If you own a rental property or other financial assets, good planning makes you aware of the possibility of lawsuits. If a tenant or other party were to sue you, you'd need a plan to protect your assets. This blog offers some suggestions, but each situation is different. You’ll have to weigh your options to come up with a plan that suits your portfolio.
Know your State Laws
Each state has its own laws governing what can and cannot be touched in a judgment or bankruptcy. For example, in Florida and Texas, state law protects home equity. So, one could (in theory) “protect” their reserves by spending it on real estate. Of course, this strategy has many limitations; home equity is not liquid, and property values fluctuate. However, it is one way of protecting your cash in those states.
We list this step first because it begins your search for the right strategy (or strategies) for you. There’s no point in wasting time exploring one method if it's illegal in your state. Learn the law. That brings us to our second piece of advice:
Consult an Attorney
Lawyers who do estate planning or liability protection for a living will know the laws in your state. An experienced attorney will have excellent suggestions to guide you in your search, and will likely know some vendors. Talking to one will give you a picture of settlements and how they play out in court. Ideally, they will provide you with several options to select.
Asset Protection Options
Again, not all of these are available to everyone. But, if you’ve done your homework, a couple may be relevant.
Landlord Liability Insurance
Liability Insurance for Landlords is relatively straightforward. If an incident arises on your property resulting in material or bodily harm to someone, they may make a claim. Such incidents can occur from faulty equipment, weather hazards, dangerous visitors, and more.
Your liability insurance company will investigate the incident and argue on your behalf. There are also versions of such policies that protect your employees while they are on site working. Still, others protect you from libel if a disgruntled tenant attempts to harm your reputation.
If your policy pays less than the claimant wants, they may attempt to sue you for the rest. Make sure you choose a liability policy that will cover all of your defense costs, as they can be considerable. An excellent policy may not be cheap, but it should cover a wide range of possible problems.
Landlord liability policies are essentially mandatory with rental properties, as most homeowners policies will not cover incidents related to tenants. They are your first line of defense, so getting one with excellent protection is worth a thorough search. If all goes relatively well, you won’t need anything else. However, some liability judgments can easily consume all of the coverage, leaving you with a huge settlement to pay off.
Establish a Trust
Assets can be protected with trusts that can own the assets or their equity. A judgment made against the property owner may not always be able to obtain financial assets from a trust. Of course, this varies, depending on the jurisdiction and its laws, and the nature of the trust.
When considering creating a trust in a foreign country, choose a country that enables you to protect investment property. Many real estate owners use foreign trusts to protect their assets. They are highly effective because attorneys often must travel to the country of origin to pursue a settlement. You must do thorough research to find a country that can give you the kind of protection you are seeking.
Trusts are extremely useful when combined with other strategies. For example, if a company owns your holdings, and that company is owned by a trust, getting a settlement can be difficult. If that trust is in a foreign country, it can be much more difficult. If trusts are new to you, consider choosing a partner or firm to help set it up or manage it.
Limited Liability Companies and Family Partnerships
LLCs (Limited Liability Companies) and Family Partnerships are other entities that one can form to locate ownership of an asset. By design, LLCs limit the number of potential judgments to the assets of the corporation. If one wants to sue the owner of a rental property for damages, they can sue the LLC. However, their judgment will be limited to the value of its assets. In other words, they may be able to win the rental property, but not your home or personal accounts.
LLCs work well with trusts and family partnerships. If a family partnership owns your LLC, that partnership can be held by an offshore trust. These extra layers of protection make lawsuits impractical. Even if one can get a settlement, the amount may not be what the plaintiff is seeking.
There are several other kinds of instruments for asset protection. Offshore havens, retirement plans, and Delaware trusts are such instruments. To understand precisely which ones can be used to protect real estate, you need to know state and local laws. The sooner you begin this process, the more peace of mind you will have.
A Property Manager Can Protect Your Investments
With the help of MGR Residential and Commercial Real Estate, you won't have to deal with the stress of fending for yourself. We will put our decades of experience to work to ensure you're protected from liability, as well as see the maximum return on your investment.