Managing wealth is a two-fold endeavor, pairing two important goals: building and protecting. As advisors, we often find that while our clients’ initial questions and interests focus on the growth of their investments, a vital part of our ongoing work concerns the safeguarding of those assets.
As part of our regular planning meetings, we include a review of personal assets such as private real estate. Our goal is to ensure these assets are managed in a way that supports our clients’ long-term financial goals. When we identify an area of need, we may recommend immediate action be taken with a respected attorney or tax professional.
One area that often presents an opportunity to create better protection is with rental property. In a number of cases, we have concluded that a different ownership structure would more properly protect our clients from serious losses that could result from liability claims. One ownership structure that can be useful for clients who own rental real estate is a limited liability corporation (LLC), and here’s why:
Unlike an umbrella insurance policy, an LLC structure can protect personal assets in the event that insurance is insufficient to cover a monetary judgement (from a lawsuit). Most umbrella policies kick in after your homeowners insurance limit has been reached, and then they only pay the prescribed monetary claims up to a specified amount. But an LLC provides more protection and more privacy.
The benefits of creating an LLC include:
Scenarios where you might consider placing assets in an LLC include:
If you own multiple rental properties, it might make sense to set up more than one LLC.
LLC formation can be time and paperwork intensive, requiring the creation of documentation including articles of incorporation and an operating agreement. LLCs must also pay taxes and often an annual fee based on their income. In some cases, LLC members must report profits and losses on their personal tax returns.
Once an LLC is created, in order for it to provide the planned protection, the ownership of the property must be properly transferred into the LLC. This can also become complicated if the property has an underlying mortgage, as that will need to be coordinated with the lender. And LLCs should maintain separate bank accounts to avoid comingling funds with your personal accounts so you don’t provide an opening for a creditor to successfully seize your personal assets through a court order invalidating the LLC.
Because LLC formation can be complicated, and the protection is not absolute, we recommend that our clients speak with a tax advisor as well as an attorney to make sure the potential implications, and the protection benefits, are fully understood.
Whether forming an LLC makes sense for you depends on your personal financial situation. As with any estate planning technique, we’ve found that every individual or family presents a new set of circumstances and opportunities. That’s part of what makes our job so interesting and rewarding.
Do you have questions or want to know more about asset protection strategies and estate planning? Please call your Litman Gregory Wealth Advisor or contact us here.
Gretchen Hollstein and Monica Muñoz Named to 2021 Top Wealth Advisor Moms List
We are pleased to announce that Senior Advisors Gretchen Hollstein, CFP® and Monica Muñoz, CFP® have been named as two of the country’s Top Wealth Advisor Moms for 2021 by Working Mother. This recognition is a testament to their passion for both roles they hold, advisor and parent.
Commentary from Our CIO—Third Quarter 2021
Chief Investment Officer Jeremy DeGroot reviews key elements of the global macro environment and how they impact our financial market outlook: COVID-19, U.S. economic policy, growth, and inflation. He also covers our reasons for near-term caution on U.S. stocks, and an in-depth review of emerging market equities, in light of recent market headlines and regulatory developments in China.
Introducing Litman Gregory’s Updated Logo
For many years, our team has referred to the services we offer to our clients as "wealth management". To us, this communicates that we provide both investment management and financial planning in an integrated way to support their broader wealth planning goals. As of today, we have officially updated our name and logo.