Both are necessary. Both give you fantastic benefits one month out, the other is just not the same. And the trust is at the top encompasses everything. So when I say, hey, look, I have a living trust, I'm having all my things held inside there and it's a transfer mechanism. It's what makes sure everything moves to the next generation without a courthouse being involved. Like, if you never get to a court, that's a good thing. If you never have to go and spend time, that's fantastic. So Sally controls everything via her living trust while she's alive and when she's gone. She just has a name successor, trustee that steps in and the structure just keeps on running. You don't need to go to a court. You don't need to get court orders. It's like that. And I can't even tell you how many times I've seen it, where it's just such a burden being taken off of your family, off of somebody who's going through this, to not have to go through a 12 month or 18 month probate process after somebody that they loved pass away.

Now I'm just going to go over something that will come up and you'll see it. And here's the big discussion is should we use an LLC or a limited partnership for maybe for the holding companies? And I'm just going to say it is really based off of your situation, and I want to address something that you might be wondering should this should this holding company. I've heard it's going to be an LLC, should it be a limited partnership? And here's the honest answer for for most people, the LLC gets you there. It's 90% plus of the benefit and it's a little bit less complex. You have a little more flexibility, a well drafted operating agreement that restricts membership control, transfer rights and distributions gets you every bit as strong asset protection and something called valuation discounts if you ever need them. The limited partnership has a little bit of an advantage when it comes to the investments, and that is because the state laws have those protections already baked into it. Limited partner, limited control. If you have an LLC, there could be additional controls. So the limited partner is powerless. Ness is already baked into the state law, not just your agreement. And that makes when you're doing something like if you're a large estate, you're over 15 million if you're a single or over 30 million, as in you're married, it makes your if you're using something called a discount valuation argument cleaner and more defensible. When the IRS looks at it in an LLC, the discount lives or dies with how well the operating agreement is drafted is contractual, not statutory. So I'll kind of give you a decision tree if you are comfortably below 15 million per person, which is 30 million for a married couple, the LLC is probably the right call. Unless you're doing something in the trading realm like you're really actively trading. Then I might go the LP route, but you don't blow up a working structure chasing a marginal improvement. In other words, I wouldn't go and do your whole thing. If you have an LLC in your in its holding your your brokerage account. If it's over here holding this guy, I'm not crying about it. Or if you have a an LLC holding your real estate 99.9% of the time, I want that to be an LLC no matter what. If estate planning is on your radar because you're above those thresholds or you're approaching them, then it's worth having a discussion about a limited partnership. Also, many investors that are using a dual entity strategy for trading, like this guy where you know who you are. Again, I done videos on this. Maybe 20% is held by your family office. I may do that as an LP because again, under state law, it's very clear that limited partners have limited powers. I might do it for that, but you could still do it with an LLC. You just make sure you're using a company like us because we draft it very specifically for that purpose. Other people just like, don't go on on the internet and try to use like a legal doom or one of those companies to do it.

Now, the discount for those who needs it. And I kind of said I would cover this piece, the estate piece. So I just want to go over it real, real quick. But I want to be upfront. This part applies really to people that are over 30 million if they're married, 15 million if you're single. And if that's not you right now, then just kind of listen and file this away and come back when it is relevant. And here's why. The LP structure can be powerful for a state planning. So imagine I offered to sell you a 30% stake in my limited partnership, where it's controlled completely by my family office. You can't control it. You can't force distributions. You may never get a nickel out of it. You can't make them sell assets. You can't liquidate your interest. There's no market for it outside of your family. What would you pay for that? Let's say this thing was worth a million bucks and you were 30%. Would you pay $300,000? Heck no. You would not pay full price. Nobody would. That's not a loophole. That's just economics. And the IRS and the Tax Court have accepted it for decades. There are two discounts that apply here. Let me put them on the board. It is discount for lack of control. And there's discounts for lack of marketability. So on a discount for lack of control. Talking 15 to 20% discount on a lack of marketability. You're probably talking about the same. And again there's transfer restrictions on the ability to sell it. You can't just sell it to anybody. So try selling a 30% LP interest. It's not like selling stock and your typical discount. There might be 20 to 40% depending on what that LP holds. So this is the piece where most explanations get this wrong. By the way, these are not cumulative. So if I have a 20% discount here and a 40% discount, that's not 60%. They don't work like that. They're they're multiplicative. They're not additive. So they don't sit side by side. They stacks sequentially. So if you start with let's say I have $3 million in my LP, that's what the value is. And I have a 20% discount. Then I'm going to be at 2.4 million. So I'm going to get a $600,000 discount. Then I'm going to the discount for lack of marketability. Let's say that's another 30%. So what is that going to be like? 70% of that is probably what, 1.68, 1.7 right around there. So it's not hey, I add those up and I have a 50% discount. I'm only worth 1.5. My discount is multiplicative. It's 44%. It's not 50. So people add this up wrong and they always kind of overshoot. And then they make it sound like it's going to be bigger. But at a 40% tax rate, that's still a pretty big discount. So the difference between 3,000,001.7 or 1.68, that's going to be worth a half $1 million in tax savings on that pool of assets. You scale that up and you get to $10 million portfolio where you have that type of discount and you start seeing $1.5 million of tax savings. Yes. That's why sometimes we're using an LP structure, and that's why we would do it at that point.

All right. So let's bring this all together. The family holding company is not an estate tax tool. It's a containment tool. The estate tax piece is really a bonus and a significant one for people who need it. The risk reduction this is really this is really simple active business. Put it in a box. Each rental put them in a box holding company put it in a box. How about this guy up here. Your non risk assets. Put it in a box and then have all the governance run out of that business. The living trust goes over all of it and it works out fantastically. So John had assets. Not too bad. But Sally had I would say Sally has architecture. And when things go sideways and at some point for most investors, something always go sideways. Architecture is what protects you. If you want to know what your structure looks like, what's exposed, what's isolated, what a clean structure would look like for your specific situation will offer you a free strategy session at Andersen Business. One of our guys will go over this, a 45 minute discussion with you, to kind of lay out what your blueprint would look like. Absolutely free. All you have to do is look in the show notes or just type strategy in the comments, and we'll send you a link. If this video helped you hit that like button, subscribe to this channel if you haven't. I'm always putting up videos. I can put up like 2 or 3 a week and share it with any investor you know who's got assets scattered everywhere in no real architecture holding it together. Best of luck to you and I'll see you in the next one.