LLC inside a trust vs just getting a 2 million umbrella policy
Member since 2009 · 3 posts · 0 votes
We own multiple properties. I know that each LLC would have to have it's own insurance on the property it holds. I know that if it is a commercial property, it will have to have a commercial umbrella policy. Our estate attorney is recommending that we set up a separate LLC for each property. If we do that, it's going to cost a fortune in fees each year. The properties we currently hold in our names (no llc, etc.) are covered under our existing umbrella policy. What are the advantages of complicating things by creating these llcs and then signing them over to the revocable trust?
The way you run your properties and think about risk is 180 degrees different from the way I run my properties and how I think about risk.
If you are looking for protection, you have probably done the opposite and created risk for yourself. You have a huge target on your back by having paid-in-full properties. Every ambulance-chasing lawyer and fraudster is out looking for a reason to come after you. There are tons of databases that people access every day that shout out "sue me" because your property is clearly a rent property with no mortgage.
Saving a few bucks each year to avoid a catastrophic loss is the opposite of what I do. I don't focus on cutting insurance costs. I am happy to pay for the insurance that protects my estate from catastrophic loss.
I cant (and wont) answer your question. Based on what you said you are seeking, I think you are asking the wrong question.
Your primary care physician recommends eating better and your surgeon recommends getting something cut out of your body. It is hard to tell what to do. I am not an attorney or a doctor but have been around real estate a lot.
"A separate LLC for each property" It probably depends on how big those properties are. If they are $100K SFRs, I would probably put several in one LLC. If they are $5M commercial properties, I would have one LLC for each. It is also worth discussing what kinds of loans you have. Some cannot be put in LLCs. Some prefer LLCs. Talk to your lender.
"Inside a Trust". I assume that is for estate planning. There usually isn't much downside to that, at least as far as I am aware.
"vs an umbrella" Why would get rid of the umbrella policy? It protects you from your assets and ALSO protects your assets from you. All my investments are in an LLC and / or our trust and we still get an umbrella policy. Its pretty cheap in the scheme of things.
Just got quote for commercial umbrella, 900 a year. I can out it in an LLC and pay the 200.00 annual report fee.
There are no loans on any of the properties, so was not mentioned and is not an issue.
we hold one house in an LLC. Will have to get commercial umbrella for that one.
everything else is either single family home (×2) or just land, one is a mobile home lot that is currently rented, and one is just a vacant undeveloped lot. Our current umbrella policy would cover the properties that are in our name. My question was "is it worth it to do single properties llc, or just go with our 2 million umbrella coverage.
The way you run your properties and think about risk is 180 degrees different from the way I run my properties and how I think about risk.
If you are looking for protection, you have probably done the opposite and created risk for yourself. You have a huge target on your back by having paid-in-full properties. Every ambulance-chasing lawyer and fraudster is out looking for a reason to come after you. There are tons of databases that people access every day that shout out "sue me" because your property is clearly a rent property with no mortgage.
Saving a few bucks each year to avoid a catastrophic loss is the opposite of what I do. I don't focus on cutting insurance costs. I am happy to pay for the insurance that protects my estate from catastrophic loss.
I cant (and wont) answer your question. Based on what you said you are seeking, I think you are asking the wrong question.
Fare thee well. Best wishes. I'm not looking to cut insurance costs, just the opposite. You do you, and good luck going forward.
Think of it this way - you have rings of protection.
The first ring is your well written lease contract, vetted by a local real estate attorney and your vetting process for how you choose as tenants. (I know that seems basic but it's one of the biggest mistakes I see new landlords make).
(Side note)Don't just grab a free lease online. You need a LOCAL real estate attorney! Example: In Cuyahoga County they have some funky rules - such as the renewal clause on your lease has to be in bold font double the text size as the rest of the lease document. If you get in housing court and the beef has something to do with the renewal part of the lease you are dead in the water if your lease does not have the bold font 2x the size of the rest of the lease. You also need your property lead inspected in the city of Cleveland and without that inspection and being registered with the city guess what happens when you get to housing court trying to evict someone. Yep - adios Mr. Landlord come back when you have your paperwork correct.
(Side note) Do you allow pets? You require the tenants to have renters insurance right and that you are named as additional insured on their policy... right? Do you also look at the tenants renters policy to verify it does not have a dog bit or dog breed exclusion? This has saved one of my landlords a few times. It's annoying to do this but if the tenants dog bites someone even if they are out at a public park you can still be named to the lawsuit and if the tenants policy has a dog bite or breed exclusion then you will be the one defending that dog bite claim and your landlord policy will be the one paying out.
Ok back on topic...
The second line of defense is your landlord policy as this is how you will be defended from lawsuit and damage to the property. You need this policy in place before you can get an Umbrella.
An Umbrella is only additional liability coverage above and beyond your landlord policy - it DOES NOT cover any physical property damage.
If you are sued and the amount you are liable for exceeds the coverage on both your underlying landlord policy and Umbrella - this is when you can be personally exposed.
I have not seen that happen (yet) but it can happen.
Hence the property is owned in an LLC which hopefully shields your personal assets from a lawsuit. The theory is you bankrupt your LLC and walk away from the property. (Also why some suggest putting each property in it's own LLC so if you have to walk away you don't lose the other properties not related to the lawsuit).
Is an LLC bullet proof protection for your personal assets? NO!
I'm not an attorney and this is not legal advice - it's my understanding that an allegation of "negligence", if proven, can allow the aggrieved party to pierce your LLC and come after you personally.
We had Mr Land Trust come to a REIA meeting once and he had some interesting ideas.
Property A is owned by an LLC. The LLC is owned by Trust A, Trust A is owned by Trust B in a different state, Trust B is owned by a third trust in a different state than the first two trusts... and this state has tribal lands. Trust C is set up in that tribal territory - say Cherokee North Carolina.
The Trust A attorney of record has orders to resign at the first whiff of a lawsuit and refer the suing party to Trust B. Trust B attorney has the same orders to resign and refers the suing party to Trust C. To continue after all these hoops the suing party needs to sue you in tribal court and pretty much any BS lawsuits will have gone away at that point.
Even if that is a giant crock of BS it's still a cool story to idea with your landlord friends lol.
In summary - you can't skip the basics of having a well written lease, tenant selection process, and your landlord policy in place while hoping the switcheroo of multiple LLC's and Trusts protects you. Get the basics correct and you will hopefully never need the nuclear option of stacked LLC's and Trusts.
One thing I ran into with LLCs that are owned by our Trust (for estate planning purposes) was that our personal umbrella would not renew because of the potential for "business" to be covered. We went back and forth on this, and they would not let me exclude the LLC from the umbrella. Complete PIA dealing with insurance companies.
Anyhow, for us, we have separate LLCs per property. So yes, each one I need to file income taxes on. And for each one, I have to pay California $800 annually because I live here but my LLCs are elsewhere - cash grab BS but that's another conversation. As long as I send an email from within California, I need to pay that $800!
We have our own personal umbrella policy. We have umbrellas for each individual LLC as well. Am I overly cautious? Probably, but at this point in my life, peace of mind is my goal.
Here is a challenge: find a real estate investor who was saved by his LLC's & trusts.
#snakeoil