A comprehensive estate plan should take into account all of your assets. For most people, an estate plan should address three common asset categories: (1) your home/real estate; (2) financial accounts; and (3) personal property. Other types of assets – such as life insurance, retirement funds, and annuities – should also be taken into account as part of your estate plan. If you own rental property, your estate plan may be more complicated due to various considerations.
Rental Property and Asset Protection Planning
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, a claim under the landlord-tenant act or a lease dispute can all end up in the courtroom and result in a potential judgement against you. A well-designed estate plan can help to protect against this risk.
Protecting Your Assets: A prudent landlord purchases adequate umbrella liability insurance coverage as the 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, which leads us to the next layer of protection.
Using a Business Entity as Protection: Owning property through a business entity or holding company, like a limited liability company (LLC), can protect your other personal assets against potential claims and judgments arising from the rental property. 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 followed in order to benefit from the liability protection of the LLC. Additionally, when addressing your rental property as part of your overall estate plan, you should consider who will manage your assets if you are unable to do so, which is our next consideration.
Special Considerations for Property Held in Trust: Another factor to consider if the rental property is or will be owned in trust, is who is serving as trustee. A trustee bears the fiduciary 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. Many institutional and independent trustees are reluctant to own closely-held real estate due to lack of liquidity and diversification, and fiduciary liability concerns. For this reason, using an LLC to hold your rental property holdings, which shields the trustee from potential liability and allows the trustee to simply collect the net income from the overall rental operation, can be a good solution.
Tax Advantages of a Like-Kind Exchange under IRC Section 1031: A 1031 “like-kind” exchange is a vehicle to defer taxes from the sale of rental property. The rules to qualify are complex, but if followed can defer any inherent gain on the rental property by exchanging for new like-kind property. We can help guide you through the 1031 like-kind exchange process, and make sure that your estate planning and LLC documents contain the necessary provisions to allow your family to take advantage of this tax-savings if you are incapacitated and unable to manage your own affairs.
You’ve likely 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. Don’t Worry, We’ve Got This!