Many of my clients own rental property, and while that property is a good long-term investment and provides additional monthly income, it also exposes the owner to a liability situation that could cause him or her to lose everything. The situation I am talking about is the risk of being sued by a tenant of that property, or by one of the tenant's guests.
EXAMPLE: Husband and Wife own their home, 2 rental properties, an investment account, and retirement accounts. They have liability insurance policies on the rental properties, for coverage up to $1 million. There is a fire in one of the rentals. Everybody lives, but one tenant is seriously injured and burned and requires dozens of surgeries, years of physical therapy, years of medical and in home care, not to mention the loss of earnings due to being unable to continue working. The tenant sues the landlord, and the jury finds the owners at fault on a negligence theory and awards the tenant damages of $10 million, what they estimate all of the costs and losses to be. The insurance company pays $1 million. Husband and Wife lose everything (depending on state "homestead" laws about their residence), except for their retirement accounts (although the judgment can attach to the accounts' distributions).
This situation could have been prevented if Husband and Wife had their attorney place the rental properties into LLCs. A properly formed and maintained LLC will protect Husbad and Wife's other assets in such a situation as the one described above. The result would have been that Husband and Wife are not personally liable -- only the LLC is liable -- and the tenant can only collect against the LLC-owned assets, i.e. the rental. Husband and Wife lose the rental, but nothing else.
Is this situation too remote for you to take seriously? It shouldn't be. It is simple risk assessment: $1,000-$1,500 to set up, plus $100-$200 per year to maintain, plus a bit more effort than you are currently used to doing...
VS.
Losing everything you own. The choice is an easy one.
WARNING: This strategy is not as simple as filing the state's form and paying the fee. Filing Articles of Organization without executing an Operating Agreement only protects to the extent that the statutes permit. The statutes vary (sometimes dramatically) state to state. Many courts have imposed liability on single-member LLCs where an Operating Agreement does not exist to show evidence of true LLC status.
An attorney should review your situation and go over what that means for you. Additionally, an LLC has annual requirements that must be maintained in order for it to remain intact. And last, some courts have "pierced the veil" on LLCs to impose personal liability on the owners when LLC records were not maintained.
It is best to have an attorney's advice to make sure that you are accomplishing your objectives.
To your family's health & prosperity,
P.S. Want to get started on the most important planning you'll ever do for your family? Give our office a call at (503) 235-5150 to get started. You'll be glad you did.
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http://candiceaistonlaw.com/.
Well stated Candice! Something I go over with all my clients in the planning process.
Posted by: Brian Engelhard | January 11, 2011 at 03:45 PM