Hi there. I must say there is some really great information in these forums. Major thanks to all who have contributed!
I am a reasonably seasoned REI, but have amassed a number of properties to the point where I need to setup a structure for this. I have spoken to what seems like dozens of so called ‘experts’ in Asset Protection. Mainly law firms trying to sell a $20K ‘product’ that doesn’t really seem to fit me. Most have some form of offshore component, but for me all I really need is the following.
I rent properties that we own. I don’t want one of my tenants deciding to ‘get back at the landlord for evicting them for non-payment of rent by doing a slip & fall’. My tenants don’t have much money. If they did, they would own property rather than rent from me. But they probably have a brother-in-law who knows someone who knows someone who is an attorney. And my concern is that if that attorney is light on work, I don’t want my tenants to become clients of a contingency lawyer who will take their case because its ‘easy pickings’.
It would seem that most people who own property in their own name would fall into the ‘easy pickings’ category. But I may be wrong on this. I read that people are suggesting buying insurance for this sort of thing, and I’m open to that. But wouldn’t setting up a structure of LLCs that own the title on properties that are then owned by Limited Partnerships, etc. send a clear message to any lawyer that this isn’t going to be a simple process and therefore would be less incentive for them to take the contingency case? I know that if my tenants were forced to come up with $5K as a retainer for a lawyer, they’d back off on some frivilous lawsuit.
The problem seems to be that my tenants have way too much time on their hands to watch Judge Judy than they do to go out and get a job. Hence they get evicted.
So what do you guys suggest? I read your posts regarding piercing LLCs, etc. and I hear ya. But I also think that a certain amount of this may be, and don’t take this the wrong way but, a bit of “I’m smarter than you and I can tell you that I can pierce your LLC faster than you think” speak. Nothing wrong with that, but in general reality is it worth the effort to invest in any estate planning or asset protection or just buy insurance?
And if buying insurance is the way to go, who sells this? What is the name of the insurance policy I should get a quote on?
Thanks for your time and I appreciate any responses.
Stay away from offshore anything. Those plans require the movement of assets out of the jurisdiction when trouble comes and real property cannot be moved. IRS reporting requirements are draconian and carry punitive penalties for innocent mistakes. Be prepared to spend some serious money for maintenance if you plan to go offshore. Even if you go offshore, no judge has ever refused a repatriation request since Anderson. You either give up the assets, leave the US, or spend 6 years in prison. Offshore entities are for folks who actually conduct international business.
Insurance is a key component of any plan you devise. It is not a substitute for planning and planning is not a substitute for insurance. Insurance is the second line of defense in your plan. The first is keeping your properties in top shape, taking care of maintenance issues quickly, and treating tenants with respect. I didn’t say let them pay late or destroy the place. You create a set of rules, explain them to tenants so that they understand them, and enforce them uniformly to everyone. That will keep you from getting sued in the first place. The cheapest lawsuit is the one that is never filed and the key to that is to be consistent in your application. For the cheats looking to take advantage of an accident, insurance provides the pay off money to make them go away. Most PI lawyers who work contingency will take the insurance limits and move on. They don’t want a long court fight where they have to put up money to bring the case. More insurance is not necessarily better. The vast majority of lawsuits are settled for less than $1M. Anything more is not necessary unless your assets are in the $20M range.
Keep in mind most insurance does not provide anything for excess judgements, mold, lead paint, and discrimination. Planning can help protect from these situation and 20K may not be unreasonable depending on what you get and the size of your assets. A good planner is going to look at tax minimization, business continuity, retirement planning, estate planning, and asset protection. He will work with experts in those fields to create a custom solution for you. The cookie cutter plans pushed by most gurus are junk. DIY kits are not appropriate for a seasoned investor and a single entity like an LLC is insufficient. It will take a combination of entities and structures to give you what you need. That will take a team of people and cost real money. If you can’t afford it, then you don’t need the planning. Good planners will give you an initial consultation and explain what they can offer. They will explain why they recommend what they do and how to use it effectively.
I stay away from anyone who uses the terms bulletproof or protecting 100%. It is not possible to protect everything. I don’t like anyone that will not discuss taxes and estate planning. Run fast and far if they push an AP product without discussing your overall financial situation and will not do long term planning. Good planning covers many areas, not just one. My opinion is that planning should focus on minimizing taxes, not protection from lawsuit. We all pay taxes. Not everyone is sued. Good tax planning has can have signficant asset protection benefits when set up properly.
Much appreciated. We have been renting properties for over 10 years now, and I do have international business (we have properties in 5 countries and I’m originally from Australia so International business is a normal ‘day in the life’ for me). But with that said, I don’t want any red flags with the IRS and I agree that no ‘product’ for asset protection is going to be good here.
In regards to the insurance policies that you mentioned, if I went shopping for such coverage, what should I ask for? Do you know of insurance companies that are ‘landlord savvy’ for this and who has competitive policies for this sort of thing?
Most LLs have a dwelling only policy with a liability rider of 300k to 500K per property. They purchase an umbrella polilcy with $1M or more in coverage depending on the total value of the assets. A good insurance agent will review your existing coverage and recommend a policy for you.
Do they have a name for this type of policy? I’ve gone shopping to insurance agents before for this sort of thing, and when I ask them about it I get the “Huh?” response.
It’s called a LL policy or dwelling only policy. The umbrella policy is called an umbrella policy. I think these terms are pretty standard in the insurance world and your insurance agent should be able to tell you the correct terms in use in your area once you explain what you want to do. I would not do this kind of thing on the internet. I would find a local independent agent and actually meet with him.
Thanks again. We have many of our properties in HOAs where the HOA insurance policy covers things like fires, roofing, etc. Do you think that with the properties that are under HOA, that just the umbrella policy would be sufficient for what I need for general coverage?
Umbrella coverage is not primary coverage. It kicks in after the primary policy limits are reached. I don’t buy properties with HOAs or condo boards or any other type of governing body. I would have to defer to a local insurance agent at this point.
just to add a few things (in no particular order)
when considering insurance, remember grannie got $10,000,000 for spilled coffee. Million dollar umbrellas aren’t really much any more.
you are correct in your first post that throwing up hurdles makes it less likely that an atty will take a case. Not to bash bloodsucking attys (I think BLL may be one) but the ambulance chasers are looking for easy pickin’s. If they search your name and find no assets, search the property address and find an LLC, with no other assets and a mortgage or lien, they know that they are going to have to work harder to find assets to get. work = time and time = money. money = they’re going to ask Sally Slipenfall for a retainer. She doesn’t have $5,000 and it goes away.
the goal is to separate your assets from risk. you deal with people, so you are a risk. so don’t own any assets in your name.
the basics aren’t complicated, but when dealing with an “empire” such as you have, you need a coordinated plan that includes estate planning, tax planning, transfer of ownership if desired, life insurance, disability, long-term care planning, the whole 9 yards. It’s worth a few bucks to have it done right.
Go ahead, Mark. The bloodsuckers give the whole profession a bad name and don’t really add to society. I think it’s good that lawsuits have brought consumers safer products, but there needs to be some kind of mechanism to prevent frivolous BS from getting into the system.
P. S. I am not a personal injury or plaintiff’s attorney.
Thanks for all the valuable information here. I spoke with our insurance agent today, and happily found out that the person I was speaking with also was an owner and landlord of properties, and she knew exactly what I needed. So I am getting a quote for this right now.
She is telling me that its likely to be around $300 a year per property for LL insurance, which works out to about $25 a month per property. At that price, I can definitely justify this. She also recommended an umbrella policy as well, which was quite inexpensive.
So I’m going to do a two-pronged approach on this. LLC ownership for all properties (its inexpensive here in AZ to register and setup), with a LP/Family Trust for our personal assets. And insurance coverage in case of unforseen disaster like this. I believe that should do the trick.
Doesn’t sound bad. I would just caution you to use a person who actually knows what he is doing. If you can’t find someone, use a local attorney and tax guy you trust to act as a buffer between you and the national planners.
EXCELLENT discussion so far! I hope the less-experienced members read and re-read this dialog. I’ve spent 20 years investigating and learning the various aspects discussed but still have questions. The laws keep changing so you have to remain flexible enough to change your structure accordingly.
Doing “something” is better than doing “nothing.” You lock your house in hopes that the burglar tries the next house that may be unlocked.
If you can structure your holdings such that each property stands alone, you avoid the domino-effect. You may loose that property in a law suit but most likely you won’t loose your entire empire. Keeping your personal name off public records is equally important. The reasons are well-discussed above.
For real estate holdings, offshore trusts don’t make much sense for most people but they do fill a need. Yes, these rules have dramatically changed also, but you play according to the rules. You don’t have to like the rules, but you’d better play by them for your own protection.
So I’d summarize this excellent discussion series by advocating:
Buy a landlord insurance policy on each property plus a liability umbrella policy overall.
Use whatever title procedure that best suits your personal needs: Land Trust; LLC; Corp; FLP.
Pay attention to the maintenance and condition of all your properties all-the-time. Insist that your managers minimize the opportunity for Sally Slipnfall to claim otherwise.
Try to screen-out the Sally Slipnfalls before they get into your properties in the first place. Plenty of background-check services available for this procedure.
Treat all your tenants with dignity and respect. You don’t have to drink beer with them to be considered a friendly land lord. Defuse any/all misunderstandings as quickly as possible. Admit it if/when you are wrong and fix the problem immediately. Don’t make promises you can’t keep and do keep the promises you make.