By Richard E. Durfee Jr. of Durfee Phelps Integrated Legal Planning, PLLC

Every rental property owner has experienced the “what if” feeling. What if my tenant leaves tomorrow? Will my tenant pay the rent on time? Do I have enough insurance coverage if someone gets hurt on my rental property?

There are many ways to put your mind at ease and know that your assets are protected property and your risk is minimized. You should ask yourself, do you have something worth protecting? Are you prepared for the most likely risk events? How much do you value your freedom?

The asset protection fairy is not going to sit on your shoulder and whisper in your ear. Now is not the time to sit back and continue with the what if game, you need to take action and speak with an expert.

The Benefits.  The law is becoming increasingly complex.  Sadly, the potential liability of owning a rental property is growing faster than the potential income.  A seemingly small unplanned event may result in the total loss of your entire investment and all the fruit of your labor.  A timely, well structured, and appropriately operated plan can completely protect your wealth.  You can be metaphorically “bomb proof.”

The Delay.  Asset protection is best served cold.  The longer it is in place before a risk event occurs, the more effective the protection.  This requires action well in advance of trouble.  Waiting weakens and dilutes the protection.  So why do so many put off taking action until a risk event (a threatened or actual lawsuit) is on the horizon?  This is like driving around without seat belts, air bags, or anti-lock breaks on your car under the assumption that you can install them quickly just before an accident happens.  How is that going to work?  The longer you wait, the more it costs, and the less it works.

 

The Choice.  Some delay is a result of not knowing what can be done.  Do you know what your choices are?  Would you be interested in knowing how other real estate investors have successfully protected themselves and their assets?  How would you find out?  Do you know that if you don’t take charge of implementing your own plan of protection, the IRS, the courts, and plaintiff’s counsel have their own plans for you?

The Cost.  Some delay is from concern over costs.  Knowing the real costs of protection will help you make an informed decision on what is right for you.  There are three kinds of cost associated with an asset protection plan.  First, there is the set up cost.  This is paid to the attorney.  It is typically a one time event, with periodic nominal up-dates after that.  The second cost is the accounting and tax reporting cost.  This is paid to the CPA.  It happens every year.  The third cost is the operational and complexity cost.  The best of asset protection structures is of absolutely no value if it is not used properly.  It is complicated.  There is no way around it.  This is sometimes the toughest cost to pay.  If you want protection, you will deal with it.  You will truly take ownership of your wealth and make sure the various components of your plan are in place and used correctly.

 

The Risk.  Some delay is from not appreciating the risks.  There are many risk events: litigation, property devaluation, car accidents, partner liability, tenant claims, divorce, disability, and death.  While some risk events are simply unavoidable, exposure to the resulting liability is a matter of preparation.  Advance planning enables you to control the exposure and the costs.  The most notorious risk event is taxation.  We are taxed when we make money, when we spend money, when we save money, when we move money, and when we give money to our children.  Many high net worth investment real estate owners inadvertently structure their business and finances in ways that unnecessarily increase taxes.  Some taxes are optional.  They are only paid by those who fail to plan or who plan poorly.  “Where” you create wealth within your plan significantly effects how much it will be taxed and whether or not it is available to predatory plaintiff’s claims.

Good Fences.  Some delay is from anxiety about the unknown.  Asset protection is about building fences.  “Good fences make good neighbors.”  Good fences keep your dog in and the neighbor’s dog out.  Good fences protect inside value from outside risk, and contain inside risk so it does not contaminate outside value.  The right combination of the right kind of trusts and business entities will protect you.  How the entities are structured and operated is just as critical to asset protection as what particular kind of entities are used.   Your plan will be diagramed so that you can understand and remember what you have, how it works, and why.

True Freedom.  Genuine liberty has at least three components: There is the macro – which is political protection of personal rights. There is the micro – which is personal financial independence including both the possession and the preservation of wealth.  Then there is the internal – which is the mental or spiritual capacity to create, preserve, and enjoy your freedom.  Each of these essential elements of liberty is at risk when we fail to be good stewards and protect what we have earned and been given.  Litigation can destroy not only civil liberty and outward wealth, but also inward peace of mind and family relationships.  Is your freedom worth protecting?

Options.  When a patient needs a procedure that lies outside a general practitioner’s area of practice, the best course is to involve someone qualified to handle that particular procedure. You will not reduce your liability or protect your assets by simply reading this article, you need to take action and talk with an expert who can answer your questions with knowledge and expertise in working with rental property owners.

ARPOLA members have access to the very best asset planning in the nation at a significantly reduced price. More information is available here. The initial conference is complimentary.  Fees will be fixed and known before we start.  No surprises.  Are you ready now?  Your Move!