Asset Protection Misconception Number 1: Insurance Protects You
You know what I hear the most from my clients, who are exclusively real estate investors? “I thought all I needed to protect my assets was a general liability insurance policy?” This couldn’t be more further from the truth.
I have nothing against insurance, but when you think about it, they’re almost a criminal business. When you get insurance, you’re betting against yourself. An insurance company is like the house in a game of casino poker. In the end, they never lose. And even if the insurance company pays out for a claim, you still lose because they’re going to raise your monthly premium.
The truth is you do need insurance. But insurance alone won’t be enough to protect your assets. Insurance policies include what are called “exclusions”. Insurance companies include exclusions in your contract to minimize their losses. Remember, their goal is to make a profit, just like you.
Unfortunately most people won’t sit down and read these exclusions. And even if they did, they probably wouldn’t be able to understand the complex legal language insurance companies use in their contracts. What these exclusions do is prevent you from suing a company for any particular reason, as outlined in the “exclusion”. It could be an exclusion for something as simple as a fire caused by a microwave, to a volcanic eruption.
Most liability insurance policies will protect you from a slip and fall. That’s it. When a lawsuit comes around, your insurance company will be nowhere to be found. This is why you need a real asset protection strategy. A proper asset protection strategy is supported by:
- Smart contracts
- Legal entities such as LLC’s, Trusts, and Corporations.
What I like about this bullet pointed list is that it shows how insurance is only one third of an asset protection strategy. If you’re a real estate investor and you only have insurance, that’s the equivalent of going into battle with only one third of the ammo you need.
Asset Protection Misconception Number 2: Forming A Legal Entity Guarantees Your Protection
Yes, LLC’s, Trusts and Corporations do provide you with some serious legal protections. But that’s only if you properly set them up and maintain them. You can’t just form an LLC and do anything you want.
For example, once you have an LLC you have to be extremely careful about not mixing your business assets with your personal assets. The reason you form an LLC in the first place is to separate your business assets from your personal assets. If someone sues your LLC and the court finds out you used your business credit card for personal reasons, such as getting a haircut or going to see a movie, a judge will allow a plaintiff access to your personal assets.
So the moral of the story is, when using a legal entity like an LLC, be sure to keep careful records of your business related transactions, and never mix business with pleasure.
Asset Protection Misconception Number 3: An Asset Protection Strategy Can Be Put In Place Later And Still Protect You
I can’t tell you how many times I’ve received a call from a real estate investor seeking to put in place an asset protection strategy after someone’s just filed a lawsuit against them. Asset protection isn’t like a hat you can take on and off when you please, it has to be put in place well in advance of a lawsuit. This is because there are laws that basically make transferring assets in the middle of a lawsuit illegal.