A comprehensive estate plan should address all of your assets, and if you own rental property it should include appropriate asset protection considerations. 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 rental real property, life insurance, retirement funds, and annuities – should also be considered in your estate planning.
If you own rental property, however, your estate plan will be more complicated because there are some unique considerations that involve premises liability, Florida’s landlord-tenant act, and perhaps issues arising out of personal guarantees for real estate financing.
Rental Property & Estate Plans
It is no surprise that if you own rental property one of the risks of being a landlord of commercial or residential real property is the threat of lawsuits. An injured guest or tenant, a claim under the Florida landlord-tenant act, or a lease dispute can all end up in the courtroom. In Florida, if you own rental property both the owner of the real property and the occupant of the real property may be at risk for accidents that occur on the premises. However, a well thought out rental property asset protection plan as a part of your estate plan can hedge against this risk.
Protecting Your Assets: A prudent landlord purchases adequate liability insurance coverage as the first line of defense. Sometimes, however, the insurance policy’s coverage limits are not sufficient to cover damages awarded to an injured party by a court, or especially a jury. When this happens, the next place the injured 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: If you own real property through a business entity, like a limited liability company (LLC), or a Florida Land Trust, can protect personal assets other than the real estate itself against seizure by the injured party who received the judgment. Very importantly, 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. (And, if you want to protect the ownership of the LLC from your creditors, it must be a multi-member LLC, and established in a jurisdiction, like Florida, that gives charging order protection for the LLC members’ ownership interest in the LLC.)
Additionally, when coordinating your ownership of real property with your estate plan, you must consider who you want to manage all of your assets if you’re unable to do so, our next consideration.
Who Is Managing Your Assets: Another factor to consider is the trustee who manages the living trust, or the agent you have appointed to act as your power of attorney. A trustee, or your attorney-in-fact, bears the responsibility of managing the assets owned by a trust for the benefit of the trust beneficiaries, or in the case of the attorney-in-fact the assets that are owned by you. The exact duties of a trustee may vary depending on what assets are owned by the trust and the trust’s terms. While income from the rental property made you financially successful, many institutional trustees – or someone outside of your circle of family and friends – will often liquidate assets and invest the funds in stocks, bonds and mutual funds. When you own rental property in an LLC, the trustee’s powers and the power of attorney must address the issue of how you want the rental real estate to be managed. Absent appropriate direction and legal documents in place, the trustee of your trust, or your designated power of attorney, may not follow your desires regarding the maintenance and management of the rental real property. This result may or may not be what you want done with your assets. For this reason, using an LLC or a Florida Land Trust for you to own rental property holdings and have the trustee simply collect the net income from the overall operation can be a 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. 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. 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 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 asset protection.