Do I Need LLC For Asset Protection If I Have Good Insurance?
I was originally planning to transfer my rental properties into an LLC, in order to protect my other assets if I were sued - but if I have good liability insurance, do I need to do this?
eg., If I have my rental properties each insured for 300k, and I also have an umbrella policy for 2 mill, would I need the asset protection of an LLC?
That's a very good question, as I was thinking about forming an LLC with my brothers strictly for the assett protection. We too were informed that we could get an umbrella insurance policy. While I do not know the answer to your question, I am curious if asset protection was your sole motivation for forming the LLC or if there are other benefits that I am not aware of.
Any info would be very helpful.
Thanks!
JeanMarie
How big is your umbrella policy? Mine is $2M. So what happens if someone on my property gets raped and a jury decides that it's my fault for whatever reason. They award a judgement of $10M. There goes my house, my car, my boat, my other investment property, my stock portfolio, etc.
Why would you NOT want to use an LLC???
Think of the LLC as a wall between your personal assets and your business exposures. The liability insurance simply protects the respective entity (you, the LLC, a land trust, a corporation, etc...).
In other words, it would be prudent to have the LLC AND "sufficient" liability insurance protection...
Insurance is one aspect, but don't forget about the tax advantages one has while using a LLC to conduct business.
Mark
Income from the LLC flows straight through to your tax return. In some cases, the LLC doesn't even file a separate return. So, unless you're doing something really complex, there really aren't any tax advantages. I've seen this question a lot on this forum and many people run into unexpected problems transferring property to an LLC, the most common being that the lender can invoke the due on sale clause if the property is transferred (or not transferred correctly) and insurance rates may be much higher for an LLC. Just passing on what I've seen. Hope it helps.
Blueford is correct, however, the point I was trying to make (ineffectively) was:
One of the key features of incorporation is the "corporate shell" placed around assets owned by the corporation, making them separate and distinct from personal assets. With corporate status, an individual's personal assets are, for the most part protected. In a partnership, this protection is given up, usually to secure the tax advantages of partnership.
The exciting thing about an LLC is that it provides full corporate protection even while giving the tax advantage of a partnership.
Am I making any sense : )
The problem is that without an LLC, you can, and likely will have holes in your protection. For example, if you read most liability policies, there are always exclusions for things such as lead poisioning. Also, the policies usually only pay something like $2k in medical bills. An LLC blocks anything, even negligence on your part. If the properties have a mortgage, you will probably have to first put them in a land trust and then make the LLC the primary beneficiary. If you try to move a mortgaged property into a LLC, you will most likely trigger the Due ON Sale Clause.
Also, just because your insurance covers you, doesn't mean you haven't opened up a can of worms. Insurance companies already are leaving the homeowner's business, and they certainly don't like anyone who has a claim against them.
It's interesting you bring this up. My husband and I are investigating all avenues currently. We are purchasing 2 rental properties, and when I spoke with my insurance agent yesterday, he seemed to try and discourage me from placing them into an LLC or C corp since the properties would then be classified as commercial and therefore carry a higher premium (about 300-400 more per year). He recommended we keep them personally owned until we have 4 properties, and then we would HAVE to insure them as commercial. HOWEVER, I will be contacting my real estate attorney, who also happens to be quite a RE investor, because I would bet my bottom dollar that he has a land trust and LLC set up. We are fairly certain this will be our path of ownership. In any case, we will NOT own them personally. Much too dangerous! I really love my personal assets and want to keep them.
Just my thoughts.
Diana,
You need a new Agent...
Check with the RE Attorney or a local REIA group for a referral.
Tim
Tim,
Our thoughts exactly.
Thank you,
Diana
Quote:You need a new Agent.norrist,
I don't think Diana told us all the details behind her conversation with her insurance agent. I suspect that Diana was extending the liability coverage on her homeowner's policy to her rental properties.
If that is the case, then her insurance company may very well have a limit on the number of additional properties to which liability coverage will be extended. Furthermore, they may refuse to extend the homeowner's liability coverage to any rental property if the insured owns more than four rental properties.
You might suggest that Diana purchase a separate rental dwelling insurance policy with its own liability coverage for each rental property she owns. Then, address when it might become more prudent to lump all her liability coverage under a single umbrella policy.
I have been looking at a LLC for my REI as well until my attorney and accountant talked me out of it. Look carefully at the implications of setting up a LLC. The negatives for me outweighed the benefits.
Here are the negative opinions for LLC's in Michigan from:
MY Atttorney:
>>All evicitions will have to be represented (ie. pay an attorney to go to court to evict tenants). Adding hundreds dollars of cost for each eviction.
>>While LLC protects personal assets most of the time... if any mistakes are made (undercaptalizing LLC, Gross neglience, underinsuring LLC, not setting up LLC or running the operating agreement correctly) the veil can and will be penetrated.
>> LLC will earmark you as a professional investor and classify all rental income as active income and not passive by IRS.
Accountant:
LLC will increase cost of tax preperation by 30%
Their reccomendation.. KISS (Keep it Simple Stupid) and insure yourself to the max.
Actually, I was NOT extending my homeowners policy. This agent doesn't even insure my home. I wanted a completely separate policy. His suggestion was so that we could keep the cost of insurance down. He said that the 5th property purchased automatically requires you to use commercial. He said that we can double the coverage for the same cost if we keep it owned in our names. I told him the cost wasn't as important as the protection for my personal assets. He does not represent only 1 company, he is an agent/broker representing several different insurance companies. I think this should give you most of the details.
Diana
webuyhousesmi
Thank you for the great information regarding LLC's. It will give me specific questions to ask my attorney, although I am confident he will let me know. I am sure he has his re investment properties property protected and being used as the best tax advantage. I will definitely post a response when I talk to him early this week.
Diana
webuyhousesmi
I don't know what CPA your attorney uses to estimate a 30% increase in tax preparation, but this doesn't sound like a valid reason from my experience. I also question being earmarked as a "pro"... JohnMerchant may be a good source here (on TCI) for a "2nd opinion" as well. Though some attorney's may favor other entities over LLC's, owning properties personally and exposing personal assets is a LARGE negative consideration that should be rightfully addressed...
">>All evicitions will have to be represented (ie. pay an attorney to go to court to evict tenants). Adding hundreds dollars of cost for each eviction.
>>While LLC protects personal assets most of the time... if any mistakes are made (undercaptalizing LLC, Gross neglience, underinsuring LLC, not setting up LLC or running the operating agreement correctly) the veil can and will be penetrated. "
webuyhouses,
The need to get an attorney is a state thing from what I was told by a PM in your state. As far as the other problems related to the possibility of the veil being pierced, I believe those primarily apply to corporations,not LLC's. My attorney said that owning an LLC is pretty much like working for a company. If the company gets in trouble, no matter what it is, you can simply walk away from it if you want to. Of course, that assumes you didn't do something that was criminally wrong.
Diana,
I stand corrected.
State Farm insures eight of my rental properties, each with its own liability rider.
I asked the agent how many properties they will insure for a single investor. His response was not based on the number of properties, but rather the total risk or insurance liability.
He said that when my aggregate loss coverage for all my policies reached $2MM, he would not be able to write a new policy for me. Since I am well under this threshhold, we did not explore whether a commercial policy would have to take over at that point.
This might be a stupid question but, What about an umbrella policy? Can you possibly have all your property covered by an umbrella policy while under an LLC? Will it come out cheaper, or not advisable?
Not at all a stupid question. Many people confuse "umbrella" with "blanket" coverage. An Umbrella is "excess" liability overlying coverage within your main policy(ies). A "blanket" usually covers more than one property or location... An LLC, just as a sole proprietorship, or any other ownership form, can purchase umbrella coverage...[ Edited by norrist on Date 10/04/2004 ]
Well, I finally spoke with my real estate attorney. He definitely, no doubt about it, suggests we hold the properties in an LLC and get the insurance through the company. He said that in the event there is some sort of catastrophe, this is the protection we want. However, we are going through with the purchase in our names so that we can expedite the process, then he will transfer them into the LLC. The only thing we will personally be liable for is the mortgage, which he said would be the case even if we were already an LLC purchasing these properties. We would still have to sign personally for the mortgages. Of course this means we would give up the classification of passive income, but I guess I would rather sleep peacefully at night with the LLC protection. Hope this helps any of you. It certainly shed light on the subject for me.
Diana
What? Tests for passive income are the same whether property is in an LLC (and income flows out to the owners) or the property is held by the individuals. Please elaborate.
Hi Diana,
I have a property under my personal name that I need to transfer to the LLC I set up. my email is **Please See My Profile**, is it possible for you to let me know how you did that.
Thanks
RF
Quote:
On 2004-10-06 15:57, DianaS wrote:
Well, I finally spoke with my real estate attorney. He definitely, no doubt about it, suggests we hold the properties in an LLC and get the insurance through the company. He said that in the event there is some sort of catastrophe, this is the protection we want. However, we are going through with the purchase in our names so that we can expedite the process, then he will transfer them into the LLC. The only thing we will personally be liable for is the mortgage, which he said would be the case even if we were already an LLC purchasing these properties. We would still have to sign personally for the mortgages. Of course this means we would give up the classification of passive income, but I guess I would rather sleep peacefully at night with the LLC protection. Hope this helps any of you. It certainly shed light on the subject for me.
Diana
Hi Diana,
I have a property under my personal name that I need to transfer to the LLC I set up. my email is **Please See My Profile**, is it possible for you to let me know how you did that.
Thanks
RF
Quote:
On 2004-10-06 15:57, DianaS wrote:
Well, I finally spoke with my real estate attorney. He definitely, no doubt about it, suggests we hold the properties in an LLC and get the insurance through the company. He said that in the event there is some sort of catastrophe, this is the protection we want. However, we are going through with the purchase in our names so that we can expedite the process, then he will transfer them into the LLC. The only thing we will personally be liable for is the mortgage, which he said would be the case even if we were already an LLC purchasing these properties. We would still have to sign personally for the mortgages. Of course this means we would give up the classification of passive income, but I guess I would rather sleep peacefully at night with the LLC protection. Hope this helps any of you. It certainly shed light on the subject for me.
Diana
Hi Diana,
I have a property under my personal name that I need to transfer to the LLC I set up. my email is **Please See My Profile**, is it possible for you to let me know how you did that.
Thanks
RF
Quote:
On 2004-10-06 15:57, DianaS wrote:
Well, I finally spoke with my real estate attorney. He definitely, no doubt about it, suggests we hold the properties in an LLC and get the insurance through the company. He said that in the event there is some sort of catastrophe, this is the protection we want. However, we are going through with the purchase in our names so that we can expedite the process, then he will transfer them into the LLC. The only thing we will personally be liable for is the mortgage, which he said would be the case even if we were already an LLC purchasing these properties. We would still have to sign personally for the mortgages. Of course this means we would give up the classification of passive income, but I guess I would rather sleep peacefully at night with the LLC protection. Hope this helps any of you. It certainly shed light on the subject for me.
Diana
Mantis,
Regarding who owns or controls the LLC. Could this be accomplished using a Family Limited Partnership (FLP)? The LLC would be owned and controlled by the FLP. This assumes that the FLP is structured correctly.
Are you an attorney?
Thanks,
Jon
My wife and i are just about to purchase our first renat property in Syracuse NY.
Should we quitclaim our personal property (house) to only one of us?
Then set up the Grumpy Sleepy and Doc structure described by Mantis?
also, I spoke to some lenders, all of which said that I cannot purchase properties in an LLC name... needs to be in my name. Would I purchase them in my name and then quitclaim them to appropriate LLC? Is that allowed?
thanks
Thanks for the useful info Mantis,
I am quite the newbie in the investment real estate game.
My understanding thus far was that it is best to quit claim my home to my wife and then form my LLC(s) with myself as the only member. By doing so, we totally separate assets as a precaution to the threat of having the corpoate vail pierced.
is it just as secure in this case, leaving my home in both names and having one NV LLC with wife and self as members and one LLC per investment property controlled by the NV LLC?
why is it so important to have at least 2 members of the NV LLC?
The nice thing about this structure is that the C Corp. is the general partner and therefore has the liability as opposed to you and your wife. And the cost is only 1% that is taxed inefficiently through the C Corp (cheap insurance). Make sure that you do not exercise rights similar to a general partner in this case though because these transactions require that you respect limited partner vs. general partner duties. Your attorney can advise further on this.
thanks.
Quote:
As far as increase in Insurance Premium, you can just put your Land Trust into your policy instead of your LLC.
I assume you mean naming the LT and not the LLC? If so, How would doing this affect (or not affect) the premium?
Tim