Asset Protection Strategy

[Harsh Dangaria]

Researching various sites (including many posts/forms in BP), books, etc. I have tried creating a blue print for asset protection (see the image). Does it make sense? Did I do something incorrectly? Is it an overkill? At what net worth is this no longer an overkill? and most importantly, Will it provide the best possible asset protection? (This is in addition to liability and umbrella insurance coverage policies). Also, with such structuring there is going to be added expenses (e.g. SLLC filing fee, land trust and trustee fees, foreign entity registration fee, general partner LLC registration fee, fees to CPAs/attorneys to set it up, extra costs with end of year tax filing, etc.). How much additional expense will this create as compared to owning rental properties without entity and land trust formation?

I did not find any clear info on other trusts as asset protection. Are there any advantages  with trusts such as  domestic/offshore asset protection trusts, etc.? Are they used instead of above or are they used in addition to above? How much additional expense will using a DAPT create?

I understand that I need to see experienced CPAs and attorneys. Any recommendations? I tried getting info on the fly from 2-3 attorney friends but they were not very helpful. I am sure that the collective knowledge/experience of BP members is far better. 

Thanks,

HD

[Costin I.]

Wow! A lot of good advice and confusion information - allow me to summarize previous input and add to the pile.

1. I first must recommend seeking legal counsel and this is not intended as legal advice. Check out Podcast 109 and talk with @Scott Smith.

2. Asset protection it is a shiny object that is used as a reason to oversell services, but as the same time, insurance and umbrella insurance do not CYA all the time. Both are tools that complement each other and you should learn how to employ them properly along with your other tools (financing, marketing, management, etc.) in your investing toolbox.

3. Asset protection is a form of insurance - insurance against litigation. My recommendation would be to apply a "2% rule" - the cost of setting up and maintaining your asset protection should be less than 2% of equity you are trying to protect. Let's say, it costs you 1.5K to get your structures in place (holding LLC or Series-LLC, with or without land trusts, with or without separate operations LLC) and 0.5K per year (for maintaining the LLC properly, bookkeeping, lawyer and CPA, etc.) for a total of 2K. You should have 100K or more in equity to protect before it makes sense to spend that money - compare that with how much you spend in annual insurance for the same property/equity.

4. Trusts provide anonymity and are private, but don't offer liability protection - they complement LLCs.

5. Mortgages helps reduce equity and helps in keeping the lawyers at bay - the notes itself is a form of asset protection. Thus you should worry about asset protection only when you have a good amount of equity (or cash flow) to protect.

6. Recommend to establish a holding entity (that only holds the assets), and separately, an operations LLC (that holds nothing and has minimal capital necessary for operations) for all the public interfacing (property management, leasing, hiring, contracting, etc.), with a property management agreement with the holding entity.

7. State registration depends on the structure you put in place and the state where property is located - if you have land trusts, you might have to only register the Operations LLC for property management. Specialized and custom advice is needed here.

8. The Operations LLC can be a C-corp for benefits like getting a salary for the PM, estalbish health and retirement plans. But do NOT hold real estate in a C-corp or S-corp. Owning rentals in an S-Corporation might be a costly mistake, in a C-corp a bigger one even.

9. I would not bring offshore trusts into the equations unless we are talking about millions. In which case, cost is a secondary consideration and you shouldn't look for free advice on BP.

10. Your diagram and scenario gets complicated by the partnership - which introduces its own set of problems. That partnership structure itself requires specialized advice, but I think everyone in the partnership should be represented by their own LLC to limit possible impact from partners (what happens if one of the partners gets sued for hitting someone with their car?)

11. Bonus: my own diagram to help you in the asset protection question (although no partnership involved).