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. 
 

[Kyle Bergren]

I had purchased one of these "Legal Packages" to hide your assets from Anderson Advisors in Las Vegas back in 2018. I do regret the expense I paid and the experience. They don't tell you the whole truth of trusts and llcs really work. I bought into the fear mongering message "that everybody is out there to sue everyone else who has a little money". 

In all I paid $14k to setup various entities, trusts, and government fees. I disbanded the LLCs and trusts this year because the upkeep costs (LLC fees, Trust Fees, Registered Agents etc) just are not making sense. Two years ago a tenant still found me and attempted frivolously sue. It was more of a headache proving that I was the property owner in court to represent myself. Overall, its just better to put that money away in a rainy day fund and good insurance. You can pay for a lot of legal help for $14k when you actually do need it.

The experience led me to study law/court procedures, and understand what lawyers actually do. In my opinion, 95% of what lawyers do, in terms of Real Estate and Contract Law, can be done by any lay person. Most municipalities have a free help line to prepare oneself for civil court. If you're not too sure you can always hire a certified paralegal to assitn in filing court documents and arguments.

The last time I paid a lawyer to file a contracts lawsuit for me... I wrote the draft amicus, organized the evidence, and complaint which they pretty much used my writing word for word.

[Frank Chin]

There's a ton of posts on this site mentioning the use of LLC's. Then there are plenty of replies that you don't need it, as all you need a good insurance.

I have a business in a LLC, not for anonymity or risk aversion. On one occasion I overheard two customers chatting in the waiting room and they had no idea I was the owner. One guy mentioned he did OK over the years suing owners for small amounts, five to ten thousand. Due to the hassle, people settle. I said nothing and walked away.
 
Sure enough, a few weeks later, I got a letter from an attorney, photos of his client injured from a slip and fall, and a demand letter for $10,000. As I got liability insurance, an umbrella over for $3 million to cover myself overall, I called my insurance agent. She said just to send all the paperwork and calls to the insurance company and let them handle it.

I contacted the lawyer, advised him to send all correspondence and make phone calls to the insurance company. What happened? The customer came back nine months later, told me his attorney is not returning his calls and asked me to find out what's going on. I was shocked, I'm supposed to follow up? Called the insurance company, they looked up their claims file and found three calls and three letter from the lawyer. When asked what they did, they advised they filed it away. The reason is for that amount, that's all the attorneys would do on a contingency basis, and they only charged a fee if they collect on a lawsuit, 

The customer then asked if I would pay him a few dollars instead. Told him he needed a new lawyer. Funny he still patronizes my business and never mentioned the case again. Ignored my advice to get a new lawyer.

Conclusion. The insurance company acted as my legal department and did a wonderful job by just filing letters away. My LLC did not come into play at all.

[Steve Smith]

Well, trusts and LLCs make not be total asset protection, but they sure can help. With and LLC, the partners are not liable for anything personally.
With your rental houses, put a mortgage on them to the hilt and use the money for another investment.
Overall, houses are pretty bullet proof. The first thing in asset protection is to get great tenants. Next is a good insurance policy.

[Frank Chin]

@Steve Smith

I bought a business from someone who had it in an "S Corp" and I put the business in an LLC. Found out the prior owner had a lawsuit against him for $3 million. He only had $1 million insurance coverage. I had a front row seat in this case since I took over his employees and I paid them for attending depositions in the litigation. The prior owner was on the hook personally for $2 million.

I was worried enough to speak to a lawyer involved in these litigations since his S Corp and he and his wife was sued personally as the owners. I learned that the prior owner tried to get the lawsuit against him personally dismissed arguing that he had an S Corp. The request was denied. 

The lawyer advised that he sues small family owners personally as a matter of course and request to deny liability of owners are also normally denied as a matter of course, It was explained that as a property owner, failure to shovel snow for instance, both I and the LLC will be sued. I'll be sued for negligence since the LLC doesn't shovel snow, I do. If I use a licensed PM, the onus would be on the PM who would carry his own E&O insurance.

Interestingly enough my employees were asked what the owner did all day. The owner bought the business as an investment and was never around to supervise it. It was also during the deposition that the litigants learned the owner moved to Florida after the sale of the business and bought a mansion. When the litigant attorney heard this, shouted "oh no, we're screwed" and pounded on the table. Florida had the best homestead laws.

When I purchased my liability insurance, it was not that much more to buy the additional millions. I only got $3 million when my insurance agent said that was more than enough. The litigants finally settled for $1 million which is still a pretty good payday.

[Ritesh Keskar]

Is there anyone here who would be up for a phone call on this topic. We're trying to sort out the same thing, about what's the best structure for our investments. We currently have a WY LLC registered but investments are happening in other States. Any legal advisor/attorney available for a chat?

[Jonathan Bock]

 @Ritesh Keskar   By chat do you mean billable activity ? 

[Ritesh Keskar]

Well, that's up to the advisor :). I understand, consultation is not free.

[Marcus Auerbach]

Advanced asset protection via a complex entity structure is for most investors like wearing a bullet proof vest when grocery shopping. Obviously an unproportionate response to the potential risk of a shoot-out in the parking lot.

Most people who ask the asset protection question have no assets to protect that are large enough to make them a viable target. Nobody is going to come for your $200k duplex with a loan - it is so much easier to target your insurance.

First of all, don't give people a reason to sue you!
Use a good lease 
Have proper insurance
Add an $1million umbrella policy

Anyone can sue for anything, but winning is another issue. Once your asset's equity exceeds your umbrella policy it makes sense to start thinking about more advanced protection. 

Protect yourself as much as you think is right for you, but don't let a guru tell you what you need.

[Dana Yobst]

This is such an interesting post. I see the value of placing a STR in an LLC in my home state and keeping banking separate.

I've been advised to create a Wyoming LLC to hold my home state LLC since Wyoming is anonymous. My home state is not so anyone could see my name.  I'm trying to figure out if there is real value to the Wyoming LLC ..... 

[Ritesh Keskar]

Quote from @Dana Yobst:

This is such an interesting post. I see the value of placing a STR in an LLC in my home state and keeping banking separate.

I've been advised to create a Wyoming LLC to hold my home state LLC since Wyoming is anonymous. My home state is not so anyone could see my name.  I'm trying to figure out if there is real value to the Wyoming LLC ..... 

 I'm in the exact same boat, with very similar advice from others.

[Dana Yobst]

Quote from @Ritesh Keskar:

Quote from @Dana Yobst:

This is such an interesting post. I see the value of placing a STR in an LLC in my home state and keeping banking separate.

I've been advised to create a Wyoming LLC to hold my home state LLC since Wyoming is anonymous. My home state is not so anyone could see my name.  I'm trying to figure out if there is real value to the Wyoming LLC ..... 

 I'm in the exact same boat, with very similar advice from others.

I've spoken to some more folks and I'm going to stick with an LLC in my property's state and skip Wyoming. For one STR with the right insurance, I don't think the potential (but seemingly unprovable) benefit is worth the extra bookeeping efforts.

[Ritesh Keskar]

That's good feedback. Thank you.

[Regina Saxton]

@Steve Smith do you create an LLC to be the beneficiary of the trust?

[Steve Smith]

Regina,

Maybe, but not necessary. I may us a "friend" that has an LLC, but will not create one just to be the trustee. I'll often use another trust to be the trustee. Also, there are services that will act as your trustee for property which is an excellent choice.