Asset Protection: From Protecting Your Downside To Building Your Legacy
When someone starts out in the world of real estate investing, they are often focused only on finding the right cash flowing deals and acquiring them to build a portfolio. But as time goes on and their portfolio grows, their thinking will begin to change.
Seasoned investors will start to think instead about how to protect themselves and their assets, in addition to protecting themselves and their families through things like supplemental life insurance. They might realize that they have a lot of exposure to loss, or they might even experience a challenging situation such as a damaged property or a lawsuit ? that acts as a wake-up call to the need to protect themselves.
But asset protection is more than simply protecting yourself from loss. It’s really about preserving your way of life, protecting your family, and building a legacy that you can pass along.
Why Asset Protection?
At first glance, asset protection can seem like a boring topic. After all, it?s way more fun for investors to look for cash flowing deals than to think about all the bad things that can happen to their properties.
At one of REIN?s recent Mastermind Sessions, REIN CEO Patrick Francey, real estate investor and accountant George Dube, insurance broker Chris Westrop, and real estate investor and lawyer Barry McGuire weighed in on why it?s so important to think about asset protection.
In Barry’s words, It’s not just about protecting, which is kind of reacting to negative things that might get thrown at you. Instead, you?re asset planning. You’re working with a team to say who you are in this game, where you’re heading, and where you want to end up. What you?re really doing is planning to keep, grow, and pass on whatever you?ve worked so hard to achieve in your business and in your investing life. For me, this is not just asset protection; it?s a wider question of legacy planning? it?s a much bigger, broader, more inclusive, positive thing to do than just building the fort around your rental properties and your bank accounts.?
George added that real estate is an asset but so is family, suggesting that by protecting your real estate assets you?re really protecting your family.
With Barry?s and George’s definitions of asset protection in mind, the conversation becomes one of the most important conversations an investor can have!
Patrick explained that life might start out simply and with the best intentions but it becomes more complex over time as your relationships change (such as a marriage or divorce or a new joint venture partnership) and as you accumulate assets. Each of these new components adds a complexity and will require further asset protection planning.
Asset protection is done to protect your assets from excessive taxation, from lawsuits, and from loss. Fortunately, there are a number of tools available to help investors.
Tools of Asset Protection
There are a number of tools available to an investor to help them protect their assets. Work with your team to identify the right mix of these tools for your situation.
The first that most investors think of is a corporate structure. However, this doesn’t always necessarily mean incorporating right away, as explained by George: ?From a tax perspective, yes the corporation may be the solution but it is certainly not definitively the solution. You may have partnerships, limited partnerships, trusts; you may have investments and activities going on in different countries that will require different forms of investment and different planning.? So corporate structure is a tool but this corporate structure can take many forms.
Corporate structures can also protect you from liability, in addition to E&O
insurance, and Barry explained how multiple corporate structures might be appropriate as investors grow their portfolios: The point of asset protection is to take this bucket of assets in a corporation and protect the other bucket of assets over here from overlapping, so you can only be sued in one corporation, not both corporations.?
Another asset protection tool discussed by the panel is insurance. Chris said, a lot of people, when they’re buying their first property, will attach that property: they’ll get insured with their home insurance policy. But as someone grows and incorporates, the rules change. If you are considering incorporating, talk to your insurance broker who’s doing your insurance for you and find out if it will cause any issues so that you are prepared for that if it does in fact happen.
Not only should landlords have insurance on their property but they should ensure that their tenants have home coverage you can afford as well, Chris said. One thing that we’ve started suggesting to our clients is if your tenant tells you they have insurance, find out who the broker is and get the tenant to write a letter to that broker saying, I hereby authorize [your name] to call you every six months to confirm that I have insurance and I authorize you to disclose that information to me. You’ve now got that ability to phone up the broker and say, ‘just want to make sure that my tenant still has insurance’ and they can say yes.
Asset Protection Strategies
Asset protection is an ongoing approach and investors should start thinking about it even if they only own just one small property. George explained: Spend the time, even when today’s assets may not be significant. Protect your assets in a coordinated fashion and have a plan that’s scalable. Now you’re not wasting opportunities or costs, or going back fixing; instead, you’re tweaking and taking advantage of new opportunities.?
Work with a team of experts who can help you construct the right asset protection strategies for your situation. In Barry’s words, Asset protection strategies depend on your own situation and it depends on you taking some action to work on what you’re why is. What is yours why? Why are you doing this? What are the goals? What’s the plan? How long is it going to take you to get to that plan??
Patrick followed up with a story from his own investing life to illustrate: You know when my wife Steffany and I started investing in real estate back in 2001-ish, we did have a fundamental vision of what it would look like, plus I had an operating company and she had an operating company. So as our accountant sat with our lawyers, they actually put in place a structure for us based on the information they had at the time, based on what we knew or felt we were going to do and committed to doing. So that?s where we started. Of course, things change; plans change; partners come into your life. But if the structure is at least an overarching structure that the experts can build into now, that?s paid off significantly for us, especially when it comes to the tax planning component: so when I’m having conversations with my accountant, telling him what I want to do and what my thoughts are, he’s saying, OK, from a tax perspective we’ll slide this over here, we’ll do that over there, this will all come together.?
It’s essential, to be honest in your disclosure with your team of experts. Patrick used this example: ?If you went to your doctor and said, ?well, I’m sick, and he’s trying to figure out what?s wrong with you and he?s asking these questions, it would be really silly to not disclose to your doctor all of the things that you?ve got going on. It’s exactly the same here. Your lawyer, your mortgage broker, your accountant? disclosure is what?s going to keep you out of trouble, given that these are the team of people that are going to help you overcome the challenges that you face.?
Another great asset protection strategy is simply to be a good landlord. This is overlooked but it’s a great way to help protect you. Chris weighed in that It’s not likely a tenant is going to be able to sue you for anything as long as you’re a reasonable landlord and you’re maintaining the premises in a reasonable condition. If you aren’t, your tenants can contact a lawyer to take you to court, if your homes are based in places such as Illinois, they can approach a personal injury attorney springfield and put a case against you, so make sure everything is above board. If you’ve got a deck, make sure there are railings on it. If you’ve got stairs, make sure there are railings on the stairs. If the tenant tells you there’s a problem with something, fix it.?
Asset protection it’s a topic that might initially make your eyes glaze over with boredom when you’d much rather be scouring markets for exciting cash flowing deals. But once you have these deals, it?s important that you protect and preserve those assets from excessive taxation, liability, and loss, ultimately to help you build your real estate portfolio. You’ll sleep better at night, enjoy greater cash flow, and pass along a better legacy to your children.
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