Understanding Legal Liability
In order to protect your assets, you have to know what jeopardizes them and what to do about it. Additionally, you need to know a few things about our legal system. So our goal here is to give you insight into understanding legal 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 assets that produce liability. So, that should be taken into account during your asset protection planning.
Types of Legal Liability
- External – This is liability that exists outside of your asset protection tools. Let’s say you set up LLCs to own your income producing real estate. You you have three homes, for example. Each are all paid for. They are owned inside of separate LLCs. You get sued personally. There are provisions in LLC law such that when you are sued personally, the LLC and the assets therein are safe. The creditor can get a charging order against your LLC. But cannot take your company in a lawsuit or force you to make distributions out of your company. So, the legal action against you will likely not likely jeopardize the assets contained inside your LLC.
- Internal – Following the same example above, let’s say that your 3 homes are owned by your LLC. Then somebody is injured at your property and pursues the owner legally. Now that you your created the liability, the responsibility falls onto your LLC. Both of your other homes are assets within the entity and are exposed. With this type of liability, we set up another LLC that records mortgages against each piece of real estate. When the “bad thing” happens, we set up an offshore trust. Then an international entity purchases the mortgage. They, in turn, place the cash into a “you can’t touch it” account in your trust.
Related content: What is an Asset Protection Plan?
How Many Asset Protection Vehicles Do You Need?
When planning your asset protection, you must take into account the existing liability, the value of the asset, etc. Then determine what kind of vehicles you will use and 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 one LLC. If you own four rental homes that are paid for and worth hundreds of thousands of dollars, it is a different story. You would then start to separate these into multiple LLC’s. Again take into account liability, risk and your exposure. Then determine exactly which home(s) get an LLC and how to complete an asset protection plan.
Business real estate produce an incredible amount of liability. 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.