Asset protection and umbrella policy

[Kulin Dakwala]

Hello BP Community,

I am at New Jersey and kind of a beginner to RE investment world. So far I do have one SFR that's located at Michigan. I am exploring various asset protection options to protect my personal assets as well as one rental. I do have couple questions:

1. Is creating a land trust and LLC a better option? Is it worth to bare maintenance costs? I consulted couple firms and they provided a structure but that's going to cost me around 7K and other annual maintenance of 2K. I maybe wrong but doesn't make sense to me as just have one property as of now. Please let me know your thoughts / other options.

2. I am planning to get umbrella policy that covers my personal assets as well as rental. Any suggestions/guidelines for coverage amount? I appreciate if you could recommend any agent that you are working with.

Thanks in advance.

[Scott Smith]

@Kulin Dakwala I agree with Nathan that being an ethical and honest person is of upmost importance, however, disagree that insurance is all you need.  A real estate investor has a higher chance of being sued than your average joe.  This is why there are asset protection firms and attorneys.  True, the level of protection is going to vary for case to case and depends on what you feel is right for you. 

When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I 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(maintain your property, etc) - 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, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend 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 for FREE. If you're interested in using an LLC, this article also further explains the advantages of a Series.

The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

The fifth pillar is owning everything anonymously. If people don't know that you have assets, then they are less likely to sue because there's no use in suing people that qualify for food stamps. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn't matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.

I would really just take your time and consider all factors as you make a decision.  There are some helpful articles right here on BP that are a great resource.  Here is one that discusses insurance vs asset protection: https://www.biggerpockets.com/blog/insurance-asset-protection/

- Scott