Asset protection strategy tier list: Worst to BEST

[Account Closed]

Now that you have an asset, let's talk about asset protection. Below are a few strategies I've ranked from worst to best, which offer varying levels of protection. 

Worst:

- No coverage, held in your name.

Bad:

• Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.

Good:

• Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.

Better:

• Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.

Best:

• Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.

Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:

• Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
• Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
• Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.

[Stuart Udis]

Most who implement asset protection start off with the correct intentions. However, very few understand the operational procedures and obligations which diminishes the effectiveness. Merely purchasing real estate well doesn’t guarantee success. The property requires proper management thereafter. The same applies to asset protection. Forming the appropriate entities and obtaining the correct insurance is only the first step and if you want the benefits of the asset protection strategies that are frequently discussed in these forums following through with these actions is equally if not even more important.

1. 1. Once you correctly file your organization documents, follow the procedures of your operating or partnership agreement. If you want the benefits of separating yourself personally from the business, treat the entity like a business. By way of example, if your agreement requires meetings, conduct those meetings. Also, open your bank accounts correctly and do not co-mingle funds. Failure to take these measures will leave you vulnerable to a plaintiff’s attorney interested in piercing the corporate veil. While the standards vary depending on the jurisdiction, the examples I shared tend to be the most common avenues.
2. 2. Make sure you are signing well drafted contracts and you are not only collecting insurance certificates but are also being added as a certificate holder before any 3rd party vendor performs services for you. Your insurance carrier will expect indemnification and these step are critical to ensuring you are satisfying the terms of your insurance policies.
3. 3. Secure responsible debt on your properties. Debt provides many benefits in real estate, and one is asset protection. You are “less marketable” to plaintiff’s attorneys if your properties are encumbered with debt but keep your leverage at responsible levels.