How To Protect Yourself From Real Estate Liability
October 9, 2007 by David Cowgill
When dealing with real estate investment properties you want to make sure you’re always protected. I don’t just mean having a proper landlord insurance policy, I’m more referring to what’s called a living trust structure.
The most successful real estate investors out there today all have some sort of trust set up for each and every one of their real estate properties. This could be just their primary residence, or it could be dozens of apartment buildings they own. Since real estate deeds are a publicly accessible document, it means anybody can find out whose name is on title for a specific address. This type of trust structure which is better known as a Living Trust or Master Protection Trust is very useful for your real estate investments. It has many benefits one of which is especially important to celebrities and wealthy individuals. Do you think that Donald Trump or Bill Gates is names are listed as the owner of any property title document? I don’t think so.
I’m guessing that most of you aren’t celebrities or extremely well-off individuals so protecting your name isn’t as important as it is to them. But nevertheless keeping your identity hidden and assets protected is still very important. Let’s say for example someone gets his seriously injured on one of your properties and they decide to sue you for millions of dollars. Now your landlord insurance policy will cover a certain amount depending of course on your liability coverage but it won’t cover anything on top of that. So when this injured tenant of yours decides to personally chase after the owner of the building he’ll only be able to find the name of the trust listed on the title document. This prevents him and his lawyer from coming directly after you in hopes of obtaining additional money.
An easier way to visualize this is to think of a company like Google. Say one of Google’s employees gets injured by another co-workers pet rock. This employee’s lawyer cannot sue the pet rock owner directly since they are protected by Google Corp.. The lawyer has to then sue Google Corp. and cannot go after the co-workers personal belongings or wealth.
I am actually in the process now of working with a real estate attorney to set up a Master Protection Trust. I at first didn’t want to spend the $5,000 in legal fees and paperwork but then realized for someone who owns multiple properties it makes good business sense. So right now each one of my investment properties has title in my personal name but now needs to be moved into individual land trusts. Here is an illustration of how I plan on structuring everything.
So as you can see, the shell of the structure is the Master Protection Trust which is a rollup and direct holding of all assets. Underneath it is the second layer of protection and could potentially be any sort of corporation but in this instance I’m using a limited liability corporation (LLC). Then rolling up to the LLC are my real estate investment properties. So each one of these investment properties will be moved out of my personal name and into a new land trust name. You can call each one of these properties any name you want but most commonly I’ve seen the address of the property used as the land trust name. This makes it simple to know and keep track of each one of your investment properties especially if you continue to acquire more. You can of course have more than four as the illustration above is just a basic example of how you would construct this sort of protection for yourself.
Now it does take time and money to set up this sort of protection and structure and if I knew about this before acquiring multiple properties in my personal name I would’ve done this long ago. Even if you have just your personal residence or one investment property, I would highly recommend contacting your local real estate attorney to help draft these documents for your protection and peace of mind.
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