Asset protection and umbrella policy

10 Replies

Hello BP Community,

I am at New Jersey and kind of a beginner to RE investment world. So far I do have one SFR that's located at Michigan. I am exploring various asset protection options to protect my personal assets as well as one rental. I do have couple questions:

1. Is creating a land trust and LLC a better option? Is it worth to bare maintenance costs? I consulted couple firms and they provided a structure but that's going to cost me around 7K and other annual maintenance of 2K. I maybe wrong but doesn't make sense to me as just have one property as of now. Please let me know your thoughts / other options.

2. I am planning to get umbrella policy that covers my personal assets as well as rental. Any suggestions/guidelines for coverage amount? I appreciate if you could recommend any agent that you are working with.

Thanks in advance.

The best way to protect your asset:

1. Know and obey the law;

2. Treat your tenants honestly and fairly.

The risk of being sued is extremely low, which is why insurance companies are able to make so much money. There's nothing wrong with an additional layer of protection but educate yourself and make a smart choice rather than panicking and building 20 levels of protection against something that will probably never happen.

Thanks Nathan. Yes this make sense and do not want to got for all types of protections that's really not require. I think umbrella policy should suffice in my case but would like to get advice from experience investors.

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From an insurance standpoint there are a couple of things to consider:

1. will adding the Trust force you to change insurance companies and if so what is the additional cost

2. will your current carrier write and umbrella over both the trust and you personally or will you need two umbrellas.

I would get quotes for a $5,000,000 umbrella policy and use that as a comparison to the annual maintenance costs.  At that point you can decide if the extra layer of protection is better than a large limit. 

You should also discuss the things that can cause a court to break through an LLC/Trust with a qualified attorney. if you can't do the things needed to separate the yourself from the entity you may be personally exposed anyway. Something like having a single umbrella policy for both may be enough to sink you (especially if you pay for the policy from only one of the entities). This is definitely an Attorney question.

@Kulin Dakwala I agree with Nathan that being an ethical and honest person is of upmost importance, however, disagree that insurance is all you need.  A real estate investor has a higher chance of being sued than your average joe.  This is why there are asset protection firms and attorneys.  True, the level of protection is going to vary for case to case and depends on what you feel is right for you. 

When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.

The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.

The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you're interested in using an LLC, this article also further explains the advantages of a Series.

The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

The fifth pillar is owning everything anonymously. If people don't know that you have assets, then they are less likely to sue because there's no use in suing people that qualify for food stamps. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn't matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.

I would really just take your time and consider all factors as you make a decision.  There are some helpful articles right here on BP that are a great resource.  Here is one that discusses insurance vs asset protection:

- Scott

Thank you @john mocker. I was thinking to get either one - LLC route or umbrella. Yes, single member LLC route is protecting against personal assets and other investments based on discussion with couple attorney firms as that's the way they create structure.

Thank you for detail explanation Scott. I do have one rental at present and goal is to add couple more in next 3 to 4 years. May nit be true but my concern is, does it make sense to go with series LLC structure thought I like it pretty much? For current scenario, if I go with this structure, I will end up paying few years of cashflow and majority of cashflow in maintenance each year. At end of the day, may not have anything other than equity so what's the point to get cashflow property?

My rules of thumb - 

If personal assets + investment equity < $1M  then use $2M umbrella policy

If personal assets + investment equity > $1M then use $2M umbrella policy plus LLC

Best, Terrell