Protecting Your Fiefdom: Issues for First Time Landlords to Consider

Owning investment real estate can be a very rewarding and profitable experience, but it can also be a huge headache and a drain on resources.  Having recently purchased my first investment property, my head is filled with conflicting images of myself sunbathing on my private island or lying penniless in a gutter.    The possibilities and the liabilities seem endless.

While real estate is often a great way to store wealth and create streams of passive income, it does come with a myriad of strings attached.  Unlike stocks or bonds, real estate often requires a “hands-on” approach and exposes an owner to significant liabilities.  Here is a sampling of situations where an owner may incur liability for their property:

  • A tenant trips and falls down a flight of stairs due to a defective handrail
  • A tenant’s child drowns in a pool which isn’t adequately fenced off
  • A branch on a tree on your property which isn’t adequately trimmed falls on a third party’s car
  • An environmental survey reveals significant contamination on your property which needs to be remediated

These are all situations which could involve a lawsuit or a claim against your insurance.  In certain examples, the liability may be so great that insurance doesn’t cover it, allowing the injured party to come after your investment properties or even your personal assets.  The question here is “how do we reduce this risk?”  In an estate planning context, our goals for investment real estate are to:

  • Protect ourselves from liability while we are living;
  • Preserve our assets to maximize what we pass on to our children or other beneficiaries;
  • Make it as easy as possible for this transfer to occur upon our passing.

One simple and relatively inexpensive way of reducing the liability on investment property is by purchasing an umbrella policy.  An umbrella policy is a policy that provides additional coverage above and beyond your primary policies.  For instance, if you have insurance on your investment property for $300,000 and an auto policy with limits of $500,000, a $1,000,000 policy will increase those limits $1,300,000 and $1,500,000, respectively.  This provides a greater cushion in case you incur significant liability.

Another way to protect yourself is by creating a limited liability company (LLC) to hold your real estate.  An LLC is a legal entity that provides significant benefits to its members.  The primary benefit is that the liability of the owners of the LLC is limited to the assets of the LLC and does not extend to the personal assets of the owners.  By holding your real estate in an LLC, you can compartmentalize your liability to the assets in that LLC.  Let’s say that a tenant unfortunately falls down that flight of stairs we mentioned earlier, suffering severe injuries.  In that case, the tenant can only go after the property held in that LLC.  He can’t get at your personal home or other investments that you have outside of the LLC.  If you have multiple properties, you can create multiple LLCs to maximize the amount of protection you have.

Another benefit of LLCs is that they can be seamlessly blended into an existing estate plan.  It is relatively simple to transfer LLCs into a living trust to allow your loved ones to manage things in the event of your death or incapacity.  Furthermore, as you acquire more assets and build your net worth, you may want to start transferring some of your assets to your children to reduce your estate tax liability.  Transferring fractional shares of your LLCs is not only a easy way to make gifts to your children without losing control of your real estate, but it also allows you to qualify for significant valuation discounts from the IRS when calculating your estate taxes.

Brian Y. Chou, Esq. is an estate planning attorney based in Southern California at the Law Firm of Barth Calderon, LLP.

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About brianychou

Brian Y. Chou is an Associate Attorney at the firm of Barth Calderon LLP and his practice focuses on asset protection, estate planning, and business succession planning. Mr. Chou assists clients in all stages of life, from the young professional couple that is concerned about estate planning for their minor children, to the wealthy real estate investor who wants to insulate himself and his properties from lawsuits, to the successful business owner who is agonizing about how to transition his company to the next generation. Mr. Chou understands that coming to grips with an impending lawsuit and confronting one’s mortality are typically not high on most clients’ list of things to do and his goal is to make the planning as accessible, digestible and (dare we say it?) enjoyable as possible. Mr. Chou seeks to build lifelong relationships with his clients to ensure that as their personal lives and legal situations evolve, their planning continues to accurately reflect their wishes. In addition to working with clients to protect and transition their assets, Mr. Chou actively seeks to be a resource to his clients in all aspects of their lives. He encourages his clients to contact him with all manner of needs, whether it be a plumber to fix a clogged drain, or a qualified accountant to contest an aggressive property tax reassessment or anything in between. An avid public speaker, Mr. Chou has presented to numerous groups all over Southern California, including University of California Irvine, Cal State Long Beach, the Planned Giving Roundtable of Orange County, and the California Society of Tax Consultants. He is also especially proud of passing the California State Bar Certified Specialists Exam for Estate Planning, Trust & Probate Law. Mr. Chou has also obtained his Series 7 & Series 63 Securities licenses and is also a licensed life & health insurance agent. For Mr. Chou, establishing a connection with the community is paramount. To this end, he is active in a number of organizations, including the Estate Planning & Trust Council of Long Beach, Provisors, Business Networking International, and Comprehensive Child Development, a non-profit providing early childhood educational programs for low income families in Long Beach. Brian Y. Chou is a native of New Jersey and the son of Chinese immigrants. After high school, he moved out to the west coast to attend the University of California, Los Angeles, where he received a degree in economics. Upon the completion of his degree, Brian earned a JD/MBA degree from Pepperdine University. During his time at Pepperdine, he participated in a number of activities. Notably, Brian was a literary citations editor for the Dispute Resolution Law Journal, the President of the Asian Pacific American Law Student Association, the Vice Magister of Phi Delta Phi Honors Fraternity, and a member of the Moot Court Board. He also worked in the Career Development Office at the Pepperdine School of Law and remains involved with the community there. Before establishing his estate planning practice, Brian worked for a law firm in the Inland Empire specializing in insurance defense and construction defect litigation. Prior to that, he clerked at law firms in West Los Angeles where he participated in the practice of Workers Compensation litigation and general corporate law. He is committed to using his broad range of experiences to build relationships and effectively represent his clients in a way that is thoughtful and pleasant for all parties involved. In addition to his professional achievements, Brian can speak Mandarin Chinese and can understand Cantonese. His interests include: surfing, basketball, tennis, jogging, drawing and cooking.
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