5 Most Common Mistakes Real Estate Investors are Probably Making
Tax Attorney Scott M. Estill
Protecting your assets is one of the most important things a real estate investor can do. And ready-made options don’t work. Asset protection really does keep you and your investments safe, so you can’t ignore the threat. In our law and tax practice, here are the five most common asset protection mistakes we see real estate investors make:
Mistake #1: Not Understanding the Choice of Entities.
There are many possible methods of owning real estate, including in your own name (not recommended), or with a business entity (such as Limited Liability Company, S or C corporation, General Partnership, Limited Partnership, Family Limited Partnership, Limited Liability Limited Partnership, etc.). There are many different reasons why one entity would be the best for your particular situation, including protecting your assets/equity/investments, tax ramifications, liability concerns and many other factors. However, asset protection is not a “one size fits all” proposition but is instead a unique (to you) planning opportunity. Not fully understating the differences in the potential choices can be a costly mistake.
Mistake #2: Not Understanding Land Trusts.
A land trust can be very valuable in real estate transactions. A land trust is a revocable trust used specifically for holding title to real estate. Each piece of real estate is typically titled in a separate land trust. By doing so, privacy, anonymity, transferability of ownership interests and discouragement of potential lawsuits benefits may be attained. It will not, however, protect your assets in the event of an actual lawsuit. Not understanding how land trusts operate and who/what should be the beneficial owner of the trust are common and costly mistakes.
Mistake #3: Lack of Coordination with Other Plans.
An asset protection plan should not be created in a vacuum. Instead, careful planning must be done to coordinate any asset protection plan with the current tax laws (for tax planning) and estate laws (for estate planning). The failure to do so can create situations with unintended consequences, nearly always for the worse. A coordinated plan, on the other hand, will function well in all three areas of planning concerns.
Mistake #4: Having a Grantor Trust or Single Member LLC own Rental Properties.
A grantor trust is a revocable trust and is often associated with estate planning, such as a living trust. While this may be excellent from an estate planning perspective, it provides absolutely no asset protection (the grantor of the trust- i.e. you- will still have personal liability). The same can be said of a single-member LLC in which you are the single member. Many states, including Colorado, severely limit (or eliminate) the asset protection benefits of a single-member LLC. If you are going to use this type of entity, make sure your planning at a minimum includes the consideration of using a business entity as the single member.
Mistake #5: Doing Nothing.
Unless you have no assets to protect or are unconcerned about potential future lawsuits, you need to take steps today to protect yourself and your lifetime of earnings. Many people get overwhelmed by the process and do nothing- which in many cases can be financially devastating. If you do not feel competent to handle this on your own, you should consider seeking the services of an attorney or other professionals who can assist in your overall plans and help you achieve your financial and other goals.
We know asset protection is a little bit like algebra… unless you get it right away it can be hard to master. But with a little tutoring and some hard work you’ll be able to solve even the hardest of problems.
Want to learn more about asset protection? Attend America’s premier training class on asset protection. . . . .The 3-Day Asset Protection & Wealth Creation Summit, where I will be a featured guest speaker or visit us at www.estillandlong.com.
“5 Most Common Mistakes Real Estate Investors are Probably Making” Asset Protection, Asset Foundation. 21 November 2014. Web. 02 November 2015.