9 Most Expensive Mistakes Apartment Building Owners Make In Asset Protection
Before you buy your next apartment building, or before you get sued as an owner of that building, follow these tips to cover your multifamily assets.
1. Transferring Ownership of the Building into Your Spouse’s Name
While this provides some modest protection, realize:
- Courts scrutinize such conveyances. If the court finds that the conveyance is fraudulent, the court can invalidate the transfer.
- If the court finds that the spouse played a role in management (through actions or her accounts), the spouse may be sued as well.
- If your spouse dies, the assets may revert back to you.
2. Owning a Property Individually
When a tenant is injured or feels he has been wronged, he will go to a lawyer’s office. That lawyer will do a quick asset search on you (if he knows you are the owner) or look up the property the tenant was living in. If he sees in the public records that you have any number of units, you are now worth pursuing. He will file a lawsuit and seek an amount that will probably exceed the limits of the insurance policy you have on your building. He will be very motivated to come after all of your assets, above and beyond your apartment building’s insurance policy.
3. Not Having an LLC Own Your Apartment Building
Holding title to your apartment building through an LLC limits your business’ liabilities to only those assets held within the LLC, and nothing else. A properly formed LLC will guard its owners from lawsuit liability, including acts of its employees and agents. Consequently, the LLC insulates the business owners’ residence, bank accounts, vehicles, and other investments from lawsuits. When buying that apartment building, be sure to take title as an LLC. Still own it individually? Transfer title ASAP!
4. Not Taking the Following Key Steps Immediately After Creating LLC
Before taking title to buy that apartment building, be sure you have followed these steps below for your LLC:
- Conduct the First Organizational Meeting of the LLC
- Obtain Employer’s Identification Number (“EIN”) from the IRS
- Register Your Business Name with the State of NY
- Collect Member Capital Contributions and Transfer Cash or Hard Assets into the LLC
- Obtain the Proper Business Licenses
- Review Insurance Coverage Needs and Limitations
5. Failing to Maintain the LLC’s Business Records
An LLC must keep minimal records to prove, for one thing, that it is a real LLC. Such documents include copies of resolutions, unanimous consent forms, copies of meeting minutes, tax returns (from 3 to 6 years), the names and addresses of all current and former members and/or managers, and a copy of the operating agreement. If your LLC does not keep these documents, a court may determine that your apartment building was owned individually after all.
6. Not Having a Living Trust for Estate Purposes
A Living Trust is a legal instrument that holds title to a person’s personal assets, including bank accounts, real estate, stocks, etc. The Living Trust contains your instructions for the distribution of your assets after you die. A Living Trust completely avoids the inconvenient and lengthy probate procedure if all of your assets are contained in it.
7. Using a Living Trust for Asset Protection
A living trust is an excellent financial and estate planning tool. It is, however, vulnerable to attachment and seizure. A living trust cannot protect the assets of the trust owner from the creditors of the trust owner.
8. Failing to Avoid Capital Gains Taxes In Life
Be sure to designate a Qualified Intermediary (QI) to hold your sales proceeds before transferring title so you have the time to do a 1031 exchange. Otherwise, Uncle Sam will collect on all your capital gains taxes.
9. Failing to Avoid Capital Gains Taxes in Death
A Charitable Remainder Trust or even a Family Foundation can avoid capital gains taxes and still allow you to use your asset throughout your lifetime.
Have further questions about what to do, and not to do, before buying an apartment building? Email Neil direct.
