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HOW DO I INCLUDE RENTAL PROPERTIES IN MY ESTATE PLAN?

rental-property

HOW DO I INCLUDE RENTAL PROPERTIES IN MY ESTATE PLAN?

An estate plan should be comprehensive. It should address all assets of the person setting up the plan. For many people, this is very simple because the main items in the estate (which are put into a trust) consist of their residence, financial accounts, and any personal property. Other types of assets, which are beneficiary types of accounts (such as annuities, life insurance and retirement funds) do not necessarily need to be included in living trusts, and in most cases, should not be.

For those who have a wish to invest in real estate, and have that be a major part of their estate plan, some thought needs to be given to it. One of the major risks of being a landlord, particularly of residential property, is the threat of injury and resulting lawsuits. In that instance, it is important to consider who will be liable for that debt. Adequate insurance is a key element in the plan. However, occasionally, more than the insurance limit is necessary, and the potential plaintiff will look at the assets of the owner of the property to determine if they should pursue legal action of that owner. Should that owner, therefore, be you individually? Of course not. Should it be your living trust? Absolutely not.

The owner of the property should be an entity against which there is not much recourse. For example, in Arizona, the only remedy a creditor of a limited liability company (LLC) has is to obtain a charging order. That allows the creditor to accept any distributions made to the member/owner of the LLC. It does not allow the creditor to get to any assets of the owner directly. Thus, owning rental properties in an LLC is a wise thing to do. In most cases, a living trust can be the owner of the LLC that owns the rental property, and that is adequate. Of course there are circumstances that warrant a more creative approach. However, at a bare minimum, it is important to note that neither individuals nor a revocable living trust should ever be the owner of rental properties.

If this direction is followed, it is important to know that the LLC must be treated as an LLC, and not a personal slush fund. For example, there are reports that must be filed, bank accounts that must be set up into which rent must be paid, all in the name of the LLC, and other requirements. Failing that, a party can disregard the entity of the LLC, because that is what the owner did. In that case, either the individual or the living trust, whichever is the member of the LLC, can be held liable. Therefore, it is important to consult legal counsel before deciding how to go about protecting your assets.

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