As with many things financial, the answer is maybe.
The type of protection and the type of entity you are using will determine just how protected your assets are from potential problems. A very common example is the ownership of rental real estate.
If you own rental real estate in your own name, and someone decides to sue you for whatever reason, whether the suit is related to the real estate or not, your property and anything else that you own may be fair game for attachment or settlement if you lose. Even worse, if you own that property with someone else, your ownership stake is also vulnerable to the possible liabilities incurred by your partner.
Some ask if their realty trust will protect their interests. The answer is generally not. Any trust where you have access to do whatever you want to do with the property owned by the trust may not provide you with the desired level of asset protection. A different type of trust or an LLC may be a better choice than a simple realty trust.
If you do form an entity for protection purposes, the asset itself, in this case the rental property, may not be protected from liabilities arising from within that entity or property. But of course, we would hope that you have insurance for traditional types of perils. But for a more catastrophic loss where a litigator may look to attack you individually or your other personal assets, your chances of protection are greatly enhanced. The objective here would be to contain the risk within an entity structure to prevent contagion of the liability to your other personal assets.
In order for a litigator to win against you personally, a tactic called piercing the corporate/entity veil, you would have to be proven negligent or proven aware of an issue that may have contributed to the catastrophic loss by taking proper actions to prevent or repair the issue.
If you have more than one asset, such as rental property, you may consider establishing a separate entity for each such property of business. The downside here is the cost of establishing and maintaining the entity. In my home state of MA that will cost upwards of $1,000 per year for filing fees in addition to the legal fee to establish the entity and annual accounting fees for the tax return.
The use of an entity really adds value when there is more than one owner to the asset. It may protect your portion in the event of an issue with your partner. The entity should also have a legal agreement amongst the owners stating what happens if… death, disability, inability to contribute capital, or simply a partner wants out. Beyond asset protection, it wouldn’t be a fun ride for the surviving partner if the other owner(s) share was a part of a messed up estate plan. Ask your advisors to make sure that all the partners have up-to-date estate plans that will not harm the surviving partners in any way.
John P. Napolitano CFP®, CPA, PFS, MST is Founder and Chairman of Napier Financial in Braintree, MA. Visit napierfinancial.com for more information. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please consult your legal counsel regarding your specific situation. Investment and financial planning advice offered through US Financial Advisors and Great Valley Advisor Group, Registered Investment Advisors.
