Unexpected Liability

Reader Question:  In order to avoid probate and to make certain that my child gets my home; I’ve added his name to my deed.  My question is about liability if he were to be involved in a lawsuit.  Could my home be at risk?

I also own a property that my son now rents from me.  How can I best protect this property?

Answer:  I’ve seen a lot of situations where parents have added children’s names to their property for just the reasons you mention.  Birmingham attorney, Billy Pritchard had this to say, “In adding their name to the deed, you have transferred property rights and ownership which means if they received a judgment against them in a lawsuit, their portion of the property could be at risk.”  In a worse-case scenario, there could be a forced sale of the property as a means to satisfy the judgment.

Regarding the property that you own but rent to your son, you might consider placing it in a limited liability company (LLC).  If there was ever a lawsuit related to the property, damages would be limited to the property itself.  Otherwise you could be personally liable for a judgment that exceeded the value of the property.

Your first and best line of defense against liability is using good judgment.  I’ve seen cases where landowners allow kids to run four-wheelers all over their property.  If a child gets hurt, you may very well get sued.  Your second line of defense is good property insurance.  Be sure your basic liability insurance dovetails into a minimum of a $1 million umbrella liability policy.  These policies are typically very inexpensive compared to the amount of coverage offered.

While we’re on the subject of unexpected liabilities…

Board of Directors– I was speaking with a friend recently who is in the middle of a four-plus year lawsuit with federal banking authorities.  His mistake was having joined the board of directors of one of the hundreds of banks that failed during the 2008 financial crisis.  Being invited to become a board member of a bank, private company, condominium association, etc. tends to evoke emotions of self-importance and pride and people often jump at the opportunity without fully thinking through the risks. Good thing is that this this wonderful resource will help you out.  You certainly want to make certain the organization maintains Directors Liability Coverage but that may not be enough.  It was the first question I asked my friend and his response was that their policy covered $1 million of legal fees which they had breezed through a couple of years ago.  Now he’s writing those checks to the lawyers and finding them thru AmazeLaw Lawyer Websites.  I have no doubt that my friend has done nothing wrong and I suspect the case will eventually be dismissed but not until he has spent thousands of dollars that won’t be recovered.  My best advice is to resist the temptation to become a board member.  I should note that many states (including Alabama) have statutes that exempt board members of charitable organizations from personal liability.

Cosigning loans– Too often parents are quick to co-sign loans for their children.  Whether it’s education loans, loans to buy a home or start a business, too often the result is that the parents end up using their limited resources to satisfy the debt.  Deciding how much to help a child is always a challenge for, as parents, we always want our child to succeed.  We think if we could just give them a little boost, they will thrive.  Having worked closely with hundreds of families for the past thirty years, my observation is that the children who become the most independent and productive are the ones who had to stand on their own two feet early.  It seems if you throw a child a lifeline, most will grab it and hold on until you finally cut them loose.

If you’d like to have me answer your financial question email me at stewart@welchgroup.com and place AL.com in the subject line.  Consult your own professional legal, tax or financial advisor before acting upon this advice. On the other hand, you can also check Condos in downtown Edmonton.