Hi All, I have been reading several threads lately with descriptions of worst case scenarios for Workers Comp liability.
As a result of this I am growing increasingly interested in learning the various ways to protect my personal assets should I be sued if I incur some sort of unexpected legal/financial liability while working as a contractor.
My wife and I also have several rental properties and I am realizing that if one house/tenant generates a lawsuit the plaintiff could go after all the properties not just the one that generated the lawsuit. I understand there are legal classifications that can be set up to compartmentalize my assets and protect them from all being pursued in a lawsuit.
We never felt especially affluent and all the properties were picked up at rock bottom fixer upper prices. With a vast amount of sweat equity they have turned into relatively nice properties and while we still own formidable mortgages I am eagerly watching those diminish with each passing year. In the next ten years or so we will start to actually see some income from these properties and once the mortgages are paid off this is going to be our only retirement income.
I would hate to have a irresponsible tenant or a jobsite accident take away our retirement income and I am sure others of you have similar concerns that you have addressed.
My questions for the forum are:
Did you find any good sources of reading material to get a background prior to consulting your accountant and lawyer? If so what are they?
What have you done to protect your assets?
What should I be looking for or avoiding in insurance policies (homeowners, liability, others)?
thanks in advance
Karl
Replies
Karl, I think this a very important topic for contractors, it's a real bummer to work all your life, accumulate a few assets, then have some a-hole homeowner or their attorney try to take everything away. I have done some research on this, but in no way consider myself an expert. I will tell you what I know.
First, almost everything is a matter of state law. The only thing I am aware of on a federal level is ERISA, which protects certain retirement accounts (401K, Money Purchase Pension Plans, IRA etc) under certain conditions from creditors. And of course bankruptcy laws are federal, hopefully never have to go there!
Every state has certain laws that make certain assets (your home, life insurance, annuities, personal assets, tools etc) totally or partially exempt from creditors. I doubt investment properties would ever be exempt.
Corporations give you some personal protection to the extent of your stock, LLC's do the same thing with less corporate structure (meetings, minutes, resolutions). You might consider placing your properties into an LLC. Talk to an attorney about this. I believe LLC restrict your liability to that asset held in the LLC, that is if you own 10 properties and have 5 LLC's each holding title to 2 properties, if you had a lawsuit on one property they could not reach into the other LLC's an attach the other properties.
Of course liability insurance is recommended, I would certainly want to understand every detail of a policy.
There are other avenues and issues, trusts, partnerships, this touches on estate issues. Tax ramifications are an issue too.
My advice is to learn everything you can, a GOOGLE search is a good place to start. You get a lot of web pages to sift thru, especially the off-shore advice, lawyers trying to sell books and videos, but you can eventually glean a little good advice here and there.
Allan
Just go see your lawyer.
It is unlikely that you can protect any of your assets.
Karl,
Some good responses here. A couple of points. Incorporation or LLC status will not protect you for liability arising from your own acts.
You personally service the furnace on a rental property and screw it up so someone is killed by CO. You're almost certainly going to be personally liable and your assets will be in risk.
OTOH, your LLC/corporation hires a property manager who does the same. Your personal assets are probably safe IF you've done the proper corporation dance steps.
But there are lots of execptions and exceptions to the exceptions, and as noted, laws vary from state to state. Ultimately, you need an attorney's advice crafted to the exact details of your situation.
_______________________
10 .... I have laid the foundation like an expert builder. Now others are building on it. But whoever is building on this foundation must be very careful.
11 For no one can lay any other foundation than the one we already have--Jesus Christ.
1 Corinthians 3:10-11
Thank you all for the input, I will see what info I can glean from a google search and start asking around for a good attorney.
If anyone else has a specific website, forum or publication that would help broaden my knowledge base please share it.
I don't know if times are changing or if I am just getting older and shifting my values but I seem to spend more and more of my time making sure my rear end is covered.
Karl
Karl, there are probably some good books in the local library that have a chapter about limiting liability ( most decent books about setting up any business - even if unrelated to homebuilding will cover the basics). Most lawyers, including me, will offer a free consultation for their first meeting with a business client. As the other posts mentioned, laws vary from state to state and only a local lawyer, not a book, will give you the specifics. While nothing is absolute, there are a number of techniques that can limit ( not eliminate ) the risks. One , as you suggested, is to own the properties in 5 different entities. Another step is to get umbrella insurance. I have clients with 5 million of umbrella insurance - it is suprisingly cheap considering the risk reduction effect. Again a good local lawyer will usually meet with you for free for a half hour or so and explain the various techniques and the costs to pursue each. You should also pay him a couple hundred to review any standard contracts you use to see if they should be cleaned up. Good luck - it is much better to think about this now than after some big claim hits.
BarryVa and Sidingguy, Thanks for the pointers. After reading some other threads about lawsuits resulting from workers comp liability which say something like "corporate veils are easily pierced" I am intrigued by the idea of a five million umbrella policy. I will plan on setting up a meeting with my lawyer to get his perspective.
I am not so concerned with the cost of this but about doing it effectively and not just giving myself a false sense of security.
I am very poorly informed on Living Trusts but I will pursue that one as well if it restricts the ability to sue properties placed in the trust.
Thanks Again,
Karl
This was a topic addressed in a news letter I read about a month ago from CPR. Michael Stones web site. The news letter had an article in it written by a lawyer who specializes in this type of sceniro (sp?). It was not named specifically (probably to get you to inquire about it with the attorney) but I believe it was a very secure way to hide your assets from people who could have access to them should they sue you and win. One thing that came to my mind was a living trust. I dont know if that is what it was but it resembeled that in its structure. I will see if I can find it and post the link to this thread.