Asset protection is one of those phrases bantered around more and more these days in all sorts of places, especially in real estate investment circles.  You’ve probably heard all the statistics about the number of lawsuits in America, so much so that you’d believe me when I say that 3 out of every 2 Americans will be faced with some kind of lawsuit in their lives (credit to Yogi Berra for that kind of statement).  But what does it mean to you as a real estate investor and how can you benefit from thinking differently about liability as you go about your real estate business.

In its simplest form, asset protection is shifting liability from you to someone or something else.  Legal liability generally follows ownership and responsibility.  If you own something that causes harm to another, your name will be on the lawsuit to remedy that harm.  If you have an employee who discriminates or is involved in harassment, you as the employer are generally responsible for their behavior.  Each state may have variations of these principles, but these are the general rules of thumb.  

The key then to asset protection is don’t own anything and don’t be responsible for anyone.  Wow, that was easy!  But can you live your life that way or do you even want to?  Is there a way to have it all and still not be a target?  Let’s explore some possibilites.

As a real estate investor, you should be familiar with title insurance to protect you against title defects when you purchase a property, homeowners insurance to protect the house and renter’s insurance to protect your tenants’ property.  You may also have a general liability policy for your business or a personal umbrella policy to cover any excess liability.  Insurance is generally the first line of defense for common liabilities.  Your payment of the premium, shifts the burden of paying for a larger claim against you to the insurance company.  The more insurance you have, the less risk you will have of coming out of your own pocket to pay for damages.

However, what happens to you if you have a rear end collision with a highly paid neurosurgeon’s car, his injuries leave him a quadriplegic and your auto insurance cannot cover the full amount of the claim.  Or a drug deal goes bad at one of your rental properties and your tenant shoots innocent people who then sue you as the home owner for wrongful death of their loved ones.  Your insurance company may not cover the full amount of damages and you could still be a target for the remaining amount. This is where your asset protection plan must come into play if you want to keep all your hard earned investments.

Your asset protection plan must begin now, BEFORE you actually need it.  In a number of court cases, judges have undone asset protection plans that were structured up to three years before a party became liable.  In fact, most judges will find a way to undo an asset protection plan that looks like it was structured to avoid liability.  How do you overcome this trap?  Talk to an attorney who is familiar with your type of business and regularly helps people structure their affairs to avoid liability.  If your plan looks like it was put together as a normal part of your business and personal life, it is much more difficult for a judge to undo your plan.  

What should your plan include?  Two components – First, ways to avoid or shift responsibility to pay for damages and second, ways to keep your personal name off your assets.  We’ve already touched on one way to shift liability through insurance.  Another way to shift liability is to delegate responsibility by contract to someone else.  For example, when you have an accountant prepare your taxes, he will accept liability to the IRS for his preparation errors.  Similarly, hiring a management company to manage your properties can allow you to shift liability to them for items covered in your contract with them.  Again, get an attorney involved in either drafting or reviewing any contract such as this to make sure you know where you stand and your assets are covered. Additionally, if you have others you have delegated authority to, make sure you have procedures in place so they don’t do or say things that they shouldn’t. A written procedures manual will help you be better organized and can potentially save you from liability.

In my next article I will discuss some of the ways to keep your name off your assets so you can reduce the risk of losing everything in one lawsuit.

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