This guest post was written by Jackson Cooper, a writer and real estate enthusiast, involved in the outreach team at Jensen and Company. Follow them on Twitter Or Facebook.
The United States is by far the most litigious country on the planet. The Pacific Research Institute estimates about 15 million civil lawsuits are filed in the U.S. every year, costing litigants over $250 billion (1). Nearly one-fifth of these lawsuits are classified as torts: legal actions as a result of someone being injured and/or suffering loss.
Real estate investors are particularly vulnerable to lawsuits because they are typically held responsible for injuries occurring on their property, regardless of how or why said injury occurred. Forming an LLC provides excellent protection to your personal assets. But real estate investors should not rest on their laurels simply because their company is structured as an LLC.
An LLC is the recommended structure for rental properties but it has to be done correctly. There are varying ways of setting up an LLC depending on your location. This gives great merit to hiring a professional asset protection expert as you’re setting things up. Since each state operates under differing laws and statutes regarding an LLC, a professional will be able to recommend a sound path to take for optimum asset protection.
Single Member LLCs
Some states are more desirable than others for LLC establishment due to tax laws. Its also important to know the scope of personal asset protection by state when it comes to an LLC.
Florida, for instance, treats single member LLCs differently than those with multiple members. The Florida Supreme Court ruled in the 2010 case of Olmstead v. FTC that creditors can legally seize “corporate stock” of single member LLCs via charging order to satisfy debts (2). The Court ruled that since Shaun Olmstead was the sole member of two Florida LLCs, the FTC could transfer interest in said companies to its name to help satisfy a $10 million judgment. The reasoning was that seizure did not affect other LLC members and is thus a viable remedy. Utah interprets its laws in a similar fashion (3).
Granted the Olmsted decision was state specific to Florida. But the Court was answering a question asked by the Eleventh Circuit U.S. Court of Appeals. Therefore similar cases in the other two Eleventh Circuit states (Alabama and Georgia) could be affected by this decision. The best way to protect your assets from these developments is to form an LLC with multiple members. Courts are far less likely to view the LLC as simply an alter ego of a sole proprietor if more than one person owns the company.
Asset Protection Kits
A bar in Illinois had been robbed several times in 1997, so the owner set electrocution booby traps inside the windows. Five days later a man attempted to break into the bar after hours and died when he came in contact with one of the traps. Despite several warning signs outside the building, the bar and property owners were found liable for the burglar’s death and ordered to pay $75,000 to his family (4).
The above example is referenced to demonstrate the range of torts that are brought against property owners regardless of circumstances. It behooves real estate investors with large portfolios to consider some type of asset protection program in addition to establishing an LLC. But all such programs are not created equal. G. Kent Mangelson, a certified financial planner at the American Society of Asset Protection, says total asset protection is a threefold process: lawsuit protection, strategies for tax reduction and strategies for estate planning (5).
The idea is to hire a firm that has experts in all three areas and not just one. Its also important to be proactive instead of reactive when it comes to asset protection. Real estate investors with home offices have limited liability protection under their state’s respective homestead laws. Washington, for instance, protects up to $125,000 of your home’s total value from being seized to satisfy debts (6). Tennessee, on the contrary, provides only $5,000 in protection for single homeowners (7). A good asset protection kit provides all this information and more to ensure all bases are covered.
You Might Not Be Bulletproof
LLCs have only existed in the United States since 1977 when Wyoming became the first state to recognize them as corporate entities. It has since become the preferred business structure of real estate investors because of the tax benefits and layers of insulation from personal risk. Simply establishing an LLC isn’t guaranteed protect of your assets. Knowing the best way to structure your LLC depending on your location is key to maximizing your asset protection.
Sources:
- 2010 Tort Liability Index Report
- Florida Supreme Court case of Olmstead v. FTC
- LLC Protection for Members’ Personal Debt in Utah
- Family Of Electrocuted Thief Gets $75,000
- The American Society For Asset Protection Package & Kit
- Homestead Exemption Might Not Protect Home
- Bankruptcy homestead exemptions
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Gary Lucido is the President of Lucid Realty, the Chicago area’s full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think he’s the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.