When purchasing real estate, it’s critical to protect ourselves and our possessions from lawsuits. We live in the most sue-happy society, in one of the most litigious times, and you need to protect yourself. One way to help prevent people from obtaining all your assets is to take precautions and think ahead, in order to ensure all your life treasures are secure. When a lawsuit is filed against you or your business, all your personal assets like you car, house, equity in your house, and bank accounts are at risk to be taken away. Here are a few ways to help ensure your real estate and personal possessions will be protected and secure.
1. Set Up Your LLC to Hold Your Real Estate
Let’s imagine you are purchasing 4-plex for an investment and will be renting it out for profit. When setting up your entity, make sure it is structured properly to hold the title of the real estate. An excellent entity for real estate is a Limited Liability Company (LLC). When you set up your LLC be sure that is it holding the title of your 4-plex. This structure also helps protect all your personal assets. For example, if a tenant of that 4-plex sues for falling on the property and wins the court case, they are not able to acquire all your personal assets like your bank account, the equity in your home, and all your other assets because the 4-plex is owned by the LLC. They are only able to access the assets in the LLC.
However, if you personally owned the 4-plex and did not set up an LLC to keep your assets separate, you could be vulnerable to unlimited personal liability, and you could be personally responsible for paying back whatever the court awards to the tenant for compensation. For some, that could mean bankruptcy. This is why it’s valuable to set up LLCs for protection.
2. Properly Maintain Your LLC
In order for your LLC to protect you from claims, you must maintain it much like taking care of a garden. Taking care of your garden by watering and feeding it properly is the best way for it to survive and keep it producing food for you. In order for your LLC to survive and keep protecting you, you must pay the annual fee to the state, ensure that minutes are being kept at meetings, and there needs to be a resident agent to accept service of process, or notice of a lawsuit. If you do not follow these easy steps, your business entity will lose its good standing, it will not be able to protect you as you could be vulnerable to piercing the corporate veil, and all your business and personal assets could be taken if a legal decision is decided against you. However, if you follow these steps you will be properly protected.
3. Segregate Your Assets
When creating your LLC, it is important to keep in mind that people are still capable of obtaining all your assets within that LLC. So why put all eggs in one basket? Instead separate your assets into different LLCs to act as a safety net, and ensure they aren’t able to obtain all of your real estate investments or company assets.
4. Get a Wyoming LLC to Hold Your Other LLCs
Certain states have different regulations on LLCs that can offer more protection, so why not take advantage of that? Wyoming is special in that it has great asset protection, great charging order protection, and it doesn’t list your name on the internet. Wyoming LLCs can own other LLCs established in other states. Not only does it have these great benefits, but it also has one of the most affordable state fees. Corporate Direct has also identified a way to ensure that the more preferable protections of Wyoming’s state laws take precedence over other state laws. This is a service we offer through our copyrighted legal language that is not available from any other company or law firm. We call it Armor8® . Learn more about our ultimate Wyoming LLC protection.
5. Use Equity Stripping
Another method of protecting assets is ‘equity stripping,’ sometimes called equity transfer. With equity stripping you protect your equity by encumbering the property itself. Debt is a form of asset protection. The more debt, the less equity, the lesser chance of litigation. Since debt is asset protection, why not create the debt yourself? This can be done several ways such as spousal transfers, using your property as collateral, obtaining a secured line of credit, and a technique called cross-collateralization. Cross-collateralization is a term used when the collateral for one loan is also used as collateral for another loan. If a person has borrowed from the same bank a home loan secured by the house, a car loan secured by the car, and so on, these assets can be used as cross-collaterals for all the loans.