subject: Protect Your Assets By Simplescreening.com [print this page] Many real estate investors assume that their assets are protected because they have insurance on their income & rental properties. Unfortunately, they are dangerously wrong. For a long time now, judges and juries have been awarding outrageously large judgments for personal injury lawsuits and there is little chance that this will change in the future. In fact, judgments will likely increase at least as fast as real estate values. One million dollars of liability coverage under a basic rental policy, even when there is an additional one or two million dollars of umbrella policy coverage, doesn't help much if a judgment is 5 or 10 million dollars.
Insurance coverage is necessary and provides protection against many risks, but it is usually cost-prohibitive to attempt to fully protect all your assets against every possible risk with insurance at a cost that is practical. Even if you spent the money in an attempt to cover the worst-case expected claim, you could still discover in the end that it provided inadequate protection either because the judgment is millions of dollars more than the coverage or because the matter being litigated is not even covered by your particular insurance policy. For example, few insurers will currently write mold coverage.
How well you survive a major lawsuit related to one of your rental houses, apartments or properties can depend entirely on how ownerships of the rental properties are vested. Vesting of a property is the form of ownership of that property, that is, who or what entity is shown as grantee on a deed.
When income properties are held in the names of individuals or in entities for which individuals have personal liability whether vested as a single individual, joint tenants, tenants in common, community property, general partnership, limited partnership (for general partners), or a revocable living trust the individuals are at risk in the event of a judgment resulting from an event related to any one property owned by the individual. Assets at risk include all rental properties, personal residences, stocks & bonds, bank accounts, and all other personal property of value (jewelry, furnishings, antiques, art, autos, boats, etc.).
A variety of limited liability entities are available in most states that can provide significant protection to investors. Typically, these are:
>> Corporation,
>> Limited Liability Company (LLC),
>> Limited Liability Limited Partnership (LLLP), and
>> Limited Liability Partnership (LLP).
Currently, both operational and income tax issues favor the LLC as the vesting entity of choice for most investors.
Of additional significant importance, it is usually best to have a separate LLC for each property. The reason for this is that a large judgment against an LLC resulting from a claim against one property owned by the LLC would result in all other properties owned by that same LLC being available for satisfaction of the judgment.
We advise you to seek competent professional advice regarding issues that are specific to your own asset protection and other risk management needs. However, it is to your advantage to have a good understanding of the issues prior to doing so.
