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The Attorney-Client Privilege
I usually write about Asset Protection, Tax Planning and Financial Privacy, so I thought I would discuss a somewhat related topic; the Attorney-Client Privilege. The Attorney-Client Privilege is a legal concept that protects certain communications between a client and an attorney and keeps those communications confidential. This privilege is “owned” by the client, and it protects the communications even if the client is only a prospective client.

For a communication to be considered privileged (that is protected from disclosure) three (3) things must be established:
1. The holder of the privilege is a client or a prospective client;
2. The communication is made confidentially with a licensed attorney or subordinate; and
3. The communication is made with the intent securing legal advice and/or representation.
This privilege is one of the most important concepts in Western legal studies. However, it is also one of the most misunderstood issues even among lawyers.

As with all rules, it is in the exceptions that we find the heart of the matter.

The communication must be with an attorney. There is no such thing as an Accountant-Client Privilege. If you describe a troubling situation regarding past tax returns with an attorney, the attorney will most likely be required to keep the communications confidential. Even upon subpoena the attorney would be required to refuse to answer questions. However, an accountant in the same situation may be required to report what the client said to the authorities as the accountant’s foremost duty is to the taxing authority.

A communication is only privileged if it was intended to be confidential. Speaking in front of 3rd parties destroys the privilege, so attorneys and clients should avoid those elevator conversations. No one wants to hear what you are saying anyway!

The communication is privileged, not the facts. So if you toss a bloody knife onto your attorney’s desk and ask, “What should I do if I just killed my wife with that knife?” the question is privileged as is the possible answer, but the fact that you had a bloody knife in your possession is not protected.

The privilege does not apply in the face of an ongoing or prospective criminal activity or conspiracy. Telling your attorney about your criminal activities in the past may be protected, but if you describe how you intend to continue with such activities the attorney may have a duty to the courts to inform the authorities. A very troubling situation to be in if you are an attorney. If the attorney is not careful he may be considered an accessory or even a co-conspirator to a crime if he fails to disclose the information, or he may be held in violation of his duty to the client if he discloses it inappropriately.

The privilege can also be waived by the client. Remember, the privilege is “owned” by the client. If the client chooses to disclose the content of the communication that is privileged, well it is not privileged anymore. Now this raises an interesting issue (at least to me): to what degree does a partial disclosure of privileged communications waive the remaining undisclosed communications? Under some rules partial disclosure by a client waives the entire privilege, and under other rules partial disclosure only serves as a narrow waiver regarding the exact facts that were disclosed. For instance, let us say that the client files a grievance/complaint against the lawyer. Obviously, the lawyer has the right to defend himself. In Texas, this waiver of privilege is limited to those communications that serve to defend the attorney’s interests, and does not serve to waive the privilege in regards to other forums. However, if the client discloses confidential communications in open court before the Federal Courts, this disclosure may result in a broad and universal waiver of ALL communications between the client and the attorney. OUCH!

The Attorney-Client Privilege is a powerful right that gives people the ability to speak candidly to their attorney even if they do not end up retaining the attorney. But it is not as simple as some believe, and it certainly does not cover everything you say to an attorney. As always, caution is the rule!
February 24, 2013
The Philosophy of Learned Hand

Learned Hand was perhaps one of the greatest legal minds in American History. Although not a Supreme Court judge, his analysis on and off the bench influenced a generation of legal scholarship. And what a fantastic name!!!!

In a famous ruling concerning the duty of the individual regarding the law, he clarified the traditional rule that people do not have a duty to go beyond the written meaning of the law. That is you should only have to guide your actions by the rules laid out by the law, and not by the unwritten intentions of the lawmaker or your own subjective intentions. In Helvering v. Gregory, 69 F. 2d 809, 810 (2nd Cir, 1934), aff’d 293 U.S. 465 (1935) he stated that:

“[A] transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.

“Over and over again Courts have said there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor, and all do right, for nobody owes any public duty to pay more than the law demands. Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

In this ruling Learned Hand made it clear that the government has no right to expect taxpayers and citizens go beyond the mandates of the law and do what is best for the state. It is enough if what they do is within the technical boundaries of the law. The individual need not guide every action by the consideration of what is best for the government.

This was the basic sentiment that drove the American Revolution and the Founders: The Government is the Servant of the Citizens, not the Master.

Sadly, our sentiments have changed. Contrast Learned Hand’s statement with the “sham transaction doctrine” as approved by the court in Jacobson v. CM, 915 F. 2d 832 (2nd Cir, 1990):

“Transactions that are entered into solely for the purpose of obtaining tax benefits and that are without economic substance are considered shams for Federal income tax purposes and purported indebtedness associated therewith will not be recognized…. [A] sham transaction [is] a transaction that is lacking in objective economic reality and that has no economic significance beyond expected tax benefits.”

No longer is working within the law enough. No longer is it enough to dot every ‘i’ and cross every ‘t’. Now the taxpayer/citizen must act with subjective intention of doing what is best for the government; paying taxes. Now the government has the right to not only examine WHAT you did, but they can now examine WHY you did it!

As World War II was drawing to an end, and Learned Hand looked back on his generation and the terrible destruction that had taken place, he wrote:

“What do we mean when we say that first of all we seek liberty? I often wonder whether we do not rest our hopes too much upon constitutions, upon laws, and upon courts. These are false hopes; believe me, these are false hopes. Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can save it; no constitution, no law, no court can even do much to help it. And what is this liberty which must lie in the hearts of men and women? It is not the ruthless, the unbridled will; it is not freedom to do as one likes. That is the denial of liberty, and leads straight to its overthrow. A society in which men recognize no check upon their freedom soon becomes a society where freedom is the possession of only a savage few; as we have learned to our sorrow.” Learned Hand, P. 190, The Spirit of Liberty (1944).

February 4, 2013
When Going “Offshore” Should be Avoided

Many people come to me saying that they want to go offshore to protect their assets and reduce their taxes, but are often not ideal candidates. I try to explain that I do not help people go “offshore”. What I do is help people protect their assets, reduce their taxes, and obtain greater financial privacy, all in a legal and ethical manner. Offshore structures are just some of the tools that sometimes come in handy to reach these goals.

For many people, “Going Offshore” is not just the wrong tool to use to accomplish these goals, but for many it is a very dangerous and unwise tool. As I described in my prior article, “What is Jurisdiction?”, the point of going “offshore” is to take advantage of another jurisdiction that may provide more friendly laws and regulations in regards to taxes, asset protection and privacy.

However, just setting up a foreign company and then doing business inside the old jurisdiction will not work. You need to be in a situation where some or all of your business can be successfully transplanted to that new more friendly jurisdiction. Examples of “offshore” friendly businesses are: importing/exporting, software design (particularly if you are already using offshore technicians or have significant offshore clients), Internet services, financial services, entertainment industry, and other types of intellectual property. If you do not have a business that lends itself to “going offshore” then it would be wise to focus on more cost-effective domestic alternatives.

If what you are doing is entirely defined as “US Source Income” (that is you are making, providing, storing, and/or delivering a product or service inside the USA from resources located inside the USA) then there is very little reason to “go offshore”. Setting up a foreign company that is going to do business inside the USA will require the foreign company to submit itself to the laws and tax regulations of the jurisdiction. Far from reducing taxes and protecting assets, this often results in some very negative tax consequences and subjects otherwise safe assets to US liabilities. It is for this reason that most non-US companies and investors usually establish US companies to act as affiliates and/or subsidiaries of the non-US structure.

So the bad news is that “going offshore” may be unsuitable for many if not most US taxpayers.

The good news is that there are a lot of reasonably priced alternatives that can still help to protect your assets, reduce your taxes, and obtain greater financial privacy.

The easiest and simplest of these is the good old tried and true “S Corporation” which combines limited liability protection with a convenient “pass through” tax treatment. A favorite of small businesses and investors for decades, the S Corporation provides adequate asset protection by segregating the liabilities of the business from the assets of the owners. Establishing an S Corporation is simple and even a Limited Liability Company (hereinafter an LLC) can be used for those like me who think the LLC is simply the greatest thing since sliced bread. In addition the S Corporation can provide significant savings in “self-employment” taxes (the 15.3% you have to pay for Social Security and Medicare). Instead of having to pay the self-employment tax of 15.3% up to the $113,700 cap (for 2013), you can give yourself a modest salary, and take the rest of the profits as profit distributions. Although you will have to pay taxes on the profit distributions, the savings of 15% can add up very quickly and is a safe and secure way of saving taxes as long as you pay yourself a “reasonable” salary with withholding. For additional privacy you can use a Revocable Trust to own the shares and appoint a nominee officer to be named in any official papers, thus obtaining near anonymous treatment.

For most small businesses an S Corporation is all they need to protect their assets and significantly reduce their taxes. However, if the operations of the business require significant investment of capital and involve significant exposure to liabilities, additional efforts may need to be taken to insure necessary protection is in place. For such situations we have developed the “Advanced Corporate Fortress”. This combines three (3) US entities that are used together to limit the exposure of the business assets to liabilities, and to maximize the tax savings of the owners. First a C Corporation is established that will stand alone as a taxable entity. All assets of the business will be placed into this C Corporation for protection. An LLC treated as a “disregarded entity” will be established to do anything that involves any exposure to liability. Although the LLC will be owned 100% by the C Corporation, it will have little or no assets that could be seized by a potential litigant. Finally an S Corporation is established to provide management and possibly employee payroll services for the LLC. In summary the C Corporation holds the assets of the business behind its protective wall, the LLC acts as a shield to protect the C Corporation since the LLC will be exposed to any and all liabilities but has no assets, and the S Corporation helps further protect the owner’s interests and reduce the owners taxes as described above. There are also several other advanced strategies that can be used to take advantage of the fact that the C Corporation has a very low initial tax bracket, thus allowing you to place some income into the C Corporation at a reduced tax rate and then lending it out to the S Corporation which can then deduct the interest payments on the loan as deductible expenses thereby further reducing the taxes of the owners.

Now for some people, none of this is necessary. They have no business and are only concerned with protecting their assets. For these people the “Personal Preservation Fortress” is ideal. It is simple yet provides extremely powerful protection. The Personal Preservation Fortress uses two entities to provide the ultimate in asset protection. An LLC is established to hold all the assets of the individual(s). The individual(s) will receive 99% of the shares of the LLC. An Irrevocable Trust is established naming someone other than the owner(s) of the LLC as beneficiaries (this is usually children, grandchildren, pets, etc.). The Trust will receive a 1% interest in the LLC and nothing else. Here is why this system works: creditors can only take what you have. If all you have is a partial interest in an LLC, then the creditors can only take that. Now in most states creditors who seize an LLC interest of less than 100% receive only an “assignment” of that interest, not the interest itself. As such they cannot vote the shares, and they cannot demand distributions from the LLC. This is because the LLC is treated as a partnership and most states provide protection to the other partners from being forced to accept as full members involuntary additions to the partnership. Although the creditor cannot vote the shares and cannot demand a distribution of income or assets, the creditor may be liable for demands of additional capital. That is the creditor may be required to pay additional funds into the LLC in order to maintain its economic position. Finally, if the LLC produces taxable income this income does not need to be distributed to the members, but the members still must pay taxes on the income. So the creditor would have to pay taxes on income earned by the LLC which the creditor did not actually receive. Finally, the only remaining voting member of the LLC is the Trust, which is “influenced” by the owners who act as members of the Trust Committee. The Trust Committee can remove the Trustee if the Trustee fails to satisfy the Trust Committee. As you can see, this is a very unpleasant situation for a creditor to be in, and you can expect them to start negotiating on reasonable terms. The best part about this system is that it applies to all creditors including the dreaded Internal Revenue System.

Finally, there is a unique structure that combines the benefits of an Individual Retirement Account with a tax-free entity:”The IRA Rescue Plan”. This program was initially established to assist people with large amounts of IRA money earning low rates of return who wanted to invest in unconventional investments that would otherwise be prohibited or difficult with a traditional IRA. First, the funds in your current IRA must be transferred to a more cooperative Custodian (conventional Custodians like banks, brokers, etc. only make money when you trade or keep your funds in their institution). We then establish a LLC following the dictates of an important US Tax Court ruling and have the IRA Custodian buy 100% of the shares of the new LLC. The client is then appointed President of the LLC, and does whatever he or she wants to do with the money (subject to basic good faith business limitations). The IRS requires that certain rules be maintained regarding distribution of funds from the LLC to the client, but these rules essentially involve reasonable compensation to insure that the client is not “defrauding” the LLC and thus unreasonably avoiding taxes and penalties on the IRA withdrawal. The long and short of it is that the IRS does not want you to transfer the funds from your IRA to an LLC, and then raid the piggy bank and avoid paying the withdrawal fees and penalties. If care is taken, funds can be paid to the client. Now, not only do we have the IRA funds in an entity managed by the client totally free and clear of the IRA limitations as to investments, the LLC is also a tax exempt entity since all profits of the LLC “pass through” to the IRA which pays no taxes on interest, dividends and/or capital gains. Furthermore, the IRA is one of the few entities to withstand the recent changes to the Bankruptcy Code. Funds in an IRA are still safe from creditors, and the LLC, being owned by the IRA, is thus protected.

As you can see, there is an amazing number of options available for people who may find “offshore” planning too risky, or who simply do not fall into a category whereby they could benefit from “going offshore”. If anything, the choice may be too much to deal with. But that is a good thing. Having plenty of options on how to protect your assets, reduce your taxes, and obtain greater financial privacy is a consumers dream come true. If you have any questions please do not hesitate to contact us.

January 27, 2013
The USA is a Great Place to do Business!
With all the bad press going around, I thought now would be a good time state the obvious: The USA is a Great Place to do Business… If you can figure out how to get started here.

The USA:
- has advanced pro-business laws and regulations making it easy to start a business and form a company,
- has state of the art banking and financial access at very reasonable terms,
- has a dynamic economy,
- has a spirit of rugged individualism, and
- can offer foreigners privacy, tax reduction, and advanced asset protection.
But most people need a little help getting started. Specifically, they need help getting a US Bank Account opened and operating. Since 9/11 this has become a much more difficult process. But it is not impossible. In fact, it can be quite easy.

Contact us if you would like some help.
January 24, 2013
What is Jurisdiction?
I thought I would discuss the important issue of “Jurisdiction”. This is because I have been hearing a lot about some countries enacting “draconian” anti-offshore rules and regulations. I thought I would explain how and why most of these stories are rather apocryphal and mostly just propaganda to scare people into submission.

Here is a fairly good definition of jurisdiction:

‘In law, jurisdiction (from the Latin ius, iuris meaning “law” and dicere meaning “to speak”) is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility.’ (Wikipedia)

Now if, let’s say, Australia (or the USA, or the UK, etc.) says in its propaganda literature produced by the tax authorities that new laws are being enacted to do away with “illegal offshore tax dodges”, I want to explain why people should not be too terrified. If done properly, systems can be created that will legally remove the transactions from the jurisdiction of that country making the hyperbole meaningless.

I would like to try to explain what Jurisdiction is by using an allegory.

Let us pretend that there is an odd little country named OustMuensterMark. No one really knows quite where this place is, but it is a fairly backward place. It is ruled by a rather mad Baron named Ruprecht the Red. Ruprecht recently enacted a series of tax laws which require any company doing business in OustMuensterMark to pay roughly 150% of its net profits in taxes, and require the officers to submit their eldest children hostage to the Secret Police. Although the taxes are punitive, there are so many loopholes and exceptions to the tax rules that business manages to limp along in the country, but the place is far from prosperous.

Now let us further pretend that you have a little company chartered and operating out of Florida. Your company’s name is “Wingnuts R Us, LLC” and you sell wingnuts. Every month the Museum for the Science and History of Torture and Decapitation of OustMuensterMark orders $5.35 in wingnuts to be used to tightly enclose their numerous and ever growing display cases. Are you now bound by the laws of OustMuensterMark? Should you be forking over all your money to either Ruprecht’s Tax Collection and Torture Agency or to tax attorneys in OustMuensterMark? Perhaps you should hand over your eldest child to the Secret Police? I think it is fairly clear that your sale of wingnuts to the Museum does not bring you under the jurisdiction of Ruprecht the Red. Have no fear!

One day, Ruprecht wakes up and leaps out of bed stark naked and starts running through the palace screaming, “The British are coming! The British are coming! To Arms! To Arms!!!!” The only British that are found are a few nannies on their way to work at the Royal Orphanage. After directing the thorough interrogation and torture of the unfortunate nannies to no effect, Ruprecht collapses on the floor, a victim of his own hysterical energies. His attendants put pants on him, his doctors put a straight-jacket on him, and the Thingamajig, the Legislature of OustMuensterMark, meets and finally declares Ruprecht the Red to be unfit to rule, and appoints Waldwak the Wise, an adopted child of one of Ruprecht’s distant cousins, to become the new Baron. Luckily for the unhappy state, Waldwak does not suffer from any of the mental infirmities so common in Ruprecht and his other relations. Waldwak completely abolishes the tax code and torture (putting thousands of tax attorneys and tax collectors out of work). Instead of the confusing tax code of Ruprecht, a simple 10% sales tax on goods sold inside the country is imposed and things start to change for the better. Business booms, tax receipts grow, and the Thingamajig votes to rename the country OustWaldwakMark (hereinafter OWM).

One day you get an email from an enterprising tax attorney from OWM offering to establish a Limited Liability Company for you. The email explains that your taxes will be next to nothing, and that you will be able to keep the rest of the money for your pet project of saving orphaned giraffes. You sign up and immediately notice the dramatic increase in your cash register since you are no longer paying Florida and US taxes, and you only have to pay $0.54 cents in taxes a month for the sale of wingnuts to the Museum.

At least until the State of Florida and the US IRS impound your bank accounts, factory, warehouse, cars, house, furnishings, inventory, and dental work. Although you were in complete compliance with the laws of OWM, you were under the jurisdiction of the State of Florida and the USA since your factory, warehouse, distribution center, headquarters, house, car and bank accounts were all located there. Just as the repressive and illogical laws of Ruprecht the Red had no effect upon you when you sold a few wingnuts to the Museum, neither did the enlightened actions of Waldwak the Wise protect you from the jurisdiction of the location where you are located and doing business. And simply establishing a company in OWM did not change that since the new company simply came under the same jurisdiction for the same reasons.

If only you had better understood the concept of jurisdiction! You see, the idea was not so bad, it was just the sloppy, perhaps greedy, execution of the system that was flawed. It was possible to take advantage of the benefits of an OWM Company, but you needed to structure things very differently. First of all, the Florida company should not have been terminated, but should have been kept for the purpose of managing the domestic production and sale of wingnuts. The OWM Company should have been used to manage your considerable foreign sales. The Florida Company should have sold wingnuts to the OWM Company at a reasonable profit based on wholesale prices (not retail), and then the OWM Company would have sold the wingnuts around the world out of their modest offices in OWM. If only $5.35 in wingnuts were sold in OWM, then the tax would remain at $0.54, but if $10,000,000 in wingnuts were sold elsewhere (except the USA) these sales would be tax free. Although the US tax authorities may or may not like such a transaction, as long as the initial wholesale transaction from the Florida Company to the OWM Company was legitimate and resulted in reasonable taxable gains, the additional profits earned by the OWM Company in global sales are simply outside the jurisdiction of the USA. This system is legal, ethical and completely acceptable.

Now on a more philosophical note…

How can jurisdiction be established?
1. A nation has jurisdiction over you because you were born there and you are forever subject to its whims; or
2. Jurisdiction is based upon an agreement between the individual and the governing entity.
In the first case, jurisdiction seems to be based upon some strange power that is imputed to a location. Rather like the saying that you can pick your friends but are stuck with your family. But this seems irrational and unreasonable. Why should an individual be subject to the jurisdiction of a particular place merely because of an accident of birth? The second choice seems more logical. You are subject to a particular jurisdiction because you “agree” by your actions and/or your presence. The agreement may be far from voluntary, but it is an agreement to submit to authority all the same. If someone holds a knife to your throat, holds your family and all your property hostage, and deprives you of the ability to go elsewhere, although it may be morally repugnant, accepting this person’s authority is all the same a choice you made even if under duress.

History suggests that most agreements regarding jurisdiction have been formed in just such coercive ways. In a way it is only logical, since authority is something that must be imposed to one degree or another. Only in recent history has the concept of jurisdictional agreement been treated as a matter of true choice which a “free” person can choose to accept or reject. In point of fact, this right to reject a jurisdiction is the basis of most of Western Political thought. But this is still mostly philosophical. The fact of the matter is that you are bound by a jurisdiction simply because you are within the grasp and power of the authorities, and it would be foolish to ever expect such authorities to willfully relinquish that which gives them power.

What can we make of this? In most modern democratic countries it is possible to take advantage of different jurisdictions in order to protect your assets, reduce your taxes, and to obtain greater financial privacy. This is because even as they complain about the loss of tax revenue, these nations still acknowledge the ancient concept of jurisdiction. However, this must be done with attention to the laws and with proper execution. If you wish to take advantage of the low tax rates of a “tax haven” you must make sure that the transactions which you are imputing to the “tax haven” do not fall within the jurisdiction of another more rapacious government authority. Simply getting a company from another country and waiving it around like a magic wand will only make you look foolish and cause you great harm when the trick does not work.

If you would like to chat about asset protection, tax planning, and financial privacy, please feel free to contact me.
January 17, 2013
The Next Big Thing in Asset Protection

Well doesn’t that sound exciting?

During one of my free telephone seminars, a caller asked the smartest question: What is the next big thing we have to worry about?

When most people think about asset protection, if they think at all, they think about a risk from some nameless evil lurking just beyond their view. In fact most risks to your wealth come from much closer: family, friends, business partners, long-time associates, etc. Those are the guys who end up sticking the knife in your back. Those are the folks you have to protect yourself from. Sad but true.

However, I was asked the above question, and I must admit it stumped me a bit. I had to think a bit, and what I came up with was this:

Governmental Shakedowns in the form of enforcement actions.

With the Federal, State and Local governments all facing budget crises new forms of revenue are desperately being sought after. New taxes are political suicide, and possibly counter-productive. So the scuttle-butt that I have heard is that government agencies are looking to beef up enforcement of various little-known rules and regulations with the sole intention of obtaining increased revenue through fines.

There are so many regulations out there it is not funny. Most contain terms that allow for the government to charge punitive fines to non-compliant businesses. In the past the various agencies have decided against fines in favor of providing helpful information and warnings.

Not any more!

An example that I was told about involves the various consumer protection rules that have been instituted to protect the private financial data of consumers. The laws were aimed at banks, credit reporting agencies, loan companies, etc. However, the terms are much broader than that and include virtually all companies with employees, and thus employee data. The rules require each company to perform various evaluations, reporting, preparation, appointment of special employee contact officer, etc. Most businesses I have talked to do not even know about these rules let alone how to meet the requirements they impose upon them. Failure to comply can result in stiff fines.

So I guess the next big thing is the growing Leviathon of government. Unable to feed itself from taxes, it will start fining companies to cover budget holes. Beware.

August 15, 2012
Wealth vs Income

I am a bit shy about talking about the issue of wealth, since there is clearly an argument to be said that I am trying to explain to a chicken how to lay an egg. Also, I remember my father telling me: “Never talk about money, politics and religion; you’ll only lose friends.” But over the years, as I have attempted to help people to legally protect their assets, reduce their taxes and obtain great financial privacy, I have asked myself this question: “What is Wealth?”

In my opinion, the most obvious and destructive mistake is made when one confuses income with wealth. Although the two are related they are not synonymous.

Let us start with my definition of wealth: I believe wealth must be defined as assets which (1) generate income, and (2) that are relatively liquid, at least to the extent that they can be transferred to another party in exchange for some fair value.

Let us proceed with a simple review of what money can do. If you had one million dollars, and you invested those funds in prudent investments, you should be able to obtain an annual return of roughly $60,000.00 to $120,000.00 a year, or translated monthly, $5,000.00 to $10,000.00 a month. This is wealth (although depending upon your situation and needs, it may or may not be considered enough to make you “wealthy”). The funds produce income, and the assets which represent those funds can be transferred to others in exchange for fair value.

Now there are three things that are commonly confused with wealth:

1. A prestigious job with a high salary;

2. An expensive house; and

3. Ostentatious displays of wealth (i.e.; bling, expensive cars, clothing, consumer goods, etc.).

In the case of the high paying job, earning power is closely linked with the cost of living, so someone earning a “good living” in Houston, Texas, would most likely barely be able to survive on those same earnings in New York City. With that in mind, I think it is safe to say that someone who makes $20,000.00 a month would be considered “wealthy” almost everywhere.

And that would be a mistake almost everywhere since earnings from employment are not wealth, at least not according to my definition above. No matter how much you make from employment, since the job cannot be transferred in exchange for fair value, it cannot be considered a wealth building asset. That is not to say getting a high paying job is bad, only that it is not in and of itself something that can make you wealthy.

Another thing that is often confused as wealth is housing. People have a tendency to identify someone as wealthy because he or she lives in an expensive house in a nice neighborhood. Again, these people would be mistaken if the house was the only consideration. Buying a house may often be a safe and wise way of providing you and your family with shelter, particularly if the long-term cost of buying a house is less than the long-term cost of renting, but it is not a source of wealth. It is not wealth even if the property value of the house increases during the time in which you live in the house. This is because no matter how cost effective it may be to buy versus rent, and no matter how much the property appreciates in value, it cannot produce income for you while you are living in it. So, although it may be wise to put your money into buying a house instead of renting, and buying a house may result in the value of the asset appreciating, such an investment does not make someone wealthy per se.

Finally, the issue of ostentatious displays of wealth, often referred to as obscene consumption, clearly should not be confused with wealth, although often it is, if not on an intellectual level than on an emotional level. Who does not see someone driving a beautiful new car that costs more than the average house and shake their head thinking, “I wish I could afford that”? However, if there ever is something that is the very opposite of wealth, it is the barbaric display of wealth. In ancient times people would “invest” in gold and other movable items of wealth because of two reasons: the world was not safe enough for more permanent investments, and such displays could generate awe and admiration in others that would often translate into position and power. No doubt there are similar issues at the heart of ostentatious displays today, but I think it is fair to say the purpose of such displays have essentially disappeared, and as such they represent an anachronistic view of the world.

So, after all that, are we any closer to understanding wealth? And more importantly how to become wealthy? It is clear that earning a large salary will not in and of itself make you wealthy. It is also clear that owning a large and valuable home will not make you wealthy. And it should go without saying that ostentatious displays of wealth do not make you wealthy.

The answer is that the wealthy person possesses “wealth building assets”: assets which either generate “rents” (i.e., the money that is produced by the asset in question), or appreciate in value.

In the case of the person who makes $20,000.00 a month, if this persons converts that salary into an expensive home and ostentatious displays of wealth, then he or she will never be wealthy. Such a person may have a very nice lifestyle as long as the employment lasts, but nothing is being created that will create income or can be transferred in exchange for fair value. But this is exactly what most “wealthy” people do. A job will never make you wealthy since a job can never be considered an asset which generates income and can be transferred. If anything, it may be more akin to a form of slavery, particularly if the person becomes wholly dependent upon 100% of the earnings from the job to maintain a lifestyle. The only way a high salary can lead to wealth is if one of two things takes place: the person lives on a percentage of the earnings and invests the rest in true “wealth building assets”, or if the person is able to convert the job into a significant equity position in the employer (i.e., a partner). Anything else is just a mirage of wealth.

Often people will assert that investing most of their free money in a house is a “good investment” since the long-term costs of buying is less than renting. In most cases this is true. However, this does not mean that buying a house creates wealth. It simply means it is better than renting. Now if you take the excess income that you earn at your job, and invest it all in a house that may be more than you really need for your purposes of shelter, then you are most likely never going to be wealthy. You may have a very nice house, but you will never be able to get anything out of the house until such time as you are willing to move out of it. And then, if you are like most people, you will want to take the money from the house you are selling and put it into another house in which you will move into. A house may be a wise use of funds as compared to renting. A house may be a safe place to store your money since it may actually appreciate with time. But a house will almost never make you wealthy since it cannot generate income, and requires you to abandon it in order to get your money out of it.

In order to become wealthy you must have “wealth building assets” that either produce income from the nature of the property, or which tend to appreciate over time, and of course these assets must be liquid to the extent that you can sell them at fair value. If the above three items are often mistaken for wealth, I suppose the real way of becoming wealthy involves saving money, investing wisely (in something other than your house), and living frugally within your means. And that is it.

August 8, 2012
Passion vs Persistence

I was initially going to name this post “Inspiration: Passion vs Logic and Persistence” but I thought that might put people off. Has it so far???

Early this week a very nice lady from my business networking group contacted me on Facebook and in introducing herself asked me “what is it you are passionate about”?

Passionate? Me? I am a lawyer who specializes in asset protection and tax planning. I avoid talking about what I do at parties because I don’t want to put people to sleep. Passionate?

I told her how I helped people to form companies and trusts in order to protect their assets, reduce their taxes and obtain greater financial privacy, provided her with some of my credentials, yada yada yada. Then I asked her what she did. Well, it looked like I avoided that one.

She answered me and explained to me what she was working on. Then she again asked me “what is it you are passionate about?” Damn. Well I am either going to have to totally ignore this and not respond, or try to come up with some way of answering that is not insulting.

You see, I do not think very highly of passion. Don’t get me wrong, it serves a valuable purpose at times, but in business I don’t see the value. I realize that this goes against all the recent self-help programs and gurus. I am just not into the “aspirational” culture and society.

This was my answer: “Every day I try to wake up early, I try to do what is right, I try live up to my obligations, I try to honor my principles, and at the end of the day I look back. And if I am not altogether happy with how I did that day, I go to sleep knowing I am going to have another chance tomorrow to do better.”

That’s it. No passion.

This week I read an interesting article that I think is somewhat related: “Don’t Bet Big. Little Bets Are The Ones That Turn Into Billion-Dollar Ideas“. This articles discusses how some of the greatest entrepreneurial creations of the last 20 years have been “discovered” and not “created”. They were discovered by persistent people:

“When I was in business school, one of the most common things I would hear people say was that they wanted to do something new—like start a company or take an unconventional career path—but that they needed “a great idea” first. That always surprised me a bit, especially at an entrepreneurial hub like Stanford, since most successful entrepreneurs don’t begin with brilliant ideas—they discover them.”

The author points out that one of the biggest ideas in recent history was the result of a class project to improve library searches: Google.

I can just imagine the discussion between the two creators, Larry Page and Sergey Brin, as they discussed what they were going to do for their class project:

Larry: “Man that idea sucks. We have to come up with something better than that! Something exciting and revolutionary.”

Sergey: “Well you come up with something then. That’s all I can think of.”

Larry: “What about 3D environments for computing?”

Sergey: “What do we know about that? Plus where will we get the equipment.”

Larry: “But library search algorithm??? Can we get any more boring than that?”

Sergey: “Like I said, come up with something better.”

Larry: “Ok, library search algorithms it is. It should be enough to give us a passing grade.”

And so Google was born. Not in a passionate moment where someone cried, “Eureka!” but in a calm and plodding way.

Logic combined with Persistence, in my humble opinion, will beat Passion in much the same way the tortoise beat the hare. Not only is Passion a rather transient and unreliable motivation, but it also can be fickle; the same Passion that makes a man want to marry his wife will make him desire another. But more likely it is not the Passion that drives the cheating spouse away, but just fatigue. Passion gets old.

Of course behind the Logic and Persistence must exist Optimism. You must believe that after doggedly plodding on day after day well after the magic is gone, something out there will turn up that will dazzle you or at least give you a reason to keep going. That is true inspiration.

August 1, 2012
Is your website bullet-proof?

Most of the time I post on the importance of Asset Protection, Tax Planning and Financial Privacy, but today I thought I would post on something a little more technical: website security.

About 8 years ago I used to promote my business through seminars located in exotic places like Cancun, Playa del Carmen, Belize, Panama, Costa Rica, Latvia, etc. Yeah it was a tough job, but someone had to do it.

Well, at one seminar in Cancun I had an unusually large number of walk-ins to the seminar. I was curious where they were coming from and it turned out that they had actually come to Cancun to attend a competitor’s seminar. They had heard about my seminar and decided to ditch the other guy in favor of me. They heard about my program based solely on word of mouth. Well I gladly took their money, and enjoyed the weekend enormously!

Until I arrived back in the Good Ole US of A. It was then that I discovered that my website had been closed down, and that my URL was being held hostage by my hosting service. It turned out that the competitor in Cancun found out about his attendees abandoning his seminar in favor of my seminar and took his revenge by accusing me of spamming him. He fabricated an email that I had never sent by lifting acceptable promotional material posted on a commercial site, and changed the headers to appear like an email. My hosting service shut me down without any further notice or explanation. I was shocked. How could this happen?

Luckily for me, my hosting service responded to my request for reconsideration, reviewed the claim of spamming, and in fact concluded that the charges were false. My website was reinstated, and I was back in business.

But this made me start thinking: How can I improve my website security so that no one can ever do this to me again? I started calling around and talking to friends. Someone referred me to a Russian hacker who was living in New York. He used to work for some odd agency of the Soviet Union during the Cold War commonly called by three letters. He agreed to show me how to bullet proof my website.

3 Steps to Making Your Website Bullet Proof

Step One: Separate your domain name (URL) from everything else. Do not set up your website at a one-stop shop that provides you with the convenience of registration, DNS service, and web hosting all in one location. Instead register your URL at one of those discount registration services. I use http://www.cheapdomainnamesdot.com/. They are cheap and efficient, and easy enough for me to use it. I would consider paying a little extra and getting the privacy option (no information regarding the registration of the domain name is publicly available).

Step Two: Establish a DNS Service separate from your URL registration and your web hosting service. What is DNS? Domain Name System (DNS) is a database system that translates a computer’s fully qualified domain name (URL) into an IP address. In other words, it is the service that directs your web browser to the proper computer site when you type “www.domainname.com”. I use a free service called http://zoneedit.com/. This service will accept the registration of your domain name from a third party registration service, and then forwards the DNS to a web-hosting service of your choice.

Step Three: Find a good web hosting service. This can be just about any service out there, but make sure they make it easy for you to have your registration and DNS separated out like I described above. A good web hosting service understands how this works, and will help you do it. If they say they do not understand what you are talking about, or make it sound like you are stupid, just move on. There are literally thousands of good services out there. I personally use http://www.hostmonster.com/, but I also like a free service called http://www.memebot.com/ which provides totally free hosting and some very nice template services as well.

There are other things you can do with this system as well, and once you get familiar with the structure of things it can be quite liberating. Changing web hosting services will literally take no more than a few keystrokes in your DNS service website. No one will ever shut you down. Your website will be bullet proof.

July 14, 2012
The Secret of Asset Protection Planning: Compartmentalization

The secret of great asset protection is not secrecy or privacy, but “compartmentalization“.

This means that your assets are separated and protected from your liabilities and risks.

The ultimate example of the successful implementation of compartmentalization can be found in the USS Missouri, one of the most powerful battleships ever created and based upon the powerful Iowa Class Battleship model.

The Iowa Class Battleship was designed during World War II to be fast and nimble yet tough and reliable. Too much armor would make the ship slow and cumbersome, so the US Navy focused instead on compartmentalizing the ship so that no single strike could cripple or sink the ship.

The ship was divided into separate compartments protected by fire walls limiting any damage to the particular compartment that was hit. It was designed to withstand multiple strikes from torpedoes and shells without sinking.

In 1989, this compartmentalization unfortunately underwent its ultimate test when an explosion in one of the gun turrets set off the magazine (ammunition supply) below the turret. This explosion was catastrophic and killed everyone inside the turret compartment, but the ship itself was able to survive the blast intact; a blast that would likely have obliterated lesser ships.

This was because the explosion and fire that occurred could not spread to the other compartments.

This same concept can be applied to your business and personal assets. You NEED to separate your liabilities from your assets. Protect the sources of your income and wealth from the dangers inherent in doing business and simply living.

July 7, 2012