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Understanding Liability

In order to protect your assets, you have to understand what jeopardizes them – Asset Protection and understanding liability. Your assets can be categorized into unsafe and safe types. Nobody is going to slip and fall on your bank account or crash into your cash, but your vehicles, rental properties, business location, etc can be an asset that produces a level of liability that should be taken into account during your asset protection planning.

Liability Types

  • External – Liability that exists outside of your asset protection vehicle, such as an LLC for encumbering real estate. For example, if you have 3 homes that are all paid for that are encumbered in an LLC and you get sued personally, those assets are safe within that LLC. The legal action against you will not jeopardize the assets contained inside your LLC.
  • Internal – Following the same example above, lets say that your 3 homes are owned by your LLC and somebody is injured at your property and pursues the owner legally. Now your home created the liability and the responsibility falls onto your LLC, both of your other homes are assets within the entity and are exposed.

How Many Asset Protection Vehicles Do You Need?

When planning your asset protection, you must take into account the liability that exists, the value of the asset, etc and determine what kind of vehicles you will use as well as how many are necessary. There is no one single asset protection plan that will work for every individual. If you are a real estate investor and you have 4 rental homes with very low equity, you don’t need to create separate LLC’s for each home, use 1 LLC. If you own 4 rental homes that are paid for and worth hundreds of thousands of dollars, you would then start to separate these into multiple LLC’s, again taking into account liability, risk and your situation to determine exactly what home(s) get an LLC and how to complete an asset protection plan.

Business locations produce an incredible amount of liability and if you own your building, office or shop, you would look into splitting up those properties into multiple LLC’s. The basic rule of asset protection: the higher the liability, the more precautions you need to take.