I am seeking some quick advice on structuring my investment life properly. I fully intend to speak with a professional before making any decisions, but I would appreciate some opinions so that I can mull over some options first.
My main goal is to build a real estate portfolio over time. I bought my first property a year ago in my own name and I am preparing to move ahead with another purchase. I also intend to do some wholesaling along the way.
Following the advice of BLL and mcwagner, I am not really inclined to form a business entity (partly because I am military and would be moving all the time so the hassle and expense of resident agents would kill me). However, I am a bit concerned about some of my other assets.
I am the beneficiary of a trust that has real estate holdings and some equity to it. I don’t want to expose the assets in that trust to any more risk/liability than is necessary or prudent. Does it make sense for me to consider incorporating now to at least try to limit the liability exposure to the trust’s assets? Or is liability insurance sufficient? I realize that I can’t save myself from myself (car accident and the like) but I would like to save the trust from the tenants as much as possible.
I have no intention of managing my rentals myself so I will hire a property manager.
Are there any liability issues that I should be worried about when doing some wholesale deals? Would a business entity offer any protection in those cases or are we back to the same issue of being responsible because I was the one negotiating the deals?
Any advice that anyone can offer would be greatly appreciated. Thank you.
Is the trust irrevocable with spendthrift provisions? If so, the assets are safe from creditors.
Most cases settle for the insurance limits regardless if entities are involved or not. News flash: lawyers sue before they do an asset search and having an entity makes them think there is other property.
Trust assets are exposed if you are part of the deal. Incorporate for rentals that are managed by someone else.
You are responsible for your own actions. No entity or set up changes that fact. Entities protect other people. They work well when you have a partner that screws up or you have someone else manage your rental property.
They prevent the trustee from giving you trust income or assets whenever there is a creditor threat. There’s no easy way to add them now if they aren’t part of the trust agreement.
It actually doesn’t make much sense to incorporate if you own the entity and manage it. Incorporation makes sense for your situation.
Asset protection is not a substitute for liability insurance. Even with an entity structure, you still need insurance. Increasing the liability coverage to $1 million on your rental property insurance policy is very cheap, probably will add $25 to your annual insurance premium
Since you are in the military, and will likely end up owning property in states where you don’t reside suggest you consider probate avoidance in your planning. At the very least you want to have your investment real estate held by your own revocable trust to avoid probate in the state where you reside and ancillary probate for all your out of state properties.
I further suggest your pimary concerns should be wealth preservation, minimizing estate taxes, avoiding probate, and maintaining continuity of business operations in the event you die. A well structured estate plan may address your liability exposure concerns as a side benefit.