LLC vs TRUST vs Umbrella.....?????

[Bill Bob]

Did some snooping, LOTS of info on LLC and Umbrella policies.....
Honestly still cant pick which one is the better (no one seems to agree), but recently was suggested to try a trust....
The lady mention her parents did this as a protection to their assets to pass onto her. I speak with minimal knowledge towards trusts.

Will they protect in todays get rich quick society?

Thoughts...

Thanks,

[Lynn McGeein]

With the research I have done (I'm not a lawyer so no legal advice), our ultimate goal once we actually get settled is to put everything in a trust. If I remember correctly (it's been 2-3 years since I looked into it), the problem isn't setting up the trust, itself. The problem (read expense of time & money) is insuring the transfer of the properties in the different states where we invest into the trust and keeping it updated when we buy & sell property. But I have learned it is probably the best way to pass on our real estate assets without possibly triggering probate (and fees involved) in each state. Looking forward to other answers on here from people more knowledgeable than me, as we are finally getting close to settling down enough to get this done.

[Lawrence Ratliff]

I am not a lawyer but here is what I learned through asking the same types of questions. I am married with 2 younger kids, and have some assets, 2 large 401(k)s, savings, a few houses, etc. When looking at the bigger picture a living trust protects all your assets in the event me or my wife or both die, or become incapacitated because the assets are in the trust's name and the trust executor then ensures the assets are managed/passed as we wish. However they do not protect the assets if sued. That's where the LLC and Insurance comes in. If assets are held in an LLC and the LLC is sued then they can typically just go after those assets. Lastly the umbrella policy offers liability protection for you personally to protect you and your assets. In case I am in a car accident and I accidentally kill somebody the umbrella policy offers coverage. I have all three, Irrevocable Living Trust, an LLC, and an umbrella policy, they protect me in different ways. The LLC protects my from lawsuits as a landlord, the umbrella policy insures me personally, and if anything happens my wife or kids will automatically get my assets (living trust). It's not cheap but certainly worth it, when compared to how much I spend on other things as a Dad, Husband and Real Estate Investor. One doesn't replace the other.

[Ned Carey]

The answer is quite personalized. How much in assets do you have to protect? Are your assets all real estate or do you have other unrelated assets?

An LLC is not a substitute for insurance.

In rough order of importance

1. Run your business correctly and follow the laws
2. When a problem comes up correct it immediately and be respectful of those you do business with.
3. Have appropriate insurance.
4. Have an LLC that is properly run following the appropriate formalities

An LLC is not likely to give you the asset protection you expect. You are always responsible for your own actions even if done in the name of an LLC or other entity.

Trusts can be very good asset protection. However this is a very complicated area of law. You will find a lot of misinformation about trusts online. Especially land trusts.

You may want to serch for "piercing the corporate veil"

[Justin B.]

This is absolutely my personal opinion, but 99.9% of the time:

-- Anyone who says all you need is an entity is stupid!
-- Anyone who says all you need is insurance is stupid!
-- Anyone who says you don't need either is stupid!

I think you get the point :)

[Dennis Starkey]

Ned makes some very good points.

There is no one size fits all approach to asset protection. Asset protection, is sort of like pealing an onion. the more layers you have the better off you are, and the less likely you'll be an easy target.

Basically the more you have, the more is at risk, and the more protection you should have, vs. those who like to play it fast and loose, and assume nothing will ever go wrong. You need to gauge your own risk tolerance level, including all your personal assets. If you have little to no assets, you may not need much as far as asset protection, if however you have a lot of assets, you need take steps to cover yourself adequately.

As a minimum you should have your rentals in one or more LLC's, use them appropriately, all income & expenses flow through the LLC bank account ( yes you need a bank account, or your LLC will never survive the 1st probing by any attorney "reference Ned's piercing the corp veil above".

Just because you have an LLC doesn't mean you don't need insurance. Either a high level policy per property, or an umbrella, is your next level of protection.

Another, often overlooked, form of asset protection, "3rd layer" is having a professional property manager for your properties. If there was an issue, and you manage yourself, they can simply tell the judge "we told the owner and they refused to fix it." A property manager has no reason to not get something fixed that would be a liability issue, they keep logs, etc, and is basically what they do. Additionally they have their own insurance that would come between your LLC insurance(s) and you personally.

From there, depending on how much protection you want vs how much you'll willing to spend, or need to spend, there's more you can do, however you'll need to make your own determination... However do the basics first, or there's no point to do anything else.

[William Abanyie]

So it sounds like in order to protect my property I need to put it in a trust that is then put into an LLC, but make sure I have an umbrella policy that covers everything.

But step by step how would I do this?

I know the insurance portion can be done at any time but do I transfer my property into a trust first then form an LLC or form an LLC then put property in a trust that is owned by the LLC?

Please help 

[Aliz Raksi]

The next step, I think, would be to talk to an attorney.

I am looking for answers to the same questions. There is some great info in here, however, there is only so much research you can do on your own, at one point we will need to talk to an attorney who can help evaluate the different options and actually set up the LLC and the trust. Does anyone have any recommendations for a reasonably-priced attorney in the LA area with experience in real estate related asset protection, estate planning and irrevocable living trusts, etc.?

[Scott Smith]

The premiere in asset protection and anonymity for the California investor is the Delaware Statutory Trust. Delaware created it to prevent people from moving money offshore -- it is that strong. Also, since it is a trust, if it is properly structured and managed it may avoid franchise tax.

I'm happy to talk to you offline since these types of issues make up 100% of my practice. 

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[Rick Gannon]

I am totally new to this website and liking the detailed responses. I need exact same info what William asked for. Sorry about the long question .. but I hope it will help others as well..

My Situation: I have formed two LLCs. 1St: Property Holding LLC and 2. LLC that will contract with my actual property mgmt company and the Tenant lease.

Set up as below:

"Holding " LLC--> "Contracting" LLC"
--> External Property Mgmt Company--> Tenant

-----------
Currently the properties are in mine and my wife's name. I want to move them to an LLC for liability protection. I called my Title company and they said they can do a Quit claim and change the ownership to an LLC and no need to notify mortgage lender.

Questions:
1. Should I go ahead and change the Title to an LLC?
2. For Trust- Would LLC go in Trust or First I need to form a Trust? ( we would like to form trust so our kids get the assets smoothly)
3. Where to find " contract wordings" that can establish relationship between two of my LLCs?
4. How do you manage the profit between two LLC? Any best practices?
5. Am I even allowed to form a " Contracting LLC"? ( idea is to have multiple layers)
6. I have home insurance as well as Title insurance so .. would this " Umbrella policy " replace " existing Home insurance " policy? Or this " Umbrella policy " is additional coverage for the additional protection from lawsuits?
7. How do we establish additional member ( my wife) in my Holding LLC?
8. Any best practices around how the Business bank account should be handlers?

Regards,
Ric

[Edward Kanive]

I have extremely limited assets currently, but I am about to multiple my 60000$ income by 5-7 once my wife starts residency and I am a full fledged attending physician. Higher income, not just assets, would need protection too? Correct?

[Michael Norris]

What you are talking about is layers of protection.

I'm not a lawyer but I am an insurance agent and here is how I see it...

Layer 1 is preventative action - aka risk management. Make sure the property is up to code, free from trip hazards, repairs are done by professionals, select good tenants, have a solid lease in place, etc.

Layer 2 is a proper primary insurance policy - aka transfer of risk. This can be a personal type landlord policy, commercial policy or similar. At a minimum you need property coverage for the building itself plus liability associated with that location. That is the bare minimum of coverage and need to sort out if an RCV or ACV policy is best for you.

Layer 3 is an umbrella policy. You need a primary policy before the umbrella - this is not an either or scenario. Think of umbrella as "Excess Liability" insurance. If something is bad enough to exceed the liability limits of your primary policy then this is where the umbrella kicks in.

Layer 4 is putting your assets in a silo so that one bad incident can not take down the whole portfolio. This is where you see properties in LLC's, separate LLC's or Trusts. Both LLC and Trusts can be set up in a way to make it difficult for an attorney to find you and in theory protect your personal assets home, auto, etc from the LLC assets.

You could debate swapping #3 & #4 but either way you look at it they come after the first 2.

BUT - Having all of the above scenarios in place may not protect you from your negligence.

If you have a hack repair done to an electric panel, know about issues while taking no action and the house catches fire and people are injured or die. Your negligence can be the tool used to deny insurance coverage and to pierce all the LLC or Trust to punish you personally which is why layer #1 is so important.

[Scott Smith]

@Michael Norris hit the nail on the head. I get questions like this pretty often, but there isn't really a "one size fits all" answer. Some investors start from scratch and face minimal exposure and risk while others just get into real estate to diversify their portfolio. The real goal is to understand what asset protection really is, and how to combat it effectively. 

When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets.

1st 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.

2nd 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.

3rd 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 they 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- check out this article to learn more.

4th 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.

5th pillar is owning everything anonymously. If people don't know what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. 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 still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.

As you grow, you want to continue implementing more pillars to support your investments. There are also many more pillars that range from equity stripping to off-shore trusts and more. Once you get that far you will really want a pre-existing relationship with an experienced attorney. But for investors just kicking things off, this is how I explain asset protection.

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