While some real estate automatically receives protection from creditors, your investments in this area are at risk if they are not properly protected. Creditors or others who have filed lawsuits against you may be able to gain access to the investments that you have saved for years to make. However, if you take the appropriate steps, your real estate investments can be protected. Some of these may even be as simple as the proper corporate form that you choose to make your investment.
The first thing to remember is that the usual homestead exemption that protects your residence from creditors will not apply to your real estate investments. This is because it must be your own personal residence in order to be protected. Real estate investments are treated the same as any other property that you own. Therefore, it is important to make sure that you secure these assets the same way as you would with any other investment.
Unlike your checking or investment account, real estate is something on which you can purchase insurance. If there is a risk that something may happen at your investment property that could subject you to legal liability, insurance can help cover the loss so your property is not at risk. In addition to insuring the property, you can also purchase an umbrella policy to protect you against personal liability. By having insurance for the entire value of the property, you can help protect it from a lawsuit.
Check the laws of the state in which you live. Some states allow for something that is called a joint tenancy in the entirety. This is when a husband and wife own property together. When this happens, it is difficult to seize the property. For example, when there is a judgment against one spouse, creditors cannot take property from the joint tenancy. One must be legally married in order to create this tenancy. However, this will make it difficult to obtain a mortgage on the property if the property cannot be used as collateral. However, the joint tenancy will protect against creditors like those who file lawsuits. This tenancy will last so long as the spouses are married, but will end when there is a divorce.
While putting your real estate property in an LLC will not necessarily protect the property itself, it can help provide some degree of safety. If you put each real estate investment into an LLC, it will be immune to everything but lawsuits against that particular LLC. An LLC is only liable in a lawsuit to the extent that it holds assets. When combined with a land trust below, you will get even more protection from creditors.
Depending on the state in which you live, you may be able to establish a series LLC. This consists of a master LLC and will then set up as many separate LLCs as necessary. These are sub LLCs and each one will house a real estate investment. You will not need to make filings to establish each sub-LLC. Once created, they become automatic by operation of the master LLC agreement. This is a way to efficiently create LLCs and keep properties separate, providing them with the maximum amount of protection.
The first step towards using a land trust to provide asset protection is to establish one. However, that alone is not enough to provide protection. A land trust is a place to hold your real estate with the intent of protecting it from lawsuits. When you put a property in a land trust, there will be detailed instructions for the grantor, trustee and beneficiary. It is then easier to move property into this trust. It is important to know that this is not a final step for asset protection because it does not provide asset protection in itself, but it is an interim step on the way to asset protection. In the meantime, this serves as a lockbox for your real estate while you work to pair the land trust with an LLC.
While this seems like it may be far-fetched, keeping as little equity as possible in your real estate investment is one way to protect yourself as much as possible. While you may not be able to fully protect your real estate from creditors, you will be able to limit how much you can lose if creditors are able to take your property. This is the counterintuitive strategy of using debt to protect your investment. You can also use your property as collateral for other debt, encumbering it already so creditors cannot get to it.
Average real estate investors may not be familiar with the most comprehensive strategies to protect their property from their creditors and others who may come to take it from them. Consult with an asset protection attorney in order to put a place in place to make sure that your assets and your wealth remain yours.