Umbrella policy and LLC for house hack

[Mathew Fuller]

Hello BP,

I am wondering if I am correctly protecting myself with the current house hack that I am doing. I recently bought a property and currently renting out one of the two rooms (with the second one to be soon rented out). Before I closed on the property, my insurance advisor advised me to get an umbrella policy, which insures me up to $1M. Do you think this is adequate, should I look at putting my house into an LLC? What do you do to protect your assets while being a landlord?

Thanks

[Lionel Li]

Originally posted by @Tyler Gibson:

@Mathew Fuller if this is a house hack then you are living there. If you are living there then it is your primary residence. I believe that with it being your primary residence then it is not an asset that an attorney could come after in a law suit. I am not an attorney so you should consult with an attorney. Once you are no longer living there then putting it in an LLC or an umbrella policy could be needed. I am not surprised that your insurance agent told you you need the umbrella now I mean his job is to sell you insurance. He has probably told you you also need Life insurance. This is not to say that either of those products are not good products but they are situational.

There aren't many assets that are safe from a creditor, even a 401k that's protected by ERISA can be siphoned from in different cases. Your primary residence is 100% up for grabs in a lawsuit if you have no other way of paying. Judgment creditors can force the sale of your home to get paid so please don't think your home is ever safe just because you live there. 

Personally, I'd go with the umbrella policy especially if asset protection is what the OP @Mathew Fuller is concerned about. Putting a househack property in a LLC is less than ideal in my case. Depending what state you're in the annual cost can be higher than an umbrella policy, you lose the Section 121 exclusion for whatever percentage of the home you live in because you no longer satisfy the ownership test, and the homestead exemption. Not to mention the logistic nightmare of maintaining and convincing the court you're splitting personal expenses from business.

Short answer: If you're losing sleep because you don't have asset protection get a umbrella policy or a trust for your beneficiaries. Any trust that includes the right protective provisions can lawsuit-proof the trust assets from a lot of these creditors.