Real Property Asset Protection Strategies
Real asset protections can help preserve wealth by safeguarding your property from legal claims and creditor actions. It can help prevent your assets from being seized or liquidated in the event of a lawsuit, bankruptcy, or other financial crisis. Asset protection strategies can also shield your assets from a liability lawsuit for accidents that may occur on your property.
There are several different approaches that a real estate attorney can recommend for your specific needs.
If you have one or many rental properties, or Airbnb or VRBO your vacation home, landlord insurance provides specific coverage for the insured property owners. The landlord insurance policy protects from the following:
· Property Damage
Damage to the home or any outbuildings caused by theft, fire, or natural disaster is covered. Coverage can also include a landlord’s personal property used in the rental, such as kitchen appliances, landscaping equipment, or power tools, in case of theft or damage.
· Liability Coverage
This coverage protects a landlord if an injury occurs on the property and the injured party decides to sue. There are many potential costs aside from legal and other court fees. These may include bodily injury, medical fees, loss of income due to injury, emotional distress claims, and funeral costs.
· Loss of Rental Income
Coverage is provided for a landlord who loses rent from a tenant and must temporarily relocate when a damaged property is undergoing repairs.
It may be worth getting extra insurance coverage through an umbrella policy that provides additional coverage after reaching traditional insurance coverage limits. Unlike property-specific insurance policies, an umbrella policy can cover multiple rental properties in different cities and states.
· Non-Landlord Insurance
Adequate standard insurance coverage can protect real property assets in a non-landlord situation, such as a family home. Ensuring the policy covers many potential liabilities, including personal injury claims, is important. This insurance is your traditional “homeowners” insurance policy and should be robust.
Business Property and Limited Liability Companies (LLCs)
A Limited Liability Company (LLC) is a legal business entity that can hold property and pay the mortgage and operating expenses. One of the advantages of using an LLC is having a layer of protection between the property and the property owner. If someone files a lawsuit against the property, the LLC protects the owner’s personal assets even though the LLC can be sued.
In the case of rental properties, by forming an individual LLC for each, other business and personal assets receive protection from creditor claims limited to the assets held in the LLC.
An LLC offers solid protection for income-producing assets like a beach house, mountain cabin, farm, or second home in an Airbnb or VRBO. An LLC is not the best strategy for a primary residence because, in a lawsuit against the owner, the plaintiff would argue the LLC comingles personal and business assets.
Real Estate Trusts
In addition to providing privacy from the public domain, holding property in a real estate trust may also help protect real estate assets. A property held in the name of a trust rather than an individual may be more difficult for a creditor to discover. Transferring real estate into a trust is typically easier than using an LLC.
A trust can hold title to the property, with the owner serving as the trustee. It can help protect the property from creditors and provide estate planning benefits as it names beneficiaries to avoid probate.
Strategic Use of Debt
Also known as equity stripping, maintaining debt is another way to protect real estate assets. This strategy involves taking out a mortgage or line of credit on the property, reducing the amount of equity available to creditors. Employing this strategy can make the property less attractive as a lawsuit target.
For instance, if you own a $500,000 property free and clear, that $500,000 in equity can quickly become a target for a plaintiff’s lawyer. However, if you strip the equity and maintain a loan-to-value (LTV) ratio of 75 percent, the amount of potential cash at risk reduces to $125,000, significantly protecting the asset. A property value of $100,000 with an LTV of 75 percent reduces the cash risk to $25,000 and may not be worth the time, trouble, and expense for a plaintiff to pursue.
This exemption is a straightforward way to protect a real estate asset. However, it can only apply to a primary residence. If an owner registers a property as a homestead, the asset will be unavailable to most creditors. This strategy can limit the amount taken from the property if a lawsuit is filed against the owner, but the law is state dependent. An estate planning or asset protection attorney can advise you on specific state laws. Some states protect an unlimited value of homestead property, while others have statutory limits.
Whether a landlord or not, a keen eye for avoiding excessive risk can go a long way to protect real estate assets. In the case of a landlord, reduce risk by implementing a thorough tenant screening process, speaking with applicant references, and carefully reviewing their credit report can reveal if a prospective tenant is a good fit or has ever been a party to a lawsuit. For a homeowner, asking handypersons or contractors for proof of insurance and references can also avoid situations that can put your property at risk. Contractors without proper insurance that cause injury or harm can put a homeowner or a landlord at risk for liability due to injury, medical bills, and damages.
These are some of the most recognized strategies for real property asset protection. But they may not be appropriate or effective in every situation. It’s best to consult with a real estate attorney with experience in asset protection to determine the best strategy to meet your specific needs.
We hope you found this article helpful. Contact our Chicago area office at 630-568-6656 to discuss how we can help you with any legal real estate questions you may have. We look forward to the opportunity to work with you.