A comprehensive estate plan should address all of your assets. For most people, an estate plan must include three common categories: (1) your home; (2) financial accounts, like your checking and savings account; and (3) personal property. Other types of assets - such as life insurance, retirement funds, annuities, and business interests - should also be considered as part of your estate plan.
If you own rental property, however, your estate plan will be more complicated because there are some unique considerations.
It is no surprise that one of the risks of being a landlord of commercial or residential property is the threat of lawsuits. An injured guest or tenant or a lease dispute could all end up in expensive litigation. However, a well thought out rental property plan and estate plan can hedge against this risk.
Protecting Your Assets: First and foremost: adequate insurance for these risks is always the best and first line of defense. Sometimes, however, the insurance policy’s limit is not sufficient to cover damage awarded by a court. When this happens, the next place the prevailing party looks to for satisfaction of judgment is the property owner’s personal assets. To protect your personal assets, you need to do more. This leads us to the next layer of protection.
Using a Business Entity as Protection: Owning property through a business entity, like a limited liability company (LLC), can protect your personal assets against seizure. That being said, merely filing paperwork to create an LLC isn’t enough. The LLC must be treated as a true business entity and all reports, filings, bank accounts, and other formalities must be met at all times in order to benefit from the liability protection of the business entity. (See our post, "Is your LLC Properly Maintained? Reducing Risk of Personal Liability", for more). You also need to be sure your rental properties are properly transferred into the LLC. Additionally, when meshing your rental property ownership with your estate plan, you must consider who can manage your assets if you’re unable to do so, our next consideration.
Transferring Rental LLC to Your Trust: Once the rental property is transferred into the LLC, you can simply name your revocable living trust as the owner of your LLC. This will ensure that your trustee can continue to manage the rental property in the event of your incapacity or death without the time and expense of going through a conservatorship or probate process. You can also spell out your wishes and goals for the rental property after your death in your trust so your family is best equipped to manage it.
Who Is Managing Your Assets: Another factor to consider is the trustee who manages the trust when you are no longer able to do so. A trustee bears the responsibility of managing the property owned by a trust for the benefit of the trust beneficiaries. The exact duties of a trustee may vary depending on what assets are owned by the trust and the trust’s terms. (See our post, "How to Choose a Trustee" for more). Using an LLC to organize your rental property holdings and a trust to hold the LLC can be a great way to ensure your wealth remains invested in the rental property that made you successful.
Tax Advantages Through 1031: While many think of estate planning and LLCs as strategies to save on death taxes and provide for heirs, we can help with much more - including real estate law. A 1031 exchange is a vehicle to defer taxes from the sale of rental property. The rules to qualify are complex, but can save enormous amounts of income tax, depending on your situation. (See our post, "Deferring Taxes with a 1031 Exchange" for more). We can help by making sure that your trust, powers of attorney, and LLC allow your family to take advantage of this tax-saving law if you are incapacitated and unable to manage your own affairs.
You’ve worked hard over the years to build and acquire your rental property, along with your other assets. Make sure that your estate plan takes every one of your assets into account so that you and your family receive the most benefits and protection.
For more information, contact us!