Your questions, my opinions:
1) What will be typical scenarios where tenant files law suits? Plenty scenarios - like @Carl Fischer said, "anything and everything-trips/falls, illegal leases, discrimination, escrow handling, bed bugs", mold, fraud, etc.
2) So is it better to buy only in landlord friendly states? Is better and easier, at least till you become an experienced landlord.
3) Should we protect all assets under LLC? You should have an asset protection plan in place once your equity and tolerance risk requires it.
@Ashish Acharya
My opinion/recommendation would be to apply the "2% rule" - the cost of setting up and maintaining your asset protection should be less than 2% of equity you are trying to protect. Let's say, it costs you 1.5K to get your structures in place (holding LLC or Series-LLC, with or without land trusts, with or without separate operations LLC) and 0.5K per year (for maintaining the LLC properly, bookkeeping, lawyer and CPA, etc.) for a total of 2K. You should have 100K or more in equity to protect before it makes sense to spend that money - compare that with how much you spend in annual insurance for the same property/equity.
@Ashish Acharya gave you good advice on the various ways distribution per LLC should be.
4) What if we have multiple single families in different states? It will complicate things, and be expensive if you are in CA (but there are ways to deal with that too, you need to consult an expert), but the same principles apply.
5) Do we need to take umbrella insurance? Yes, you do, but that is just another tool/layer in your asset protection strategy. Insurance is not going to protect you at all times.
There is no absolute answer and unique tool/strategy in anything real estate. You need to learn how to use all the tools available to you (financing, insurance, management, etc.) and to understand how they fit together in your toolbox, as none will give you everything (e.g, insurance is required and it will cover you for many situations, but not always; asset protection (LLC) is litigation insurance and complements regular insurance, by minimizing the target and making it unappealing).
If you are a new investor, probably you will not have a lot of assets and/or equity to worry about (but even that is relative and subjective to each person tolerance to risk) so I would not worry about that till you pass that risk threshold (in my opinion 100K+ in equity, maybe 50K if you are really risk adverse). Regardless, you need to implement insurance and proper management procedures, regardless of how many assets and equity you have. So, learn about that first - and a good point to start is a Nolo book (https://www.amazon.com/Every-Landlords-Property-Protection-Guide/dp/1413307000/) mentioned in the doc, it will explain about insurance, how to evaluate insurance, and then about property management, property code, proper leasing and all the way to LLC and hiring.
Think of it as levels of protection. Kinda like, one house, get good insurance and umbrella policy. Two houses, make sure you don't have holes in your property management. Three houses and 100K equity, start looking into strategic asset protection. Four houses, establish holding LLC and separate operations into a management LLC. Then couple it all with your estate planning and protection from outside attack.
You can do that from the begining, but might be overkill (since you'll have to learn to properly manage an LLC and there will be some costs associated). Of course, you'll be much better protected, but will it be neccessary if you don't have much equity to protect?
Things change if you have a profession where you need to worry about asset protection from the beginning.
I can send you my notes from the rather lengthy research into the question of asset protection.
