Real Estate Asset Protection
of real estate has many benefits from an investment and tax standpoint. There
is downside risk, however, since the value of real estate holdings may be
significant and can be used to cover damages awarded in a lawsuit. Therefore,
important to consider asset protection strategies relating to real estate
holdings in order to minimize such risk.
protection planning is a way to reduce exposure to future lawsuit risk. It
encompasses insurance and how real estate is titled to make it and other assets
less vulnerable to the claims of individuals who may sue in the future. It is
about pre-emptive planning.
first place to start is with the property itself. Whether it is a single-family
home, a portfolio of apartment buildings, shopping centers, office buildings,
an industrial complex, or undeveloped land, make sure the property is
adequately insured for its type and its use. Occurrences associated with the
property, such as injury to a tenant or delivery person, employees, fires in
the building, or breaking and entering, may cause an owner to be sued.
Therefore, consult with an insurance professional on possible areas of exposure
and insurance needs based on the type of property owned and its current use.
Also discuss coverage, costs, and limits for business liability insurance and
umbrella business liability insurance. Since real estate investors are easy to
identify, easy to sue, and appear to have deep pockets, being adequately
insured is a necessity.
second step involves the proper structure in which to hold real estate. For
investment properties, it is highly unusual to hold them in an owner’s personal name. Holding property in one’s personal name or jointly with a spouse places
personal assets and other investment properties at risk if a lawsuit results in
damages being awarded. Thus, investment real estate is typically held in a
corporation, a limited partnership, or a limited liability company.
Transferring title to one of these entities will provide some insulation from
the early 1990s when legislation providing for the formation of LLCs was
enacted in all states, the LLC has become the structure of choice for many real
estate holdings. The key features of a LLC are that owners are called members
and no member is personally liable for the obligations of the LLC. The LLC can
elect to be taxed as a partnership with items of income or loss flowing through
to the members’ personal
tax returns. If it is structured as a single-member LLC, the LLC can be
disregarded completely for tax purposes. The income is included on an
benefit is that an LLC is not required to maintain records such as minutes,
bylaws, or shares as is required of a corporation, so there is no chance of
piercing the corporate veil for failure to follow prescribed formalities. Each
legislation is specific on the required steps to create and use an LLC, so
local legal assistance is necessary.
property is owned by an LLC, only the assets of that LLC can be used to satisfy
a claim. Other assets are protected. This is important as it allows individuals
to hold real estate without exposing other assets to risk. When multiple
properties are involved, although more costly, it may be worthwhile to hold
each property within its own LLC in order to isolate each property from the
liability of other properties. In some states it also is possible to establish
a series LLC that is designed to protect each property within a single LLC.
strategies can be enacted with legal help. For example, property may be titled
in a land trust with an LLC, corporation, or limited partnership plus
corporation as the beneficiary of the land trust. Thereafter, a living trust
may receive the property upon the owner’s death. Use of multiple layers requires the use of an attorney who
is an expert in asset protection planning.
domestic asset protection trusts are currently permitted under the laws of a
number of states. These are typically established by wealthy individuals and
those in high risk occupations, such as doctors and real estate developers, due
to their net worth.
cases, investors should consult a personal legal adviser for guidance on asset
protection strategies. These strategies should be tailored to their personal
situation and needs.
Stark-Hood, JD, CFP, is president of the Hood Group, Inc., and serves as a
consultant to the CCIM Foundation. Contact her at firstname.lastname@example.org.
article is sponsored by the CCIM Foundation @ www.ccimef.org.