Protecting Your Personal Assets

Shaun Reilly · 2013-08-29T19:26:01-07:00

I read a lot about the need to protect your personal assets if you own rentals or from your business activities. My question is... Who has personal assets that are worth worrying about protecting? If anything I want to segregate things in case I personally get sued to protect all the stuff my entities own! In reality I will guess that for the most part the people here are newbies that just don't have any assets anyway. Still good to have the right stuff in place early on, but shouldn't be anything to stop you from getting started. If not people will have a lot of business assets that make up the majority of their net worth. I know personally if you take away the equity and cash in my flipping business and the cash and equity in my rentals I don't really have all that much! I will guess that like me most of people personal assets of note are a personal residence and retirement counts. I can Homestead my home to protect it for many times the actual equity I have. Retirement accounts are already off limits (Think OJ). Not dissing asset protection but I think most people think about it backwards. The business stuff being protected from YOUR liability is probably the more important use of the benefits.

Brett Russell

Investor · Chelsea, MI · Member since 2013 · 350 posts · 138 votes

13y

It might be a bit of an overstep to say that most people here don't have any assets.

Your statement about segregating things is probably a good way to look at protection being both ways, but I'm sure the lawyers would find some way to make you part with things of value you aren't even considering if you're not protected.

0 Reply

David C.

Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes

13y

If you own ten entities, and are found liable, your ownership of those entities is an asset that can be taken from you, right?

0 Reply

David C.

Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes

13y

If your management of one entity makes you personally liable, then they are all at risk.

0 Reply

David C.

Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes

13y

I own my consulting business. If I do millions in damage to some big companies computer system, their lawyers will shred my s.corp.

If In drunk drive and kill a kid, they will take my s.corp as an asset.

My s.corp is good for marketing, and small liability, and makes it more clear that I'm not an employee.

Obviously my contracts and s.corp are properly maintained, but really, the people I'd be up against make me think its pointless.

0 Reply

J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes

13y

I certainly have personal assets to protect, and I imagine there are a LOT of other people in the same boat...I don't think it's as uncommon as you make it out to be.

Personally, I keep an umbrella policy both in my name and in my business name. This helps protect my personal assets from business liability and my business assets from personal liability.

That said, most liability that would put me at risk would be negligence on my part, as I only have one employee. And in the case of negligence, I imagine most asset protection strategies won't be much good. So, in addition to having asset protection, it's just as important to be smart and ethical in everything you do.

Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)

0 Reply

Pat L.

Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes

13y

Not exactly a RE issue

BUT

A friend's son has a judgement against them for over $2mill.

They were young & had nothing to lose AT THE TIME.

Now he can't own ANYTHING without fear of it being attached, & every time he gets paid there is a % garnishee. He was also been advised NOT to get married as her wages etc would also be fair game.

& all he did was lend his auto to a friend who drove drunk then wrecked it causing significant injuries to the passengers. In fact one was rendered blind as a result of the accident.

'govern yourself accordingly'

1 Reply

J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes

13y

Pat -

Awesome point that I think a lot of us forget...a judgement can stick with you for a long time, so even if you don't have assets right now, you can still suffer long into the future.

Thanks for the reminder!

Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)

1 Reply

David C.

Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes

13y

If you have a judgment, and try to pull living expenses from your 401k, are you able? Or once it comes out must it be used to pay against the judgment? Is the 401k really protected in any useful way? Or you just pay later?

0 Reply

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

13y

Is this leading to a solution? Some entity structure? Isn't one, unless you have no ownership, aren't involved. Education, insurance and prudence keeps your assets safe. :)

0 Reply

Shaun Reilly

OP

Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes

13y

@Bill Gulley

and @J Scott

allude to the best asset protection: Don't do anything wrong!

Beyond that accidents and things beyond your control can happen, and of course there are the frivolous lawsuits.

The frivolous ones are what most of the touted strategies for hiding assets are for. If you are really at fault for a bad thing the attorneys will find your assets, it is only for the BS claims from the TV ambulance chasers where making it so they have to dig a little helps.

Anyway again I'm not against asset protection I think it is very important. I have all the good stuff. Several LLCs and LPs and some Trusts, I have a lot of money in an SDIRA that is protected by ERISA, my personal residence is Homesteaded to protect the equity, I have property and liability insurance on every property I own (Even if unencumbered so I don't "have" to) and have the $1M Umbrella policy. My point was more that in reality this is to protect my valuable business assets more than the stuff I own (Other than my house and IRA) which isn't that valuable and mostly depreciating Doodads.

0 Reply

Shaun Reilly

OP

Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes

13y

BTW a point I had intended on making (and granted did not do a good job at all) in the original post was that having the perfect asset protection strategy in place to start isn't crucial. Great if you do it and I suppose if you are getting into REI after making a bunch of money at something else and maybe have a large portfolio of non-RE assets you would need that, but that is the exception.

I hear a lot of newbies get really hung up on having this all worked out before doing anything. They are tend to be the ones that ask about the best free and super cheap forms of marketing since they don't have $500 to do direct mail campaign.

If you don't have $500 in cash why do you need a 3 tiered entity structure to separate you from your business activities? There isn't anything worth protecting yet!

0 Reply

Christopher DerrPro Member

Investor · Garner, IA · Member since 2013 · 70 posts · 36 votes

13y

This is one thing I've been caught up on before buying another rental property. WHICH I WANT TO DO SOON!!! I currently have 1M in liability insurance on my primary residence that extends to my 1 rental property and a 1M umbrella along with fire/structure insurance on the rental. I keep thinking I need to set up an L.L.C but what I continuously read is that #1 since my L.L.C would be a sole proprietorship my money will obviously come from personal assets so a good lawyer will pierce a (corporate veil?) anyway so my personal assets wont be safe. #2 My Primary residence and 401k can't be touched......i do not know if this is true or not? and honestly those are the only things I am trying to protect, other than my current income from garnishment. #3 less than .1% of any judgment will extend beyond the 1M liability insurance and 1M umbrella policy provide anyway and that's if you ever see a judgement, more often than not your stuck with lawyer fees only? #4 I can't switch my current rental into an L.L.C. with out having my mortgage called due which I don't want to pay another 3k in closing cost on when the whole mortgage is only 22k #5 L.L.C financing is hard to get as business loans are much harder to obtain with worse interest rates.

I am sure partnerships and other s-corps etc. make a huge difference but as a sole proprietor I don't know if the L.L.C gives me any added separation or liability protection?

This is just what I have gathered doing research so far, but I would love to hear more from anyone on what their views are on my research, as with everything I am researching in real estate its all "clear as mud"... :(

0 Reply

Shaun Reilly

OP

Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes

13y

@Christopher Derr

Do you have anyone else you can have in the LLC with you? A spouse or adult child maybe a sibling or parent or a friend. Obviously an actual business partner to do this with works too. Not sure how much ownership they need to look legit but even just a spouses owning half the company counts as a multi-member LLC.

If you do setup an LLC you can transfer the property and it is unlikely they will call the loan. Even if they do just deed it back to your personal name. Don't know what the transfer tax ramifications in IA are for that but surely it will be better than having to refi with a commercial loan.

0 Reply

Christopher DerrPro Member

Investor · Garner, IA · Member since 2013 · 70 posts · 36 votes

13y

@Shaun Reilly I am married, I could have my wife, but my big issue even still was really the financing going forward with purchasing more homes using the L.L.C. It seems as though I am going to have a hard time financing homes with business financing as opposed to personal financing. Also I am confused as to what I am truly protecting? Is my personal home protected if I used a home equity loan to finance a property? I think that would break the (Corporate Veil) and co mingle funds. I also am not sure what is protected from law suit and what is not. I know when the builder of my home underbid my house for 30k and left me to pay it, then died of cancer (I felt cheated, but if I was dying of cancer I would have done the same thing) I couldn't touch his home where his wife and kids lived so there was no point in suing as he had virtually no other assets that would amount to anything with creditors in front of me. I would basically be wasting good money to sue for nothing.

0 Reply

Terry Portier

Engineer · Wichita, KS · Member since 2012 · 396 posts · 36 votes

13y

I’m no judge or jury but if you have to personally back an entity loan because it will not qualify that is not acting as a sole proprietor nor co-mingling funds. If you have a DOS in an existing mortgage and QCD to an entity that is fraud and can be looked at as acting as a SP and co-mingling. Home equity to get around qualifying an LLC, legit. I look at it like if I were in a court room and a prosecuting attorney were trying to pierce my LLC by proving I acted knowingly or unknowingly as an SP how can I prove otherwise. If for the most part I keep my books, contracts, bank accounts, insurance, financing to the best of ability the evidence stacks up on my LLCs side.

Another asset not mentioned is having to put out attorney fees, an insured LLC entity is very difficult, especially multi-members, most will back off unless they see a slam dunk fraud case.

0 Reply

Shaun Reilly

OP

Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes

13y

Not an attorney or an accountant so this is just my opinion and understanding from what I have seen, heard and at times discussed with these types of professionals.

To get a residential mortgage you would need to buy the place in your own name and later deed it to the LLC. Really no way around that if you want a conventional bank loan.

If you want to make it less likely to have a DOS issue you can deed it to a Trust and then make the LLC the beneficiary. The beneficiary schedule is not public record so less likely to raise any issues.

As far as worrying about comingling I have never heard of that particular thing (Deeding a property that has a mortgage in your own name to your business) as a basis to pierce the veil. Doesn't mean it hasn't, but I'd think it would be all over every post here relating to that if it has ever happened.

You can always make it look more legit by selling it to the LLC Sub2 the existing financing and could even have a HUD-1 for it. Not sure if doing this will incur other costs.

If you use a HELOC to fund the purchase of operations of the LLC write it up as a loan and charge the LLC the same rate the bank charges you. Then the LLC can directly make the payments or you make the payments and the LLC pays you back each time. Should pick one method and write the loan up that way.

If you get a HELOC on your home and there is a judgment it will serve as asset protection because you stripped out the equity. However if you can only make the payments if the property is performing and you eventually default then they can forclose on you like any other creditor with a lien on your home.

0 Reply

Ellis San Jose

Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes

13y

If you are lucky enough to know a judgment collector, not attorneys, a collector, who specializes in BIG DOLLAR Judgments,. Find one and PAY them for their time to understand the process of collection and identifying assets. It will scare you into making sure your business practices are sound.

0 Reply

Christopher DerrPro Member

Investor · Garner, IA · Member since 2013 · 70 posts · 36 votes

13y

Its hard to make the jump when there are so many ways to skin a cat! UGGGHHHH more research I guess, maybe I should pay an attorney to make sure I got it right, but heck it even sounds like I need to pay a CPA, and Attorney, and a Judgement collector before I even start....beyond that what happens when 2 different attorneys have different opinions? How do thousands of people make this work day after day with almost no knowledge?

0 Reply

Shaun Reilly

OP

Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes

13y

@Christopher Derr

While you are not the "Don't have a pot to piss in" type that I specifically called out about worrying too much about initial asset protection strategies you are falling into that trap.

If you have a 401k from a day job it is off limits based on ERISA rules. Always good to verify this stuff with an attorney but I'm pretty confident on that one.

As for your home in my state you can homestead which allows you to protect some amount of equity from judgments. IA may have weaker laws around that but they likely have something. If you do that you should have some protection. Also if you are going to use home equity to help fund your investing you will kinda protect your house in that your asset is the equity in the house not the house itself.

If those are the only personal assets you need to protect stop worrying about all this other BS and figure out how to land a killer deal on your next rental.

You can always move things around later on and buy future deals with your company once you start accumulating more assets and creating wealth.

By all means research and try to figure out the best way to set things up but do not let it keep you from moving forward with your investing career!

0 Reply

Christopher DerrPro Member

Investor · Garner, IA · Member since 2013 · 70 posts · 36 votes

13y

@Shaun Reilly oh I know you weren't calling me that or anything. I do have about 10k in Roth's outside of employer 401k, 30k in Mutual funds, and an 80k/yr job I don't want to get garnished, and 90k or so in equity in my home. I just want to protect that. Honestly I want to get into buy-hold rentals and not to generate income to live on I plan to just keep re-investing it into more properties and possibly retire in my 50's or help my kids get homes when they get older maybe with college etc. If I lost 1 or 2, 30k homes it wouldn't crush me, but if I lost the home me and my wife built together or my ability to make my house payments or our retirement funds that would. Im only 29 so I have plenty of time to recover from a loss of a rental property if I had a judgment against me. I just want to do the right thing, its not my job, i have a 9 to 5 job for income, this is just an investment opportunity that I have always wanted that creates a potential to quit my job in the future if i wanted.

0 Reply

Joe Bertolino

Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes

13y

Being in the insurance business, I see many approaches to risk management and asset protection and I often get to see those approaches tested. You can form a corp or LLC, LLC's for every project, or you can operate in your own name but put your personal assets in a trust. There is no correct answer for every situation but for smaller buy and hold investors it seems to be the easiest and most economical to operate in your own name and protect your personal assets in a trust. In CA, LLC's run about $800 a year to maintain properly and they often complicate and add expense to financing and insurance. For most small landlords it is overkill in my opinion. As J Scott said, your business practices are your best defense. I run into investors that try to skimp on insurance, maintenance and management thinking their LLC will protect them if something bad happens... those same folks often skimp on maintaining the integrity of their entity so they have a false sense of security. The cheapest form of risk transfer is proper insurance. After that it is operations/management. Entity should be way down on the list in terms of your risk management strategies. If somebody is really going to hit beyond liability limits of $2m, it is likely because they were negligent.

1 Reply

Rich Weese

Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

13y

As one that does have assets to be concerned about, I've ALWAYS been willing to pay BIG bucks for planning ahead. I suggest you find an excellent Estate Planning attorney and accountant. I'm been led to some excellent legal methods to sleep at night. It isn't a matter of worrying about being honest etc. I've been sued in my business career because they had to go through me to get to the party responsible for the problem. There are also some excellent ways of setting up Trusts and LLC's and using them together. I'm not going to answer questions on BP, but want to assure you that there are things that can be done and good representation will help you get those set up. There are also some new things. Good luck finding the right help. It does make sleeping at night very easy. Rich

p.s. I have some posts and threads from awhile back that address some of these items.

1 Reply

Christopher DerrPro Member

Investor · Garner, IA · Member since 2013 · 70 posts · 36 votes

13y

I am new here so I hope im not breaking a rule please forgive me if I am, but I found this to be a very interesting article from BP, not the article its self but the comments at the bottom, funny how almost no one can agree completely.

http://www.biggerpockets.com/renewsblog/2013/08/17/rental-properties-llc/

0 Reply

Terry Portier

Engineer · Wichita, KS · Member since 2012 · 396 posts · 36 votes

13y

Originally posted by Christopher Derr:

beyond that what happens when 2 different attorneys have different opinions? How do thousands of people make this work day after day with almost no knowledge?

I got a good chuckle out of this, thx. I've been reading BP LLC post for about a year now. One subject I don't think will ever stop debating by people that have never been in court with one, including attorneys. If you want some real answers go out and read case laws in YOUR state, and statues. Then you'll be educated enough to know that you'll still be hard pressed to find two attorney's that agree more less two BP's. But understanding the basics like the difference between legal structure and insurance many don't, single vs muliti, contracts, how in most actual cases the veil was pierced, etc….

Here is my favorite answer by Reed there really is none, http://www.johntreed.com/entity.html

I think there are so many variables and laws still being challenged by case law it makes it difficult to determine how valid the LLC vs SP asset protection really is. I decided on an insured LLC since as a construction company and REI my exposure and risk are high, well higher than a landlord. I'm still trying to figure out after a year if it is worth it for rentals since for centuries we did without them, and many successful old schools still do, not that it makes it right, but you have more case law and history there.

One way to stop all debates and BS on the subject is to ask for a recent case that proves someone’s theory as I did @bottom of the thread you referenced in your last post ;)

0 Reply

Mark Esposito

Raleigh, NC · Member since 2014 · 125 posts · 37 votes

11y

Pat Marco posted this recently:

"I am an attorney and have sued people successfully and went after their LLCs assets because they had plenty of equity."

Leverage the equity in the LLC and put your personal assets in a trust. I'm looking for answers from an attorney how to collect from a person who does that.

0 Reply

Protecting Your Personal Assets

Protecting Your Personal Assets

Most Popular Reply

26 Replies