Umbrella Policy or LLC for out-of-state California investor?

Question

So, an answer I received in an earlier post inspired me to focus on Asset protection, but I am stuck on what to do... if you were me what would you select out of the 2 options below? I am leaning more towards the first option for now since I am still small and may be changing to option 2 when I get 10 properties.

1- Simple and probably more cost-effective, I could purchase an umbrella policy

2- create an Asset protection structure (each property in a land trust, trust Beneficiary is LLC, remember I live in California so that gets expensive no matter where I file the LLC)

Teddi Tanitsky · Answer

@Patricia Becker in addition to the points made by other commenters, one great pro of an umbrella company is if you get sued and have an umbrella policy, the insurance company's lawyers will handle the suit as long as it falls under their coverage...and insurance companies don't like to pay out money! Plus, they help with the hassle factor of coordinating everything and the mental load. Even if you do the right thing, people can be a little crazy sometimes and having the insurance company as part of your team in the lawsuit can be very valuable vs. having to find and coordinate a lawyer on your own.

Justin R. · Answer

CA out of state investor here as well.  After years of research and many talks with attorneys this is what I suggest. Don't forget everyone is in a different position so keep that in mind.

1. Do the right thing, and don't let an unsafe situation manifest.

2. Be property covered in your landlord insurance.

3. Have some sort of debt/leverage on the property.

4. Be anonymous and get a property manager.

5. If you have the personal assets then get a good umbrella policy.

6. If you have a decent amount of wealth that you want to protect, get an LLC or DST. Don't think an LLC (Especially a single member LLC) keeps you safe. The biggest benefit is anonymity, and its an extra hurdle for an attorney to pierce. If you live in CA, a DST can be a better option. Not cheap to set up, but much cheaper than several LLCS over the course of a few years.

Megan Templeton · Answer

Hi there! Ultimately, I would recommend both. A good way to think about it is that insurance is a good secondary layer of defense but with a proper entity, a lawsuit would never get past your first layer. Insurance is a business so ultimately adjusters are going to look for ways to deny pay outs in certain situations. I wouldnt chance your asset protection to loopholes. If you ad in an entity with your insurance plan, you will have multiple layers of protection.The issue you will run into with an LLC while being a CA resident is that you will have to pay the yearly $800 franchise tax. The Deleware Statutory Trust (DST) is a great option to avoid the franchise fee - its is a business trust that provide operates similarly to a series LLC. You will be able to set up the DST with a one time filing fee and paperwork with DE and then will be able to create unlimited child trusts underneath the parent DST (child DSTs do not require any additional filing fees or state paperwork). By using the DST you can save on costs but also have a structure that is scalable as you will be able to put one property into each child trust so you have liability compartmentalization. DSTs can also be useful for 1031s and other assets. It also helps streamline operations by allowing you to use one bank account, on set of records, etc.

Frank Chin · Answer

Some years ago, I owned a number of MF's and bought myself a business. Spoke to insurance agents and attorneys about the best way to protect myself. The advice I got was to rely more on umbrella insurance.

Reason was I bought a small business and found out the owner was sued by a customer personally for over $3 million dollars, but his S Corp only had coverage for $1 million. He was also sued personally. Checked with my insurance agent and made sure my umbrella was $3 million, it was, and also covers me personally. Asked about $5 million but was advised it's not really necessary. Each million at the time would run a few hundred a year more.

As far as LLCs and multiple LLC's covering me, advised it won't do much. Several attorneys and insurance agents advised litigants always sued the owners personally, particularly smaller owners. So even if you establish a dozen LLC's. they win the lawsuit against you personally; you own the LLCs. all the LLC assets are at risk.

Attorneys tell me the litigants sue on the basis of personal negligence, not for issues like co-mingling assets. That's why if you use PM's, they're insured, you'll mitigate your risks. But that's expensive.

The good news is the owner of the business I mentioned earlier retired to FL, put all his money into his retirement home and unbeknownst to him made himself immune from lawsuits because FL homestead laws gives homeowners unlimited protection. He didn't know that. But I got a got laugh when employees of his, whom I took over were summoned to depositions and the litigant attorneys went crazy when they learned the former owners moved to FL from NY and bought a home. He yelled "oh NO". They settled for $1 million.

Patricia Becker · Answer

@Justin R. 1. I always do the right thing, it's my investment and I want it to shine. 2. check, it is covered. 3. working on the leverage, currently they are all paid in full 4. I do have PM companies, but looking for a replacement. (doesn't quite make me anonymous though, one of my tenants found my number and called me to update me on how bad the PM is. 5. I think the Umbrella is becoming a necessity at this point. 6. I would only have one LLC, and then the land trusts in the LLC, not sure if that is better protection than the umbrella, I understand the layering deterrent though. sound advice on all points, thank you.

@Allan C. the properties are 100% paid in full so a decent amount of equity (trying to refi now to leverage more properties) is not quite in Multi Mill status though... not yet anyway. I deff do not want a separate LLC for each one, I agree it would be a bit overkill, thanks for your comment, I think the umbrella is the way to go at this time. I have a meeting on Tuesday with the Trust attorney so we shall see where that goes.

Mio Chee · Answer

Patricia, my husband is an insurance agent in Hawaii (he can only sell here in Hawaii), and he is aware of companies that sell umbrella only (you do not have to have auto, home, etc with them). I believe IRA is one of them. I am sorry if I am wrong, it has been a while since I last shopped around but it may be worth checking

Patricia Becker · Answer

@Frank Chin That is a crazy story... and would be such a stressful thing to go through, I think layering with the land trust and an umbrella policy is probably the best route for me at this point, I am starting to see less value in the LLC, but may consider it for tax benefits later down the line.

@Teddi Tanitsky I definitely see the plus on umbrellas, the hard part is finding one, the ones I have talked to so far require you to either have the auto or home insurance with them prior to opening an umbrella. and the requirements around personal liability are higher than what I have currently. but I am all for someone else handling that litigation for me... not my area nor do I really want it to be.

@Mio Chee set up is for sure a hard thing to look at, I would love to set up the Aanonimity but it seems diluted and hard, anything that seems that complex to hide your identity just doesn't feel right, hence how easy it is to pierce the vail. but I do believe in the deterrent to keep their form digging too hard. I have a bit of a security background and the main principle is 4D's Deter, Delay, Detect, Denay access to your assets, I would think the LLC anonymity falls into the Delay category.

Mio Chee · Answer

A litigation lawyer once told me that he can pierce the corporate vail 9 out of 10 times because many ppl structure their LLC in a wrong way and/or commingle funds. The turn key company I have been using for the last 7 years used to advise me to use LLC, but now they recommend people to buy umbrella policy instead (and hold your property under your name) because they also realized how easy it is to pierce the corporate vail.

Allan C. · Answer

@Patricia Becker maybe consider one LLC for the properties that you’ll hold free and clear and keep the others that you put under a loan within your personal name. This way you only pay one CA FTB fee, while using umbrella insurance to cover the remaining assets under personal name.  You also get better financing with a residential loan vs commercial one to the properties in a LLC.

Allan C. · Answer

@Patricia Becker the number of properties that you have is less important, but rather the total equity you have in the properties. Is your second option a separate LLC for each trust/property? If so, that seems like overkill unless you are trying to shield multi-$M net worth. May be more practical to go umbrella route.

Umbrella Policy or LLC for out-of-state California investor?

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