Real estate ownership is a cornerstone of many peoples’ American dream, as is protecting one’s assets from catastrophic illnesses and judgments. Investing in our futures and that of our family is an essential step to ensure future stability, and purchasing the right real estate can be a key piece of that future estate plan. While the first big real estate purchase for most families is the marital home, it is becoming more and more common for families to purchase and maintain rental properties as a supplemental source of income as well as an investment for the future. When purchasing rental properties and acting as a landlord, you should keep in mind how these investments fit into your estate plan and your long-term plan for asset protection.
One common strategy used by rental property owners to protect assets is to form a Limited Liability Company, or “LLC.” An LLC is one of the most simple type of business structures. The primary advantage to setting up an LLC and handling your landlord affairs like a proper business is that you can insulate your assets. Any landlord knows that lawsuits are common, ranging from housing discrimination to property damage after a water pipe bursts. If you do not have the proper business structure, the tenant can sue you personally. This means that if he or she is successful in the suit, then any judgment awarded will have to come out of your personal assets. However, if you have set up an LLC, the tenant will have to sue the LLC instead of you personally. The tenant will not be able to recover any damages against your personal assets, including high value assets you intend to pass on to your friends and family such as your family home.
While a revocable living trust is usually not a creditor protection plan, it helps when it is irrevocable. With a revocable trust, you can be the person placing the property into the trust, the trustee, and also the beneficiary. Your tenants can pay their rent directly to the trust. When you pass away, the real estate can pass immediately to your intended heirs without having to have the real estate pass through probate. However, unlike an LLC, a living trust does not provide insulation from law suit liability. If this is your chosen strategy, you should consider purchasing more insurance to make sure potential lawsuits are covered.
We have extensive experience helping our clients understand their options for protecting their assets and estate planning. Contact us at 818.340.4479 today to talk about your plans for the future.
