A comprehensive estate plan should address all your assets.

For most individuals, an estate plan must encompass three common categories: (1) your primary residence; (2) financial accounts, such as checking and savings accounts; and (3) personal property. Other types of assets, including life insurance, retirement funds, annuities, business interests, and rental property, should also be considered as part of your estate plan.

Rental Property & Estate Plans

It is well-known that one of the risks associated with being a landlord of commercial or residential property is the threat of litigation. An injured guest or tenant, a claim under the landlord-tenant act, or a lease dispute can all result in legal proceedings. However, a meticulously crafted rental property plan and estate plan can mitigate this risk.

Protecting Your Assets

A prudent landlord secures adequate insurance coverage as the first line of defense. Occasionally, however, the insurance policy’s limit may not suffice to cover damages awarded by a court. In such instances, the prevailing party may seek satisfaction of judgment from the property owner’s personal assets, necessitating the next layer of protection.

Using a Business Entity as Protection

Owning property through a business entity, such as a limited liability company (LLC), can safeguard personal assets against seizure. Nonetheless, merely filing paperwork to establish an LLC is insufficient. The LLC must be treated as a legitimate business entity, with all reports, filings, bank accounts, and other formalities consistently maintained to benefit from the liability protection of the business entity. Additionally, when integrating your rental property ownership with your estate plan, it is essential to consider who can manage your assets if you are unable to do so.

Who Is Managing Your Assets

Another crucial factor is the trustee who manages the living trust. A trustee bears the responsibility of managing the property owned by a trust for the benefit of the trust beneficiaries. The specific duties of a trustee may vary depending on the assets owned by the trust and the trust’s terms. While income from the rental property may have contributed to your financial success, many institutional trustees or individuals outside your circle of family and friends may opt to liquidate assets and invest the funds. This outcome may not align with your intentions for your assets. Therefore, utilizing an LLC to organize your rental property holdings and having the trustee simply collect the net income from the overall operation can ensure your wealth remains invested in the rental property that contributed to your success.

Tax Advantages Through 1031

While many perceive estate planning and LLCs as strategies to save on death taxes and provide for heirs, there are more options to consider. A 1031 exchange is a mechanism to defer taxes from the sale of rental property. The rules to qualify are intricate but can result in substantial income tax savings, depending on your circumstances. An experienced attorney can assist by ensuring that your trust, powers of attorney, and LLC enable your family to benefit from this tax-saving law if you are incapacitated and unable to manage your own affairs.

Davis Law Group Can Help

You have likely worked diligently over the years to build and acquire your rental property, along with your other assets. Ensure that your estate plan accounts for every one of your assets so that you and your family receive the maximum benefits and protection. Contact Davis Law Group today to set up a consultation with one of our experienced real estate attorneys.