Asset Protection for Landlords

by James J. Cummings III on February 15, 2011

“Asset Protection,” as discussed here, means devising legal methods that will help protect you against lawsuits, claims and judgments arising from the ownership and operation of rental property.

Today’s insurance policies include a growing list of “exclusions” intended to reduce the items for which insurance companies must provide coverage. Accordingly, as the list of exclusions grows (lead paint, mold, asbestos, etc), property owners are increasingly at risk of suffering staggering losses from lawsuits.

“Litigation Lottery” is a term often used to describe the explosion of litigation in America today. Newspapers and television bombard us with news of huge judgments in favor of people who seem to have caused their own injuries. Our juries have failed us as they give our money away like Lotto proceeds!

Asset Protection is a long-term strategy of “lawsuit avoidance” as well as protection against judgment creditors. Asset Protection requires advance planning and careful implementation with the help of your attorney and tax advisor. It is critical that you implement asset protection strategies before trouble strikes. A good asset protection plan will discourage suits against you in the first place, and then even if you are sued, it will help protect your assets from seizure.

So what can an embattled landlord do to hold off the predators? Plenty! But one size does not fill all. Unlike real estate closings or other such legal work, asset protection requires individualized legal planning.

Situations differ from one landlord to the next. Some landlords have just a few rental units and depend on a full time job for their primary support. This person’s assets might include a house, car, savings and other income. Another person may be a full-time landlord and depend fully on his rental property for income and support. Some landlords may do much of their own work, while others may hire management companies or contractors.

Each of the situations above require different approaches to asset protection. The object is to:

Discourage suits in the first instance
Minimize loss of rental properties
Protect salaries from garnishment
Fortify savings and investment funds
Retain the family home
Guard against personal judgments
Segregate rental property ownership
Make assets unattractive to creditors
Keep personal assets invisible

Asset protection strategies usually involve a combination of things including the creation of limited liability companies or corporations, transfer of rental properties to various entities you own, transfer of personal assets, “equity stripping” of your rental properties, handling operations through your own management corporation, becoming an employee of your corporation, transfers to out-of-state companies, and similar techniques designed to discourage and frustrate the litigation predators. A cost-effective and practical plan is within everyone’s reach.

Lately, asset protection has become the subject of popular books and newsletters. Asset protection strategies have been sugar-coated, over-simplified, described as “bullet-proof” and otherwise made to sound easy. Let me tell you that when you are sued for everything you ever worked for, it will shake you to your bones. You will pray that your asset protection plan works and that you did not scrimp on it. Effective asset protection requires advance planning and careful implementation.

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