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Does an LLC for a rental property provide asset protection?

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  • afan
    replied
    If one goes with an LLC it is crucial to have the operating agreement written by people who know what they are doing. It is possible to create an LLC all by yourself, but a very bad idea. If you mess up the agreement or the form and substance of how the LLC functions you can ruin what might have been a good asset protection step.

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  • Steven Podnos MD CFP
    replied
    This is a good thread, full of useful information.   As WCI notes, state law is crucial in deciding what "works" with asset protection.  Insurance is almost always the first step in protection-it is usually relatively cheap and puts a big buffer between you and the plaintiffs.  But it is not always available-especially with malpractice liability (it is there, but at low levels for most physicians).  So, the next step is to add layers of defense-and a multimember LLC may be a good choice in many states.

     

    You have to balance the hassle and expense of adding fences with the likelihood that they will work or at least put barriers in front of the plaintiff's attorney.  A multi member LLC is pretty easy to form and manage and is a very strong consideration in rental real estate.

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  • afan
    replied
    A Nolo summary of the issues.

    https://www.nolo.com/legal-encyclopedia/llc-asset-protection-charging-orders.html

    Jay Adkisson is an attorney who writes articles for lay people about asset protection. You can find a collection of his writing about charging orders at

    https://jayadkisson.com/jay-adkisson-charging-orders.php

    And more of his writing about broad issues of asset protection at

    https://jayadkisson.com/

    It gets complicated quickly.

    When we were considering using an LLC, we spoke with an attorney who was expert in the area. Turned out that our creditor friendly state had so many gaps in the LLC protection that it did not make sense for us. With different facts, she said, LLCs were generally useful for businesses in our state but facts meant that it would not work for us. We went with insurance instead.

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  • The White Coat Investor
    replied




    It’s also relevant whether the LLC is owned by only one person or more than one person.  I am NOT a lawyer, but I understand that charging order protection is usually only available when an LLC has multiple members.
    Click to expand...


    Again, state dependent. And might not matter if that second person is a spouse.

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  • afan
    replied
    That also depends on state law. Some states, like mine, do not accept single member LLCs.The supposed "charging order only" protection has been beaten up pretty badly in a number of cases. I would not count on it without checking carefully with an expert attorney in your state.

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  • mbaCPA
    replied
    It's also relevant whether the LLC is owned by only one person or more than one person.  I am NOT a lawyer, but I understand that charging order protection is usually only available when an LLC has multiple members.

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  • The White Coat Investor
    replied
    Bear in mind that asset protection law is state specific, you don't mention what state you're in and I'm not an attorney in that state.

    LLCs provide both internal and external liability protection.

    Internal protection, as discussed above, limits a creditor of the LLC from obtaining non-LLC assets.

    External protection in most states is limited to a charging order. That means as the LLC distributes assets, the creditor gets them. However, there is no law that says you must distribute assets. But it's a pass-thru entity, so you send them a tax bill on that phantom income. That prospect is usually unattractive enough to induce a favorable settlement.

    Hope that helps.

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  • Faithful Steward
    replied
    Placing real estate inside an LLC, at least here in PA, protects the rest of your assets. So, for instance, if someone falls down the steps in your rental home and breaks their neck, the only assets that stand good to satisfy that lawsuit are the assets of the LLC.

    I normally recommend that my clients who own real estate place each property into a separate LLC. If you place all your properties in one LLC, they all are available to satisfy claims against the LLC.

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  • Fake Doctor
    replied
    Thank you all for the answers.

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  • jdkelso
    replied
    Agreed.  The LLC allows you to have "limited liability" in case something happens to renters in the house or on the property.  They can only sue for the value of the assets in the LLC.  It is an insurance policy.  If you don't own the property out right and have a mortgage, the mortgage will most likely have a clause that says you can't convert to an LLC because the new LLC will be the new owner and the mortgage company must agree to any transfers.  I have some clients who converted anyway.  If the mortgage company were to find out, they could call in the loan.

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  • jfoxcpacfp
    replied
    Larry Ragman is correct - you are looking at this backwards. The LLC is meant to protect you from harm done to rental property occupants or visitors to the property (house burns down, ceiling falls in, etc.) An umbrella policy may or may not be better, depending on facts and circumstances. This is something you should be able to discuss with your CPA, financial advisor, or attorney.

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  • Larry Ragman
    replied
    Perhaps one of the lawyers will weigh in here, but no. The LLC is your asset, so it is attainable by your creditors. Instead a LLC structure is typically used to protect your other assets from law suits based on your ownership of the real property. There is some debate on whether or not the protection offered is worth the bother. Good umbrella insurance coverage is a better bet.

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  • Does an LLC for a rental property provide asset protection?

    If I buy a rental home and put the title in an LLC does that mean it’s protected from my creditors or no?
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