Protecting your assets is one of the most important things a real estate investor can do. And ready-made options don’t work. Asset protection really does keep you and your investments safe, so you can’t ignore the threat.
Mistake #1: Not Understanding the Choice of Entities.
There are many possible methods of owning real estate, including in your own name (not recommended), or with a business entity (such as Limited Liability Company, corporation, General Partnership, Limited Partnership, Family Limited Partnership, Limited Liability Limited Partnership, etc.). There are many different reasons why one entity would be the best for your particular situation, including protecting your assets/equity/investments, tax ramifications, liability concerns and many other factors. However, asset protection is not a “one size fits all” proposition but is instead a unique (to you) planning opportunity. Not fully understating the differences in the potential choices can be a costly mistake.
Mistake #2: Not Understanding the Importance of Privacy.
Privacy is important when it comes to protecting assets because it discourages lawsuits. Think about it. Who do you think a plaintiff’s lawyer (who only gets paid if he wins a case and collects) will be more excited about — (a) a defendant who has no trace of owning any property according to the internet, or (b) a defendant whose name appears on multiple LLCs and other properties? Obviously you will be more likely to sue the person who has easily identifiable assets to go after once you get a judgment. However, maintaining privacy is increasingly difficult to maintain in today’s internet-based world. We can help you maintain privacy using a combination of various legal structures.
Mistake #3: Lack of Coordination with Other Plans.
An asset protection plan should not be created in a vacuum. Instead, careful planning must be done to coordinate any asset protection plan with the current tax laws (for tax planning) and estate laws (for estate planning). The failure to do so can create situations with unintended consequences, nearly always for the worse. A coordinated plan, on the other hand, will function well in all three areas of planning concerns.
Mistake #4: Having a Grantor Trust/Single Member LLC own Rental Properties.
A grantor trust is a revocable trust and is often associated with estate planning, such as a living trust. While this may be excellent from an estate planning perspective, it provides absolutely no asset protection (the grantor of the trust- i.e. you- will still have personal liability). The same can be said of a single-member LLC in which you are the single member. Most states severely limit (or eliminate) the asset protection benefits of a single member LLC. In addition, many states allow additional remedies for a creditor in addition to a charging order. For example, California allows a court to charge the LLC interest; appoint a receiver; order foreclosure; and make all other orders, directions, accounts and inquiries the judgment debtor might have made or the circumstances require. If you are going to use this type of entity, make sure your planning at a minimum includes the consideration of using a business entity as the single member.
Mistake #5: Doing Nothing.
Unless you have no assets to protect or are unconcerned about potential future lawsuits, you need to take steps today to protect yourself and your lifetime of earnings. Many people get overwhelmed by the process and do nothing- which in many cases can be financially devastating. If you do not feel competent to handle this on your own, you should consider seeking the services of an attorney or other professionals who can assist in your overall plans and help you achieve your financial and other goals.