Assist Protection, Insurence isn’t enough?

Question

I went to an investor meet up and we met with a lawyer who was telling us that regular Insurence is not enough.  He said that you want to have an LLC to protect your assets in case something was to happen related or not related to your real estate investments.  He said that in a court case the 1st things that a lawyer looks for is if you have anything worth value that they could sue you for.  He also said that if the LLC is not set up correctly it could be useless, better to have no LLC than a messed up one.  I want to invest, but this kind of takes the fun out of it a bit.   Thoughts anyone?

Ryan Seib · Answer

While I agree fully with Michael's points and I also like them, I just wanted to point out there is a selection effect going on whenever someone says "I grew up [doing X], and none of my friends died or had a [X-related] injury." If someone dies or has a major injury they usually do not go on to make friends with a ton of people later. Similarly the guy who gets his butt sued off might go find a different friend group because he does not want to tell everyone how bankrupt he is. That said I totally agree with everyone else, and agree wholeheartedly that the earth could get sucked into the sun tomorrow and no amount of LLCs would help you if that happened.

Scott Smith · Answer

When I sit down with clients I will always discuss (1) their personal assets, (2) what their current investments portfolio and other business ventures before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. I often break it down into the "five pillars" of protecting your assets. The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur. The second pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.

After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The fourth pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record.

You don't need an LLC until you do. Most law suits aren't caused by intentional actions, but often are by bad contractors or miscommunication. The LLC would function as an additional "stop-gap" between yourself and a law suit. There is a never-ending reservoir of tactics used for asset protection, so ultimately you just continue forward with investing until it makes sense to include more "pillars" into your asset protection strategy. If you are concerned and want to know what is exposed, find an experience attorney who knows real estate investing and have them give you the rundown - listen to their recommendations and move forward with what you think is best.

This isn't legal advice, just my opinion as a real estate investor.

Frank Chin · Answer

The lawyer is referring to "charge order protection", see: Charge order protection

I owned rentals for 40 years, and have yet used an LLC though I have LLC's for other businesses. But that is not the best reason to run out and get an LLC as clever lawyers will get around it.

So if you're in a bar fight, punched out someone, he's disabled for life, they sue you and you owned properties in an LLC. You say "ha ha, you can't do anything, everything is in an LLC". You collect rent, right?. So they'll attach your rents for the next 50 years.

I did hear the story of this famous lawyer, Roy Cohen, Donald Trumps lawyer who he raves about. He's got people suing him left and right. What does he do? He doesn't collect a salary, everything is on an expense account, so his food is on his expense account, rent payments, car payments etc., so creditors got nothing to attach.

But, do I want to live like that? live like Roy Cohen. If you do, the Donald will give you some kudos for that.

Michael Plaks · Answer

@William Orrock

Your question does not have one answer.

It is similar to wearing a helmet while riding a bike. These days, almost everybody does, and where I live it's actually a law. Because if you take a fall from the bike, yada yada yada. Similarly, lawyers will have you create LLCs, and their arguments are as good as those for the bike helmets. "What if?"

Yet, I grew up riding my bike without a helmet, and none of my friends died or had a bike-related head injury. This is an argument of investors who do not use LLCs. "Why bother?" and "We never had a problem!"

Up to you to decide which argument is stronger for you: the "what if?" or "why bother?"

PS. Motorcycles are a different story though. So as your portfolio grows, the importance of a stronger asset protection grows with it.

Assist Protection, Insurence isn’t enough?

Most Popular Reply