Farmers Insurance runs ads with the tag line “What you don’t know can hurt you.” That message resonates with me as I work with clients developing their personal asset protection plan. The most common asset protection issue that I come across involves rental property.

Many of my clients have rental property. They find it a good income source, and a way to “save” for retirement, especially when that mortgage is paid off. My clients are looking at the rental property in the positive, but what they don’t know can hurt them.

With a rental property, there is the liability risk (the risk that you will owe someone else money) because there are tenants (i.e. other people) in that house. There are certain duties that the homeowner/landlord owes to his or her tenants. If those duties are breached (you did not do something you are supposed to), and that tenant is hurt, you may owe money.

A lot of the landlord-clients that I work with have a vetting system to pick “good tenants” (it seems they have a good sense of people-picking). But the liability risk goes beyond just the tenant. Like most people, your tenants will have other people over, usually friends and family. Those visitors create the same risk as the tenants.

Do you have a plan in place if something happens on your rental property?

The first line of defense will be an “Umbrella” insurance policy. That will provide a certain level of protection, however, what if the claim is denied? Or if the injury compensation exceeds the policy limit? Are your other assets at risk? The short answer: yes.

A way to insulate, or protect your other assets from the liability risk created by the rental property, is to have that rental held in a Limited Liability Company (LLC). An LLC is a legal entity created under state law to run a business. As the name of the organization indicates, it limits (or reduces) the liability (or money owed) of the owner of LLC (you).

Having an LLC is not enough. A well drafted operating agreement is crucial to keeping the protections as high as possible. You will also need to follow corporate formalities to further reduce the ability of an injured person (i.e. the plaintiff) to lay claim to your personal property.

If you have a rental property (or properties), you should call today to talk with one of our attorneys to determine whether an LLC is the right structure for you.

Contributed by Morris Hall PLLC Albuquerque, Santa Fe and Las Cruces Estate Planning Attorney and Partner, James P. Plitz.

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This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.