LLC or Umbrella insurance?

Question

BPs community,

I recently went under contract for our 3rd rental property.  I know as we get more and more properties we are under more and more risk.  My question is, is the best way for us to avoid risk to set up LLCs or merely get and umbrella policy to cover us?

Michael McDevitt · Answer

I have had an LLC in the past to hold rental properties.  Now, I just have plenty (more than enough!) insurance.  It is easier and I feel that I am protected better with insurance than an LLC.  Plus, I don't have any of the headaches related to holding properties in an LLC.

Nada Mohamed · Answer

Depending on your situation, I typically would advise to get both. They are not mutually exclusive. An umbrella policy is great because although an LLC can protect you from losing your personal assets if/when the situation arises where you are liable to a tenant for whatever reason (not too common), umbrella coverage is added protection that I think, when it comes to liability, is probably the better route to take - again, purely for liability purposes. Both together are the best because there are benefits LLC provide that an umbrella insurance policy simply cannot. Two major benefits that are often overlooked by investors I speak to on a regular basis that LLCs provide that an umbrella insurance policy cannot are:  (1) anonymity, and (2) ease of transfer upon your death. With regards to anonymity, unless your LLC is in your name, it will be difficult for anyone to know you actually own this property. It is nice to have assets that the public cannot simply search for your last name and discover on a county or city database search. Regarding ease of transfer - LLCs do not go through the typical transfer process (probate court) upon your death, your terms in your entity agreement will determine the outcome of who gets what. Some people opt to just put their properties in a trust to get this benefit of avoiding probate - but an LLC is better because it does provide liability protection as well.

Best,

Nada

JD Martin · Answer

Depends on how many properties you want to own, whether you have any cash in them, how many insurance policies you are willing to have. I have multiple insurance policies because the insurers (at least the ones I've worked with, i.e. USAA, Allstate, State Farm, etc) have limits to the number of homes they will cover under the umbrella policy. At some point, if I decide to keep growing, I am probably going to lump everything for simplicity sake.

If you have little to no cash in the properties, I wouldn't worry about doing an LLC. Just get a good insurance policy and high PUP.

Jason Bott · Answer

@Kyle Myers a few things to consider in your decision.

You can easily purchase an additional $1,000,000 of additional liability for $400 per year to go over all of your properties.  $800 for $2M, $1200 for $3M, etc. This premium can be less if you have your home and auto insurance company is willing to offer you this umbrella over your personally owned properties.  You may want to do this while you talk to your lawyer, banker & accountant about the ramifications of an LLC and your current situation.

An LLC will protect your personal assets from claims on your rentals.  But you may still want to purchase an Umbrella over the LLC's to protect the equity in those LLC's.

David Dachtera · Answer

The recommended business entity structure has properties held in one or more LLCs, depending on the equity value, an S-Corp thru which you can draw a 1:2 salary / dividend split and a revocable trust with a 3rd-party trustee and you as the beneficiary. The trust owns part of the S-Corp and part of each LLC. The S-Corp also owns part of each LLC - the LLCs are all multi-member for added protection. Each LLC is part-owner of the S-Corp. There's no human person ownership in any entity. So, there's effort required to pierce more than one corporate veil before any ill-gotten gains are realized. Even most shysters won't commit their time and resources.

The principle to remember is this: "Control everything, own nothing". Remember to insure everything, also.

The targets are tax advantage, asset protection against liability and estate planning. Your attorney can explain how to have your heir(s) become the beneficiary(-ies) of the trust upon your passing and why to do that.

Kyle Myers · Answer

@Jason Bott Account Closed

So do I need both and LLC and Umbrella coverage with 3 properties and our total assets of <$500k right now or will the umbrella make do?  What's the point where I should look at starting to purchase my properties in LLCs? What's the advantage of an LLC on top of the Umbrella Coverage?

Account Closed · Answer

@Kyle Myers

I am for the most part a flipper and am unable to get my houses covered under an umbrella policy.  In order for the house to be eligible you need to carry a minimal amount of liability on the  home.  Many insurance carriers will limit the amount of liability you can carry on a vacant home, thus precluding them from the umbrella policy.  Buying a vacant rental that needs repair would also create the same problem.

It is a bad spot, leaving the  owner with only the  LLC to protect themselves.

IMO there is always something to make things difficult.

Kyle Myers · Answer

@Rick H. although you didn't really give me an answer to my questions, your answer has been the most helpful.  Bottom Line: It depends, talk to an attorney.

Rick H. · Answer

Many readers will be intimidated if not overwhelmed by the complexity of the strategies described in this thread.

It may be easier to think of estate building as as a dynamic, organism that grows (and may occasionally contract) and needs to be feed and nurtured and occasionally pruned of dead growth.

I have built a substantial estate but I'm lazy and need a simplified system for managing this without making it too complicated for me or others.

An LLC can offer a certain level of protection however in the real world the plsintiff's attorney will most likely name you personally in the lawsuit anyway.

In my role as alligator wrestler for trusts and estates I've been sued many times. I know the drill. I've actually come to enjoy certain aspects of it, as unbelievable as that sounds!

No ONE structure is suitable for all. Your best plan is to study what others have done and build your plan according to your current and future needs for oerhsps the next five (5) years.

If you have little to lose, having a sophisticated plan is not necessary.

If you're growing rapidly and have much equity to protect and become high net worth, you really need to invest the time to study people like Dyches Boddiford to understand how these systems are implemented and employed and a good business attorney to create the entity(ies).

I'm all for simple until you've got something to protect and even then it must be easy to use.

Jason Bott · Answer

@Kyle Myers there is no exact answer to this.  Has more to do with your risk tolerance and what set up will not keep you up at night.

I can tell you I have not seen many $2M claims, even with my larger clients who have 500-1,000 units.  Chances are, You would have to be pretty negligent with the management of the properties to get a claim beyond the $2m mark on SFR.

LLC or Umbrella insurance?

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