During these times of COVID-19, many investors find themselves at home with less work to do and more time on their hands. This is a good time to take care of tasks that you’ve been postponing. Examples of types of tasks to consider include an in-depth analysis of each of your real estate properties in search of new income streams or ways to reduce expenses. Another frequently postponed task is establishing a trust to remove valuable assets such as real estate from your personal estate. Here, we take a look at ways you can protect your investment business from legal lawsuits and financial claims.
If you are invested in real estate, you should already be aware that you have a higher risk of becoming the target of a lawsuit in our litigious society. According to the American Bar Association, the total number of civil cases filed in state and federal courts now exceeds 20 million cases annually. As a real estate investor, your need is very real to legally protect yourself and your assets. I’m not an attorney nor an accountant. I can’t nor do I want to offer you legal or financial advice. And certainly, I can’t possibly know about your specific situation. You should obtain competent professional advice to help you legally protect yourself and your business assets.
Fortunately, there are options for protecting your interests but all cost some money. As a small business owner, three worth considering are:
Your assets might be best protected by one of these, a combination, all of them, or something completely different.
The Limited Liability Company (LLC) serves several purposes but one of the main ones is separating your personal assets and other business assets from your real estate holdings. You establish an LLC at the state level. You don’t need an attorney to set up an LLC but it might be a good idea. LLCs are relatively inexpensive to set up.
The general intention is to establish a separate entity (almost another legal person) as the sole owner of the business asset and you as the owner of the LLC. The concept is that awards for a legal judgment against the LLC are limited to the assets held by the LLC. Your personal and other business assets are not considered for legal judgments against the LLC. There are certain rules you must follow to keep the assets legally separated such as not using business assets for personal use.
You will need to make decisions about how the LLC operates financially. Generally, it can be set up with a corporate financial structure that can involve double taxation when income is first taxed on the LLC and again on your personal income taxes. However, many people set the LLC up as a pass-through entity that is only taxed on your personal income. Another common practice is placing each real estate property in a separate LLC to legally separate each of your properties. You can learn more about this by visiting your state’s Secretary of State website and looking for a link saying something like “Starting a Business”.
A Land Trust is sometimes used if you want to further disguise the beneficial owner of the property. A land trust is a revocable living trust used to title ownership of real estate. Title to the property is held in the name of a trustee, who is forbidden to reveal the beneficial owner. The "beneficiary" can be an individual, corporation, or other entity for further protection. If a judgment is entered against you, a lien will not automatically attach to the property, since the title is not in your name. Not all states specifically recognize a land trust. However, in almost all states the validity of land trusts is supported by common law and general trust principles.
An Umbrella Insurance Policy can be a good alternative to a separate business entity or used with a separate entity. These policies are not that expensive and will provide close to the same protection against lawsuits as LLCs will. If money is an issue, this is a good option to take since it offers the same protection benefits and usually entails a much easier litigation process in the case of a lawsuit.
The time to begin protecting your real estate holdings is before you take ownership. If you haven’t already done this, it’s probably still not too late. However, it’s almost always too late after a lawsuit is filed against you personally.
What tips for legal protection can you offer? Please leave a comment.
Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].