Another Asset Protection Post??

Question

Hi Team! Hope everyone enjoyed the holidays.

Okay, this has been covered to some extent at length, but it’s been difficult to decipher the exact information I’m looking for. I hope this can be helpful for other people in similar positions as well.

I have a (small) handful of rental properties and a primary residence. Right now they’re all covered by liability insurance and an umbrella policy. There is not substantial equity in the properties since I’ve owned all < 4 years.

However, for my own peace of mind, I’m ready to take the next step in asset protection. I don’t need a complicated strategy. My net worth is not astronomical and my W2 is not risky. But I would be willing to spend some money to protect my spouse and family ~in case~ anything were to happen with one of the properties.

Okay, that’s the background. I think what makes the most sense is setting up an LLC and just putting the properties in there (minus my primary residence) to keep this separate. Right..? Or are LLCs futile these days? I also want to be in a place where I can refinance any property *relatively* easily.

I know there are a multitude of different angles here. But I’m interested in a simple next step from liability insurance. If someone has a recommendation for an attorney or firm they trust, who can help, that would be great. Easier is better, and I’m willing to spend a bit for my peace of mind.

Plot twist - I am based in California, but our investment properties are all out of state.

Thanks in advance, and appreciate you reading! Cheers!

Katie Balatbat · Answer

@Jarod Backens

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.  Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more cumbersome than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don’t buy CA property as a CA resident.

Any lawsuits should be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC.   Or, a charging order may be granted.

If you're going the umbrella insurance route, perhaps see if it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California could cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation.  California does not recognize series LLCs.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a fairly new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship.  The information contained in this post is not to be relied upon.  Readers should seek professional advice.

Chris Seveney · Answer

Basically if you are buying in your personal name and then transferring to your LLC you are throwing money out the window as its not an arms length transaction and will not provide you with any asset protection

A LLC is to be treated as a separate entity. Giving a property for free to a LLC does not constitute a separate entity.

The proper way is to set up a LLC, fund it and then buy assets in that LLC completely separate from you.

Also owning single family homes in a LLC - its like wearing a belt and suspenders and asking the question, how many times has your belt completely broken to need the suspenders?

If you have an umbrella insurance policy and property manager I would love to hear what you could possibly be sued for that would not be covered by your insurance policy or your property manager assuming you read the contract and had an attorney review it?

Chris Seveney · Answer

@David C.

This is the worst place to get legal advice

V.G Jason · Answer

This is a topic beaten to death on here-- everyone has their own views.

My recommendation is talk to a lawyer-- yes they have something to sell-- but find one that has been through this, has/is willing to fight for their views on it & it makes sense to you. If you cannot find that, then that answers your question too.

Personally, the legal team I work with has given me way too much of evidence and analysis on this to not do it. Plus, I have a lot, lot more at risk than the average folk so why get cute? It's a little bit of a hassle but it's nowhere near as costly as people make it out to be.

David C. · Answer

A judgement against you personally (car accident, etc) will automatically attach to all properties recorded in your personal name, including your home.

@Jarod Backens

I recently got a judgement against a tenant that didn't pay rent for all the covid years, finally got him evicted and a money judgement.  I recorded the money judgement that is now attached to his personal residence.  I don't have to go to court to collect, I simply sit and wait until he tries to sell or refinance, then collect the judgement plus 10% interest.

Turns out, he was renting from me without paying rent for all those years, all the while renting out his personal residence.  He no doubt thought he was smart.

This isn't the best place to get legal advice.

Jarod Backens · Answer

Hey All - Thanks so much for the time and responses! It's given me some peace of mind and clarity, especially where I'm at in my portfolio.

Alan F. · Answer

Especially in California

Henry Clark · Answer

Read my post what happens if you die.

LLC the key is keeping things separate from your personal life.  You already have liability and umbrella.  Do you have two sets of policies, one for personal and one for LLC assets? .  Credit cards and bank accounts.  Are they separate by personal versus LLC?  Also do you keep the transactions separate in the accounts?  Example do you ever pay for lawn care in your house with the LLC account?

You need to address your liability from three approaches

A.  Ownership or the LLC

B. Insurance as you noted

C.  Operation procedures.  Example are you documenting why you don’t rent to a person or evict them?  Do you have a maintenance program such as snow removal or deicing sidewalks?  Do you require renters insurance?  As mentioned above has your contract been reviewed by an attorney?  Do you have a water, smoke or carbon monoxide alarm system?    You still might get sued but you may mitigate the findings.

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