LLC or Umbrella Policy?

Question

I have 3 Properties in NV held in an LLC. In addition, I have 3 Properties in CA - & I am planning to move them to an LLC as well.

I have been advised to get an Umbrella Policy in order to protect my assets.

My question is - if LLC already protects my assets from a lawsuit, why should I get an Umbrella Policy in addition? What are the pros & cons?

Or should I just get an Umbrella Policy and not worry about the LLC?

Levi F. · Answer

I'm no lawyer and I'm not very smart, so I hire people to advise me. I have 2 LLCs, 2 S-Corps, and I'm 49.5 owner in a Limited Partnership and carry 5 million umbrella.

It has been explained to me like this, "inside" and "outside" protection.

Outside- Protecting YOU and your personal assets from your property. LLCs, trusts, and Limited Partnerships can provide this protection. They can also provide protection from different businesses owned all or in part by you. Example: Accident happens and a lawsuit is judged against your LLC, only assets inside that LLC could be forfeited in settlement. That's why most investors limit there equity in each LLC

Inside protection- Protecting your Corporation or shares from you. Example: An accident at your residence results in a lawsuit judgement against YOU. If that judgement is more than the maximum coverage of your homeowners policy Your assests, shares, and corporations could be seized or awarded in judgement. A PULP (personal umbrella liability policy) would kick in over the maximum of your homeowners(or auto, RV, etc) insurance up to your umbrella policy limit.

Levi F. · Answer

@Liam Goble

Again, to my understanding you're spot on about the umbrella policy.

In my opinion having both is the way to grow. I say grow because LLCs can provide tax shelter and isolate YOU from your BUSINESS. The 10+ policy works like an umbrella policy inside your entity(LLC, LP, Trust, etc...) to protect properties from one another.

Levi F. · Answer

My understand is:

Personal umbrella policies protect assets NOT in and LLC or corp. There are 10+ policies for businesses owning 10 or more properties that act in the same way as a personal umbrella policy. So a personal umbrella would NOT cover any properties inside a corporation. That is why I was told it would be in my best interest to have both.

Darrell Shepherd · Answer

They are different things.

First off, the LLC only protects them from going after your personal assets for something that happens with the LLC.  If you put all your properties in one LLC all the assets in that LLC are fair game.  I generally have an LLC for every $100k in equity.  It kind defeats the purpose if you have too much in one entity.

Talk to your insurance agent, but my understanding is that the umbrella policy simply extends the coverages on your existing insurances.  There are still things it can miss.  Very rare things, but most of this stuff is protecting against rare things and umbrella policies are cheap.

Keep in mind, its not just shielding your personal assets from attacks on your LLC.  Its protecting your LLC assets from legal attacks on you personally too.

Neither are all that expensive or hard to do, a few hundred bucks a year for an added layer of protection (and anonymity) is worth it IMO.

Jerry W. · Answer

@Rajeev Agnihotri There are many reasons for having a corporation, be it an LLC or a Sub S, Limited partnership, etc.  The original creation of corporations was to limit liability to the amount of your investment.  If run correctly corporations limit your liability.  Corporations can also have many tax benefits.  You would need to talk with an accountant to get the rundown on all of them.

As for insurance, you need it regardless, corporation or not.  That is your safety line from the nuts who sue over everything.  They also help when the tornado comes through and tears the roof off of 5 houses.

Tim Norris · Answer

This is a re-post, but if you haven't seen it, I hope it helps:

As it relates to asset protection strategies, think of the work you do  with a legal adviser who, upon considering factors such as net worth,  estate planning issues and taxation will offer advice regarding entity  and ownership issues. I believe this is your "castle walls and moat"  around you/yours. Think of the liability insurance as the "archer in the  watchtower". The entities you create (LLCs, trusts, etc...), work  symbiotically with the insurance coverage. How much is enough? Who  really knows, but keep in mind that your "personal exposures", such as  your vehicles, home, etc...(assuming you haven't exorcised ownership via  trust, etc...), are/should be segregated from your business exposures.

All that stated, I carry $500k on our personal vehicles and personal  liability (homeowner), and $3MM in a "personal" umbrella. Frankly, the  umbrella, at $230/year is worth it at that limit. We (partner) carry  $1MM over the properties we own via LLC. No "business" umbrella. Are  these limits sufficient? Again, who knows, but they are in my mind, at  least. Statistically they are, as most liability claims are under these  amounts.

Really, your asset protection strategy should start with a versed  attorney, include your CPA, and possibly your financial advisor. Figure  out how to own/control what you have, then make a call, in your opinion,  how much insurance is enough. Hope this helps!

Tim

Robert Steele · Answer

Yes.

Glenn McCrorey · Answer

I keep the properties in the LLC highly leveraged so there isn't much equity to go after.  Selling 6 houses to get 100K equity doesn't make sense because there are transaction costs associated with selling a property.

I just found a bank that is letting me refinance at 85% LTV so I'm getting cash out.  Of course, I use that to buy more properties.  I also have an umbrella on the LLC and a personal one as well.

Donald Stevens · Answer

An umbrella can be for personal or business policies. You may need both depending on your risk assessment. That being said, you personally would need an umbrella when you have an LLC. The first L stands for limited which means you have some liability.

Liam Goble · Answer

I'm in a similar quandary.  My attorney tells me that LLCs are da'bomb and that he can file them for me (which he does).  My banker also says that LLCs are da'bomb.  Most of the investors I know own their properties in their personal name and have an umbrella policy to pay for damages above and beyond their standard policies.  (If I understand umbrella policies correctly, they would also cover you in other events such as an auto accident where the victim sues you for more than your auto policy).

I'm going back and forth on this specific point, but I know there are a lot of people on BP who insist on umbrella policies.

LLC or Umbrella Policy?

Most Popular Reply