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Real Estate Asset Protection: An Investor's Guide

There's no point in building a real estate portfolio only to lose it in litigation. Learn how to protect your assets properly.


[Updated: Feb 04, 2021] Oct 26, 2020 by Liz Brumer
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Having an asset protection strategy as a real estate investor is a critical component of a secure, resilient business structure. Most investors have their investment property held in a legal entity, but this is only one component of asset protection and unfortunately, one that can easily be sidestepped during legal proceedings. Without a solid, multilayered approach, you could lose passive income or entire properties from a settlement or judgement against you or one of your businesses. Learn what real estate asset protection is and why it's important to you, as well as several approaches to protecting your hard-earned real estate assets.

What is real estate asset protection?

Real estate asset protection is a strategic approach to protecting your properties from creditors who may try to take control of your investments due to lawsuits, settlements, or credit card debt. When a lawsuit occurs, regardless of whether it's a settlement or judgement against you, you have the obligation to pay for damages, injuries, lawyer fees, and more.

For example, without a proper real estate asset protection plan, a personal suit could use a rental property to settle your financial obligations. If structured properly, asset protection planning can essentially separate your personal or entity-specific legal obligations from other business assets you own.

Asset protection approaches

There are several options for investors to help protect their assets. It's important to look at the cost and benefits of each strategy and speak with a professional for advice on which structure best suits yours and your portfolio's needs. Smaller investors may be able to get away with utilizing one or more strategies, while others may want to employ more because of the size of their investment portfolio. Below are a few of the most common asset protection approaches.

Homestead protection

Homestead protection is one of the most foolproof approaches to protecting your asset from seizure but obviously can only apply to one property you'll need to legally reside in. In most jurisdictions, a significant portion, if not the entire value of the residence, is protected from bankruptcy, court judgements, or settlements. Your individual personal residence will have this protection, but many investors will still choose to continue with other layers of asset protection to preserve anonymity and reduce liability even more.

Insurance

Having an insurance policy is the first step in asset protection. It offers no privacy but will cover smaller financial liabilities that might result from injury on the property, burglary, or other miscellaneous occurrences. There are several forms of insurance, but business insurance, property insurance, and potentially an umbrella policy may all be beneficial.

To actually have your claim covered, it's very important to select the appropriate coverage and make sure the insurance company is clear on how the property is being used. For example, if you tell the insurance company you own a farm but give a paid guided farm tour that someone happens to twist their ankle during, they may not cover you because that wasn't your stated use of the property (it occurred on a tour, not during typical farming activities).

Anonymous land trust

Creating land trusts will offer you privacy and anonymity if set up as an anonymous trust. This is done by using a trustee. You, the grantor or original owner, effectively become the beneficiary, and the trustee actually holds title. There are professional companies that perform this kind of service for investors and are experienced in appropriately handling inquiries.

When you set up the land trust prior to forming your entity, you'll be able to obtain both anonymity and limit liability, because the member for the entity is simply the name of your anonymous trust. When a lawyer runs a search for "John Doe" and all his assets are held in land trusts, all the attorney might find is an individual personal residence, as mentioned above. This makes it extremely difficult, if not impossible, to trace the ownership to you.

Selecting the appropriate entity for your real estate will depend on how it's used and the business structure behind it, as well as the tax implications the property owner is seeking. Real estate is most often held in a limited liability company (LLC) but can also be held in a limited partnership (LP) for more than one owner. Another option is a corporation.

The most important aspect of this step will be protecting a personal asset during a suit against your business or separate real estate holding. These entities create a legal separation between self and business, because you're a member and no member can be held personally liable for obligations resulting from the entity.

It also helps if you have multiple properties all held in separate entities, if one gets sued, the other assets can't be touched. Make sure you maintain your corporate veil appropriately, or the entity may be seen as null in the court's eyes. You can also potentially layer your entities or even have them held by an offshore trust.

Equity stripping

Equity stripping can contain many different facets, but ultimately you're trying to separate and remove equity or value your business or property may hold. It's basically creating debt as a form of asset protection. You can use your equity in the property as collateral against another loan, take a lien against it, or pull a secured line of credit. If other businesses have rights to the equity, it's that much less the creditors or prosecutor can access.

Another way to do this is by having a service entity. The service entity owns some assets outright, or a percentage of them, so if you were to be sued, the service entity is the owner of the items, not the main business entity. This can take some value out of the property so there's less money accessible during a suit. Service entities, as with any other entity structure, come with regulations that must be adhered to for it to remain viable in the view of the court, so make sure to follow through.

Living trust

Estate planning may seem unrelated, but putting your assets into a living trust will offer significant tax benefits to your heirs, as well as avoid long probate proceedings. As for the asset protection trust aspect, it can provide a further layer of privacy to the grantor if the trustee is not the beneficiary.

There are both irrevocable and revocable trusts, depending on how much control you want the beneficiary to have. Real estate is often put into a revocable living trust so use can change as various market influences occur. Your trust assets will be protected because they aren't yours anymore, but the property of whomever your beneficiary is, even though you may likely still control the asset until your passing. Consult your asset protection attorney as well as your estate planner to make the decision that best suits your needs.

The Millionacres bottom line

Although all these steps may not be appropriate in all situations, implementing only one or two will not typically offer much protection. But when layered together, it will make a case against you or your assets undesirable to file, if not impossible.

Properly setting up this cascade of asset protection steps requires an experienced asset protection attorney. If one step is improperly set up, it could result in a domino effect where other parts of your approach are unraveled. Choose a law firm with the track record to prove their process works and is familiar with local and state-specific regulations.

This is very much taking the offensive approach. But once you're in a defensive position, it's often too late. Taking the time now to properly prepare yourself and your real estate investment portfolio from potential liability will almost always pay off in the long run.

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