Real estate encompasses not only one’s primary residence but also other real estate such as a vacation home or a rental property. The ideal form of ownership varies depending on the type of real estate you own. Below, we take a look at the different types of real estate and offer advice about the best form of ownership for each.
Because your primary residence receives special tax treatment, you should carefully consider how your home is owned. Joint tenancy between spouses allows automatic transfer of ownership to the surviving spouse upon the death of the first spouse without court involvement. Transferring ownership of the primary residence to a joint revocable trust may also be an option for Minnesota residents. Ownership by the trust also means that the real estate will not go through the sometimes lengthy, expensive, and public probate process but will instead be handled according to your wishes as specified in the trust document.
If you are single, owning the property in your name allows you to take advantage of tax benefits for primary residences. Transferring ownership to a revocable living trust may also allow you to retain the applicable tax benefits with the added benefit of avoiding the probate process.
For some families, their cabin or vacation home has not only high monetary value but also significant emotional value. Ownership of a cabin or vacation home by a trust or limited liability company (LLC) can be advantageous because it addresses two main priorities: ease of transfer to the next generation and asset protection.
With a trust or LLC, you are able to establish rules for how the property is to be used and maintained, as well as designate what is to happen to the vacation home once you pass away. This can be a great solution if you want to ensure that the vacation home stays in the family for generations with minimal family conflicts.
An additional benefit of having an LLC own your cabin or vacation home is that it provides limited liability from outside claims. If a judgment is entered against the LLC, the creditor is limited to the accounts or property owned by the LLC to satisfy the creditor’s claims and cannot look to your personal accounts or property or those of the other members. Also, if a judgment is entered against you or another member for a claim unrelated to the LLC, it will be harder for a creditor to force a sale of the vacation home. This can be incredibly helpful if you wish to pass the vacation home on to the next generation without worrying about the individual financial situation of each new member.
If the cabin or vacation home has been in the family for many years, it is important to consult with us and your tax advisor to make sure that transferring your cabin or vacation home to a trust or LLC will not cause an increase in your property taxes or other unintended consequences.
Determining whether to title farmland in the name of a trust or not often depends on the overall farm succession plan. In many cases, farmland is retained during life and passed to the farm successors at death. In this scenario, holding the land in revocable trusts is a great estate planning strategy as it will allow you to include ownership restrictions, buy-sell provisions, and the like. Because of the high value of farmland and the lower Minnesota estate tax exemption limits, we often recommend spouses own their farmland in two separate revocable trusts to allow for maximum estate tax efficiency.
Because rental property is an income stream rather than a residence, asset protection is usually the primary concern. As a landlord and owner of rental property, you face a higher probability of lawsuits arising in connection with the property because the occupants can change over time. Transferring ownership of the rental property to an LLC is a great option. If a renter gets injured on the property, sues the LLC that owns the property, and obtains a judgment that exceeds any property insurance you have, the renter can seek satisfaction of any claims only from the accounts and property owned by the LLC, not from your personal accounts and property or those of any other owners of the LLC.
In addition, ownership by the LLC may protect the rental property from your personal creditors. However, if you are forming a single-member LLC, it is important to have us check state law to make sure creditor protection is available.
Whether you are concerned about your primary residence, family cabin, farmland, or rental property, we are here to assist you in protecting your valuable property. Given the various considerations for selecting a form of ownership, it is important to have the right advisors helping you along the way. Give us a call so we can discuss your current and future real estate ventures and the best way to protect them for generations to come. If you have any additional questions about estate planning, or would like to consult an estate planning professional, please contact our offices. We can make sure you have a comprehensive plan that is tailored to your unique needs and goals.
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