Business Management

5 Ways to Protect Real Estate Assets & Avoid Lawsuits

Expertise: Business Management, Personal Finance
43 Articles Written

Today, I wanted to make sure everyone here had access to some basic yet essential asset protection information. It doesn’t matter where you are in your journey to defend your assets: these are the concepts that can keep you out of unnecessary legal trouble.

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Regardless of which specific tools you end up needing, a thorough asset protection plan should at least include the features discussed below. Let’s break down the five basic pillars of asset protection, which you can view as a road map for how these plans defend your hard-earned assets.

Pillar #1: Avoid High Liability Situations

Yes, a healthy dose of common sense can actually start your asset protection plan off on the strongest possible foot. Part of avoiding risky situations is being aware of when you are at risk at all. In general, transactions are risky times for investors, as are new ventures and many other situations. But there are also business practices you can use to avoid liability—specifically, that nasty stuff that fuels lawsuits.

Some high-liability situations, such as being employed as a physician or police officer, cannot be avoided. So avoid the ones you can.

Don’t go in on risky ventures, always perform your due diligence, vet anyone you work with, and go out of your way to do good business. This is essential for doing your part in your asset protection plan. 

Related: Buying? Selling? New to the Business? Why You Need a Lawyer Now

Pillar #2: Insure Investment Properties Appropriately

While we’re the first to tell you insurance isn’t the same thing as asset protection, it is an important part of your plan. Each of your properties should have a suitable insurance policy, whether that’s a typical landlord policy or specialized one for your asset class or market’s issues.

Insurance does one crucial thing from an asset protection standpoint that we as investors need: it prevents frivolous lawsuits. You didn’t really think all 15 million lawsuits filed in the U.S. every year were valid pursuits of justice, did you?

While your insurance company has clear limits on what they won’t help you out with, they knock out the low-level “nuisance” lawsuits that could clean out an unprepared investor. So again, insurance is not your total asset protection solution, but it is a critical first step. Speak with an expert you trust about the appropriate policies for your properties if you haven’t already.

Pillar #3: Compartmentalize Your Assets Using State-of-the-Art Structures

Your next goal is to use the strongest legal structure that is appropriate for your situation to compartmentalize, or separate out, each of your assets. Depending on where you live, this may be a traditional Limited Liability Company, Series LLC, a Delaware Statutory Trust (hello, California!), network of anonymous trusts, or a combination of the above. 

The point is, you will have an entity whose primary job it is to isolate assets from one another and you personally—all while keeping them in “separate” legal creations. This strategy is ideal, as it allows you to minimize risk as much as possible by preventing a lawsuit threatening one asset from affecting your others.

As an asset protection attorney, I’ve seen many clients use clever business structures to stop lawsuits in their tracks. To accomplish the best protection for you, it is critical to speak to an attorney about which of the possible asset protection entities is the most compatible with your location, personal goals, and means.

Related: Asset Protection in Real Life: How My Client’s Strategy Avoided a Lawsuit

Pillar #4: Split Up Assets Versus Operations

For the purpose of clarity, “assets” refers to any material holding of or gain from your business. “Operations” are all of the day-to-day things you actually do. If we really look at where lawsuits come from, beneath every story is usually someone who failed to realize that most liability happens around operations. That’s why the easiest, most elegant solution to this issue is to simply use an operating company.

An operating company owns nothing. It just makes moves. Generally, we recommend the use of the Traditional LLC for many investors’ operating companies. Then ideally, the investor will have an entirely separate holding company, such as a Series LLC. If pulled off correctly, the two never cross paths. The assets are protected from the potential problems, essentially, under these types of company structures.

Pillar #5: Preserve Your Personal Anonymity

If you followed every step up to now, you’re well on your way to a solid asset protection plan. But you can supercharge its lawsuit prevention powers and personal protections by taking steps to preserve your anonymity as an investor. Some of the things we can do are common-sense behaviors, such as behaving appropriately online and on social media.

Other times, we need bigger guns. There are, thank goodness, some great legal tools for preserving the anonymity of property and company owners. One of our personal favorites is the Anonymous Land Trust, which can be used to obscure company ownership as well as property ownership. This means that anyone pursuing a lawsuit against you will need to invest money into discovery before even getting started in a lawsuit against you. With nothing to gain and a higher cost associated, you become a righteous pain to sue.

But that’s the whole idea, really. With the power of all of of these pillars combined, your structures and strategy will stop lawsuits at the perfect time—before they even begin.

Thanks for reading! Do you have any questions or insights? 

Please feel free to continue the conversation in the comments. 

 

Scott Royal Smith is a real estate asset protection attorney based in Austin, TX. His firm, Royal Legal Solutions, designs asset protection strategies exclusively for real estate investors. As an investor himself, Scott is sensitive to the needs of real estate investors; as an attorney, he maintains a working knowledge of the best legal strategies available for preventing lawsuits. Connect with Scott here on BiggerPockets or visit his website, www.royallegalsolutions.com, for more information about asset protection for real estate investors. Check out all of Scott’s previous work for BiggerPockets here.

    Clay M.
    Replied 5 months ago
    Hi Scott, What are your thoughts on a revocable living trust in place of the anonymous land trust? I’ve heard (and am attempting to find good books on the subject) a revocable living trust is a great legal structure to house LLCs, S corps, self-directed retirement accounts, etc. Any insights or book recommendations are greatly appreciated!
    Peter Roehrich Developer from Hyattsville, MD
    Replied 4 months ago
    If I may add, I have read as well as been told by attorneys to NEVER use a business LLC (I assume this stands for other entity types as well) for personal activities. That means no buying toys on the company credit card or distributions not in keeping with the operating agreement, etc.
    Ari Bachrach Rental Property Investor from Silver Spring, MD
    Replied 4 months ago
    Regarding point 4, how exactly does this work? So let's say ABC holding company owns the property and ABC operating company is doing the operations. Who signs the leases? Which collects rent? Pays contractors? Pays the mortgage? Gets the mortgage? Thanks