There are 2 reasons why you should invest in protecting your assets:
Litigation from false claims or damages.
Every year at least two of our investors gets dragged into a lawsuit. These range from a “slip and fall” to disputes over damaged property. Your condo could leak into a vacant condo below you as an example. In most cases, insurance will handle this type of event. However, you an mitigate your exposure by hiding all your assets from the plaintiff. Settling a dispute outside of court when the plaintiff’s attorney has little to gain will benefit you in the long run.
Unless you are a vampire, you are certain to get sick or die. If you don’t prepare for the inevitable, your assets will get eaten by tweakers while your properties linger in probate. Las Vegas is littered with abandoned properties because the owners never got around to protecting them. Do you ever wonder why those boarded up abandoned buildings seem to sit there forever? 95% of them are the remnants of assets that were not properly protected. Don’t let your investments you worked so hard for become bulldozed off the foundation. We have been around so long we actually witness the destruction of assets from customers who never got around to building a castle defense.
The picture above is a typical sequence of events for investors who don’t do anything about asset protection. It took about 8 years for that property to go from vacant, abandoned, torched, condemned and then bulldozed. Yep. I watched it all unfold before my very eyes. That sequence happened to one of my customers and I prefer it not happen to you.
The picture below gives you some idea of asset protection. Imagine your assets are components of castle. Each barrier in your castle keeps you safer. The more the barriers the more the protection.
The best castle defense is one where the living trust owns the LLCs and each LLC own property or a business. When tenants become hostile and have a reason to hire an attorney, they will first look for the ownership of record. If you do not have LLCs or a trust, they have the capability to knock on your door during dinner. If a hostile tenant comes at you, they will seek an attorney who is only interested in liquidating your assets to receive compensation. Contingency fees are only received if they are successful in winning a lawsuit and if they can place judgements on assets. If you have a castle, an attorney cannot see your other assets and will not likely take the case because compensation is unlikely.
Your Trust Attorney – They are the architect of your castle. They will connect your trust to the LLCs and the properties. The key to the castle will be given to your executor in the event you suddenly become incapable of running your castle. Your executor who has keys to the castle should not be your attorney or family! The executor needs to be someone who you trust and has experience running or selling castles. A professional with real estate experience is highly recommended. Typically, this executor will receive some compensation for liquidating your castle. Somewhere in the vicinity of 5%. We have seen families ripped apart because they chose a family member to distribute assets. No matter how fair or honest that family member is, no one is happy. By selecting a third party, you will actually keep your family together.
TIP: Never make the name of your trust similar to your family name. This is a very common mistake. This defeats the whole purpose of having a castle. If name your castle “Jones Family Trust” a plaintiff’s attorney can easily find all the LLCs and assets inside of the trust. Name your trust “Nickel & Dime Trust” or anything you want.
Your Manager – As your property manager, it’s our job to keep tenants from even approaching your LLCs or your trusts. By treating tenants with respect and taking care of your property, we mitigate hostile tenants. We do everything possible to eliminate any reason for them to look for your personal home or assets. With a castle defense, tax records will show an LLC owns the property but they will not reveal the trust owning the LLC or your personal residence.
Your Defense Attorney – They are essentially the person we contact if some clever tenant breaches the moat. In most cases, this attorney is chosen by your insurance company. The reason why we require Limestone Investments to be “Additionally Insured” is so we are have a joint defense. There are no exceptions to this rule. We get sued a couple times a year and this is no joke.
Your LLCs – Each LLC should have no more than 5 properties. Some attorneys will recommend one LLC for each property. This is a judgement call but we recommend each tower or LLC hold no more than $1M in assets. Each business you own should have it’s own tower. It is a good idea to have a family member only responsible for one tower. For example, your son or daughter could be the president of the LLC that manages your rental properties. The other son or daughter could be the vice president of your business. Segmenting your castle will make it stronger. If one collapses, it’s not the end of the world. If you have your castle built properly, your son in law can’t bring down the entire castle.
There is nothing fun about hiring a trust attorney to build your castle. It takes time (usually a couple of months) and it’s not cheap. A castle with one business and 4 properties will run about $4k. Putting this task off is probably the number one mistake investors make. Start working on it now. Before you get hit by a bus.