Structuring your entities for anonymity is NOT asset protection

[Stuart Udis]

I am tired of reading about real estate investors seeking advice on where they should incorporate or how they should structure their entities for anonymity. Anonymity is NOT asset protection. To lay it out as simply as possible: if there is a viable claim, a plaintiff's attorney will pursue it regardless of whether you are incorporated in Wyoming, you believe you are hiding behind a management LLC or whatever other anonymity maneuver you believe is shielding you from liability.

All a plaintiff's attorney needs is the deed holder name to file a claim and this is public record everywhere. Once their claims are filed they can obtain your identity through discovery but in most cases they don't care who you are! This because they are most interested in your insurance. It's the path of least resistance and how they and their clients are compensated. In fact, I would make the argument when a plaintiff's attorney sees the $100K home in Detroit owned by a Wyoming LLC that attorney will be even more interested in you....exactly the response you were hoping to avoid. From a plaintiff attorney's perspective that is peculiar behavior and may actually believe you are hiding something. Congrats you just made discovery a more drawn out process than necessary and your insurance carrier's legal bills have gone up which I can assure you will impact your next year's premium.

I'm hoping investors allocate some of the resources and energy spent hiding in the cloaks of secrecy on being a good real estate operator who avoids claims from arising in the first place as opposed to falsely believing you have greater protection.  I can assure you, your business will perform far better as well. 
 

[Stuart Udis]

I want to add a few additional clarifications after reviewing some of the posts, particularly those by by @John Morgan & @V.G. JASON. I am not against owning real estate through LLC's, LP's or other structures. I apologize if my post was interpreted to suggest that position. In fact, there are many reasons to hold your real estate outside of your personal name for asset protection & business/ succession planning purposes. The first point I was hoping to get across is formulating your entity structures in a manner that will achieve anonymity does not prevent claims from arising.

To apply this in a practical manner, I volunteer myself. I own property in Philadelphia. Premises liability claims are one of the most common causes of action a real estate owner will face. If someone were to slip and fall or otherwise hurt themselves at one of my properties due to a premises liability issue, the plaintiff's counsel will file a claim against the deed holder regardless of whether I am incorporated in PA as a single member LLC or through an entity structure utilizing LLC's from states that may have better privacy laws, the deed holder entity is layered or any of the other strategies often discussed in these forums. None of these strategies will stop the claim from being filed.

The second part is what happens when the plaintiff or plaintiff's counsel knows you are a member or the sole member of the  entity that owns the property? I will preface this question by adding an assumption and that's  most who are seeking asset protection services,  do so to protect against claims that could have significant financial repercussions, rather than being  drawn into landlord tenant court over a rent payment dispute because the tenant alleges the boiler is defective, so lets focus our attention there.

How do these claims typically start? The "victim" calls a plaintiff's attorney. This attorney will lay out the following options: pay me hourly for the engagement, offer contingent fee representation, or a hybrid approach. In most cases, the contingent fee option is selected because litigation is expensive and most plaintiff's cannot front the costs. That leads to my next point which is how plaintiffs and equally as important their attorney  are compensated? Can they obtain a judgment against the entity or you personally? Sure, but that judgment is nothing but a piece of paper. Do you know what is far more attractive? A settlement with an insurance carrier or a court decision and judgment where insurance proceeds are available. This is almost always the objective of plaintiff's counsel because of certainty of compensation. No plaintiff's attorney's want judgements that can be framed on their wall, they want to get paid!  This is why it is important to have appropriate insurance and even more importantly making sure your actions are not listed under exclusions in coverage. 

But it gets even better.... Even if your actions would be considered an exclusion under your policy, the plaintiff's attorney will more than likely ignore those facts and frame the claim in a manner that will be covered. You acted grossly negligent? Ok, chances are the plaintiff's attorney will include in their complaint just the "negligent" behavior or actions. To crystalize this point many years ago I was involved in a dispute with an architecture firm. They performed their services negligently and on top of that forged my signatures on permit submission documents. When all was said and done, the design firm cost me north of $100K in losses , some of which was caused by the drawn out design process resulting from being in the dark due to the forgery. I could have filed a claim for $100K and easily won in court. The facts were clear. However, fraud is an exclusion in all insurance policies and had the option of focusing on their negligence and completely ignore the forgery where I would receive  cooperation from their insurance carrier or alternatively go for the $100K and hope I can someday turn that judgement into cash. I opted for the insurance cooperation and received a $50K check I was able to deposit in my bank account. Sure it sucked being out the $50K, but I would rather have $50K in my bank than a $100K judgement I then had to figure out how to collect on. 

Unfortunately, most focus on preparedness for when  claims arise rather than running their business in a manner that can prevent or reduce the likelihood they come to light. The problem with the preparedness approach is a lack of understanding of the litigation process and objectives of the claim participants. Understanding this should help real estate investors make more informed decisions when it comes to entity formation structures.