Beyond Liability: Building a Strategic Defense for Your Real Estate

Liability insurance can provide vital protection against personal injury or property damage claims from tenants or visitors to your properties. However, it takes much more than liability insurance to effectively protect your real estate empire. To ensure your portfolio is secure, there are other excellent options to consider.

Key Takeaways

  • Different types of insurance, such as property, flood, and loss of rent, can offer protection beyond liability.
  • Establishing a limited liability company can help protect your personal assets from claims against the business.
  • Tenants by the entireties is an asset protection tool for married couples.
  • Equity stripping makes your properties appear worthless to creditors.
  • An asset protection trust allows you to transfer property titles to a third party while retaining beneficial interest, providing an additional layer of protection.
  • Offshore trusts can offer effective asset protection, as they’re subject to the laws of their country of origin.
  • A trust-based estate plan can protect your empire if you pass away or become incapacitated.


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Diversify Your Insurance

Liability insurance is just one way to protect the properties in your portfolio. While this type of policy is helpful if your negligence causes harm to people or their items on your property, there are other potentially costly activities that it doesn’t cover. Diversifying your insurance can minimize the financial impact of these events. Other policies you might consider include:

  • Property insurance: Pays out if your property is stolen or damaged by natural disasters, including storms, fires, and landslides.
  • Flood insurance: Covers damage to your property directly caused by a flood.
  • Loss of rent insurance: Reimburses you for lost rent if a tenant moves out before the end of their lease due to an insured event until you find a new tenant.
  • Builder’s risk insurance: Pays out if any contractors or their property sustains damages during the construction of new investments.
  • Umbrella insurance: Covers damage claims higher than a standard liability insurance policy.

Purchase With LLCs

LLCs are business structures that many investors use to protect their personal and business assets. When you purchase a new property with an LLC rather than under your name, the LLC becomes responsible for its debts and liabilities. If a tenant sues, for example, assets outside the LLC aren’t liable. Holding property in an LLC can also reduce the risk of litigation, according to Karlton Dennis of the Forbes Business Development Council, as people can feel daunted by the prospect of a legal battle with a company.

Beyond Liability: Building a Strategic Defense for Your Real Estate

Some investors set up an LLC for every investment property they own, as this practice protects the other properties in their portfolio. However, as filing for an LLC costs money, you may decide to group properties within one LLC. This can be a helpful money-saving strategy if your properties are inexpensive or you have a good relationship with your tenants. A series LLC, which segregates investments into separate sub-LLCs, is another option for protecting a property empire in some states.

Hold Titles as Tenants by the Entireties

If you buy property when married, holding the titles with your spouse as tenants by the entireties can help you protect your empire. Neither of you can transfer property ownership during your marriage without your partner’s consent. Creditors can only attach or lien the property for debts shared with your spouse. Therefore, your property is untouchable if you avoid joint credit arrangements. If you or your spouse dies, the remaining spouse automatically gets sole ownership without the property entering probate.

State laws regarding tenants by the entireties vary. For example, some states let common-law spouses and domestic partners enter this arrangement. Some states only let you use this type of joint tenancy for the premises you live in, while others permit it for any property you own.

Practice Equity Stripping

Equity stripping is a common strategy for reducing the equity value of property so it’s less appealing to prospective creditors. By adding liens to your properties, you reduce each asset’s equity. Your properties appear less valuable to potential creditors, making them less likely to come for your assets. Equity stripping strategies include taking out new loans or home equity lines of credit.

Consider Creating an Asset Protection Trust

An asset protection trust transfers a property’s title to a third party and is managed by a trustee. Creating a trust usually doesn’t go on public record, so your privacy stays protected. Anyone who sues you will have a harder time accessing your real estate assets because they may not know what you own or what those properties are worth. Only a trustee — not a court — can make you hand over your property. There are two main types of asset protection trusts: revocable and irrevocable.

If you choose a revocable or living trust, you can modify its terms and regain ownership. Irrevocable trusts can’t be easily modified. A revocable trust may protect your assets from creditors or legal claims in specific scenarios because you don’t hold the titles, but this usually isn’t the case. However, an irrevocable trust protects your assets from creditors and legal claims. When you set up an irrevocable trust, you permanently give up ownership, so these trusts usually only work for people who intend to pass on their properties as part of an inheritance in the near future.

Move Your Trust Offshore

An offshore trust can offer more protection for investors in the United States. When you create an offshore trust, it’s subject to the laws of its home country. Any creditors who try to come for your property must go due process in the foreign country, which can be challenging for entities located in the U.S. Numerous countries are known as financial havens, which means they have debtor-friendly legislation to protect investors and their assets.

Protect Property if the Worst Happens With a Trust-Based Estate Plan

We’d all like to live forever, but at some point, we all start thinking about what will happen if we become incapacitated or pass away. If the worst happens and you haven’t planned for it, you’re too late to protect your assets from seizure. Therefore, creating a trust-based estate plan while you still can makes sense. A good estate plan will ensure the properties in your portfolio and other assets go to the people or groups you choose. Along with a trust, a comprehensive trust-based estate plan may include:

  • A will and living will.
  • The names of the people who will inherit your assets.
  • The name of a trusted power of attorney.
  • The name of a healthcare proxy.
  • A letter explaining your intentions.

The right strategies to secure your portfolio can vary depending on your properties, budget, location, and stage of life. For a tailored plan, schedule an appointment with the team at Anderson Advisors. As asset protection experts, we know what it takes to keep your investments safe.

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