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Protection of Real Estate Assets

SHOULD REAL ESTATE INVESTORS BE CONCERNED ABOUT CREDITORS?

Looking through our Florida Court Cases will put the fear of creditors into the heart of any investor. Most articles on protecting assets focus on Doctors and Lawyers who are frequently sued by plaintiffs who attempt to attach all of their assets. (Isn't this a great time to say that "this is a general publication of opinion and general advice and should not be construed to be Legal advice or relied upon without proper Legal Counsel----there, I feel better now). However, asset protection should be a concern for all and especially those with significant assets. For example, a look through Florida case histories would cause concern for any owner or driver of an automobile (note: be especially wary about loaning your car to friends or relatives,) after reviewing the results of some cases and awards for Plaintiffs. Liability may also attach to you and your assets for accidents on your property, including injuries to workers being paid to do home improvements. Liability can and will occur for accidents on investment or rental properties you own, or can occur from the actions of people you are responsible for…such as your children or employees. Finally, getting back to vehicles, if you or someone you are responsible for drinks and drives and is involved in an accident…I won't even go there.

YOUR HOMESTEAD SHOULD BE PROTECTED

The great news is that your Florida homestead is protected under our state Constitution without any limits on value. However, be wary about your lot size. A homestead inside a City is only protected to the extent it doesn't exceed a ½ acre. For example, a 1 million dollar property sitting on a full acre in the City of Fort Lauderdale may only be protected up to $500,000 in value. On the other hand a $2,000,000, 4000-square foot condo in Aventura should be fully protected.

PROTECTING YOUR NON-HOMESTEAD PROPERTY

"TENANCY BY THE ENTIRETY"----NOT ALWAYS THE BEST SOLUTION

The real problem isn't, generally, in the ownership of your Homestead. As the Wall Street Journal reported last week, and as I am seeing with clients, investors are not only buying second homes; they are buying third and fourth homes. They are also buying office buildings and rental properties. Considering that Florida's homestead protection doesn't extend to these assets, how does one protect them from creditors?

Many married Florida couples routinely Title their other Real Estate holdings, as being held "Jointly as tenants by the Entirety," thinking that this methodology always protects the property from creditors. Here are some concerns with the efficacy of such a strategy:

  • While in most cases such titling will protect the property from the clutches of a creditor with a claim against one spouse only, it will not, generally, protect against joint creditors.
  • There are circumstances, such as death and divorce, which will break this tenancy. As a result, assets could be awarded to that creditor with a claim against only one spouse.
  • Recent Court rulings in and out of Florida seem to diminish the protection afforded by this Title.

OWNING PROPERTY THROUGH AN "S" CORP. — NO LONGER THE BEST SOLUTION

In prior years many Real Estate holdings were placed in "S" Corporations to protect owners from liability. While Corporation owners were generally protected from personal liability that occurred within the property, their other ownership interests were not protected from liability. For example, a Doctor with a malpractice judgment against him, or an automobile owner with a plaintiff's judgment against him, could be exposed to losing their ownership of a second home or other property owned through their stock in this "S" Corporation.

LIMITED LIABILITY COMPANY (LLC)---NEW ENTITY OF CHOICE

Recent changes in our Florida's Statutes have made the LLC the entity of choice for most new real estate owners concerned with asset protection. Similar to an "S" Corporation, the LLC will protect its owners (members) from personal liability arising from the property in question. Additionally, the advantage of the LLC versus the "S" comes from its protection of your other property holdings against potential liability. For example, the plaintiff in either of the examples described in the preceding paragraph, will not be able to grab other property to satisfy the judgment against the Doctor or car owner with the LLC owned property. Under LLC rules the plaintiff can obtain only a "charging order," which in simple terms, gives the creditor very little in the way of rights.

OUR RECOMMENDED STRATEGY: Separate LLC's held in an LLLP

Other than your Homestead property, to maximize protection, we generally recommend a separate LLC for each investment or income property you own. To provide an additional level of protection and to simplify the tax filing process, your separate LLC's should be held in an LLLP (Limited Liability Limited Partnership), which we would establish for you as well.

BOTTOM LINE—DO SOME PLANNING AND REVIEW

The bottom line is that protecting your family and all of your assets from outsiders should be a major concern for all clients. Putting off proper planning until after the DUI accident, the medical malpractice occurrence or the negligent act on your property could have potentially devastating consequences. After the occurrence of the dreaded events, it is next to impossible to implement effective protection of your exposed assets.

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