What is Asset Protection?
Asset protection is a lot like protecting yourself from the sun: you need multiple layers of protection, it can be costly, you need to set it up before you get burnt, you focus on areas you want to protect, and it gives you peace of mind.
Yet, individuals don't always use sunblock, similar to how individuals who own rental properties don't always set up any asset protection. There are a lot of reasons that I’ve heard for why investors haven’t formally set up their asset protection:
1. No time to do it
2. They think that insurance is enough
3. Creating Living Trusts and LLCs are too expensive
4. They believe that the likelihood of a lawsuit is slim
5. Never thought about it
The importance of asset protection:
1. The more exposure that you have, the more protection you need
2. Protect you and your family from lawsuits, taxes and probate
3. Only protects for the future, not the past
When setting up Asset Protection, be sure to use multiple layers of protection for areas that need it. Check with a local law firm that specializes in Asset Protection.
It’s Important To Review Both Personal And Business Assets For Protection
Personal Assets are assets that you and your family members hold in their own name.
Let's take a look at the risk and exposure you might have in your personal assets:
Are you proud that you finally paid off your home, or your home value has doubled in the past 3 years? While that’s all good, if you have a lot of equity in your home, you have more exposure. A lawyer representing the plaintiff in a lawsuit against you would love to see that you have no mortgage on your home. This is why mortgages can help with asset protection. Mortgages on your home are friendly liens because the outstanding mortgage must be paid before debtors are paid.
If your property goes to probate, not only are your assets made public, but your heirs will also need to go to court to claim the property. Going to court means that they will need to pay the appropriate fees before they can receive the assets. These fees include attorney fees, court fees, and fiduciary fees. On top of that, it could take 9 to 12 months to finish the probate process.
If you want to pass on your assets to your children, you should plan appropriately to minimize or eliminate the federal and state taxes associated with the transfer. Estate taxes vary by state.
Some things to consider for Personal Asset Protection
Make sure you have Personal Umbrella Insurance – This helps in case there is an accident by means of your property (car, home), but it won’t protect you from lawsuits related to a business that you own.
Homestead Exemption – some states allow individuals to claim a Homestead Exemption to protect their home equity for a certain amount. Florida has one of the most generous ones which is why OJ Simpson moved there!
Estate Planning – for wealth preservation and wealth preservation. In the unfortunate event of an untimely death, it’s important that you have a plan for your estate so that you don’t incur unnecessary taxes, attorney fees, probate for your assets. There are professional estate planners that can help with estate planning.
Some things to consider for Business Asset Protection
Be sure to setup the right business entity.
We’re focused on real estate and LLCs work well for us.
Limited Liability Corporations – There are ways to form LLCs for the properties that you own so that if one was forced to liquidate, your personal assets would not be attacked. If you work with the right LLC formation and services organization, they can optimize the structure and maintenance of your LLCs to maintain protection. You may need more than one LLC to optimize your protection.
Why don’t we use an S-Corp? If an appreciating asset is put into an S-Corp, it can’t be taken out without triggering a capital gain tax. We want to make sure that we can keep the option to move the asset around while maintaining our asset protection with the LLC.
Be Sure to maintain the corporate veil
Just because there is a paper document that states that your property is in a business, it’s not enough. We need to maintain the corporate veil by following basic corporate operations such as having corporate meeting minutes and keeping the bank accounts separate.
Be insured with the right type of insurance for your business.
For multifamily, be sure to get commercial residential property insurance focused on apartment buildings. This helps cover the business in case of accidents such as fires, floods, trip and falls, etc.
Invest in multifamily as a limited partner (passive)
When working with a syndicator, be sure that they have the right asset protection in place. The business structure should be set up so that a limited partner’s (passive) only exposure is the money invested, and not their personal assets. Whereas a general partner could have more exposure if the apartment was purchased with a recourse loan.
Asset Protection Law Firms Are A Critical Part Of Our Real Estate Team!
At Diamond Point Homes, we ensure we have the right asset protection to provide peace of mind for our business and personal assets. If you have any more questions, please don’t hesitate to a consult with me or join our investor club.