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Make sure you "fund" your trusts and LLCs!

12/27/2016

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I've run into a few situations recently where a client had the right asset protection "vehicle" in place but wasn't aware that there was still some small but very important work left to do.  I see this most often with real estate investors who have LLCs.  The client forms an LLC and maybe even opens a bank account in the LLC's name, but the client doesn't put the business assests, usually rental property, into the LLC.  If someone slips and falls on that rental property, who are they going to sue?  The LLC?  No, they're going to sue the owner of the property, which is the client!  That means that all of the client's own "stuff" is at risk - his/her house, car, personal bank and investment accounts, etc.  So is ANY OTHER REAL ESTATE that they own in their own name.  In Ohio it usually costs a little over $100 to transfer a property into an LLC.  I am a strong advocate for LLCs.  Especially for real estate investors, I can't think of anything else that gives you as much bang for your buck in terms of asset protection.  But you have to make sure that your properties are in your LLC for the LLC's liability shield to protect you against things like slip-and-fall plaintiffs.

I've come across very similar stories with clients who have spent literally thousands of dollars forming revocable living trusts as part of their asset protection plans, but they never "funded" their trusts.  A trust is like a bucket - it just holds the stuff that you put in it so that when you can't hold it anymore someone else can step in and do it for you without involving probate court.  There's a lot more to it, of course, but that's the general idea in most cases.  Guess what happens if you don't put anything in the bucket?  It's useless!  Think about the things that you want to transfer.  For personal property (grandma's diamond wedding ring, your prized baseball card collection, etc.), there are a few ways to do that, such as item-by-item or through a "magic wand" provision that transfers all personal property that you own into the trust.  For things like bank and investment accounts, that usually means that you have to retitle the account into the name of the trust.  These are all things that I would recommend working with an attorney on to make sure that they are done right.

If you're going to go to the time, trouble, and expense of setting up an LLC or trust, don't just assume that you're protected and good to go.  You have to make sure that you put your "stuff" in it.

Please remember that these posts are for informational purposes only and should not be considered or relied on as legal advice.  If you are ever in doubt about your rights under the law, you should consult an attorney familiar with the law in your area.
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    Ben Bauer is a Cincinnati-based attorney who writes about things in law and life that he finds interesting.

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