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LLC Landlord Protection - How Do You Protect Yourself if You're No

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I'm a landlord and I've been told that the best way to protect your assets are either:

 

1. Start an LLC with your spouse, so that it's not a sole owner LLC, own rental properties under it,

2. Set up an irrevocable trust, with your spouse as the beneficiary, and own the rental properties under this,

3. A combination of the two where the trust owns the LLC, and the LLC owns the rental.

 

Problem: I'm not married!

 

So if I don't want to be sued personally, and I don't want any personal judgments related to rental properties, how do I hold these assets safely?

Thanks,

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This is probably not the answer you want to hear, but it's the best advice I've got. There are too many variables that affect the subject of asset protection. You already noted how marital status can affect this. But also, your existing assets, your location, type of investing you do, etc, all affect the approach you should take. That said, you need to sit and speak with a professional who can review all of the above, and then some, and make his recommendations accordingly.

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Contrary to what you have been told, the best way to protect your assets is to minimize the opportunity to be sued. Operate your rental activity professionally, don't discriminate, maintain your property in good working order, make all needed repairs promptly, treat your tenants fairly, and don't violate any of the landlord-tenant laws for your state, county, and municipality. As a precaution, purchase a liability insurance rider with each of your hazard insurance policies. If you need more liability coverage, purchase an umbrella liability policy.

 

Understand that a LLC does not protect any of the assets held by the LLC. When the LLC is sued, all the assets held by the LLC are at risk. The entity structure promoters will tell you that the LLC will shield your personal assets from attack when a lawsuit arises from activities within the LLC. However, if you personally manage the property, you as the manager are also personally liable for anything that you did or should have done, but didn't. Make a faulty repair or fail to make any repair in a timely manner, you will still be personally named in the lawsuit and held personally liable. In this event, the LLC assets are at risk in addition to your personal assets. The upside here is that most of the time, when you are adequately insured, lawsuits are settled within the insurance policy coverage limits. Even if you have a LLC in place, you still need insurance. The LLC is not a substitute for insurance.

 

The entity structure promotors will tell you that if you are personally sued for something that happened outside the LLC, a successful judgment creditor is limited to a charging order against your LLC. The reality is that a charging order only protects the non-offending partners from liability for the actions of the offending partner. If you have a single member LLC, then there are no non-offending partners to protect. The LLC charging order protection has been disqualified by the courts for a single member LLC. This is the primary reason that you are told to establish a multi-member LLC.

 

The question to ask yourself next, is how much are your personal assets worth? If you have a house worth $300K with a $250K mortage, a car worth $15K with a $12K auto loan, no significant cash deposits in the bank, and nothing in the stock market, then don't worry too much about asset protection. When your net worth is a couple million $ or more, then you might be a little more concerned about using some form of entity structuring for estate planning, wealth preservation, and business continuity.

 

Asset protection is not a good enough reason by itself to justify the cost of establishing and maintaining an entity. If your only reason for establishing the entity is asset protection, then the courts will still "pierce the veil". rendering the LLC worthless.

 

I am not well versed in trusts but from what I do understand, I don't like irrevocable trusts because you surrender control. Someone else makes all the decisions about your rental property and may even liquidate the trust assets without notice.

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