Asset Protection: Holding on to your Hard Earned Wealth
April 7th 2008
Many novice real estate investors spend a good deal of time acquiring real estate wealth without any focus on asset protection. That’s a mistake. With too much exposure, you run the risk of having those assets attached in the event a lawsuit judgment doesn’t go in your favor. Landlords are named in more lawsuits than any other class of people. While some of those cases appear frivolous, others are valid. A landlord risks being subjected to judgments, fines, fees and penalties in varying amounts. In a perfect world, the real estate investor will never be sued. Unfortunately, this isn’t a perfect world.
The goal, if I may paraphrase John D. Rockefeller, is for you to “control” your assets, not “own” them. A Certified Public Accountant will have a whole-host of asset protection strategies to draw upon. Below are some of the protective strategies:
Insurance
This is simple basic protection; an umbrella policy is generally used by investors who have a sizable number of unencumbered assets with a good deal of equity, to ensure that any claim, including catastrophic ones, will not place those assets at risk.
S or C-Corporations and Limited Liability Companies (LLCs)
By law, the “owners” or shareholders of either an S or C-Corporation, or the “members” of an LLC are not legally responsible personally for the actions of the business; the only exception to this law is that of outright fraud. Even if an investor is the sole shareholder/member, he is not personally liable for losses or judgments against the corporation or the limited liability company.
Land Trusts
A land trust is merely a document that “conceals” the investor’s name on the property title as listed in the public records. It is a simple document to create and can be done by any real estate attorney, and is relatively inexpensive. While the land trust does have tax implications, namely because trusts are often taxed at a higher tax rate, its overall benefit is the privacy of ownership. In most cases this privacy of ownership can be quickly negated by a title search, which will reveal the ownership before the land trust transfer.
Revocable Trusts
A revocable trust is an agreement, in which control of assets is transferred from an owner to a designated trustee. Because an investor is permitted a good deal of flexibility, there are often changes to the asset composition, or appointment of a new trustee, if the investor is not satisfied with the trustee’s administration.
Irrevocable Trusts
An irrevocable trust can never be altered or canceled, in any way shape or form. Period. It is the ultimate in asset protection, because you are in effect, placing your assets beyond your reach. Because of the irrevocability of it, an investor must be one hundred percent certain of the capability and trustworthiness of the Trustee. In effect, they now control the asset, not the investor.
Watertight or “Bulletproof” Protection
This is a strategy whereby, with the assistance of a capable lawyer, you create a layered wealth protection strategy, which will shield your assets from seizure. Effectively, you build layer upon layer of single strategies, which throw up “legal” roadblocks to litigation activities. The foundation is typically the creation of a land trust, which is combined with one of the limited liability companies. The possibilities are almost endless.
These are very simplistic explanations of the various forms of wealth protection, and an investor would be wise to consult with an attorney or CPA for further advice. The bottom line is that an investor would do well to consider one or more forms of asset protection to safeguard their real estate wealth. One lawsuit can ruin a lifetime of wealth building.
Barb Zigah is a freelance writer covering real estate and business topics.
If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.