Estate Planning for Rental Property Owners

In all parts of the country, services such as Airbnb have grown in popularity over the past few years. Indeed, these alternatives to hotel stays are popular among homeowners and vacationers alike. If you have a home or other rental property that is generating income, you should understand the following asset protection and estate planning considerations.

Protecting Owners from Liability

Just like any rental relationship, there is risk for the property owner. If anyone is hurt on the premises during their stay – no matter how short – a property owner could be held legally and financially liable for injuries suffered, which may possibly include the property owner’s personal assets.

The first line of defense is general liability insurance – assuming there is proper and sufficient coverage on the property. In the case of a lawsuit the insurance company should step in and defend the claim up to the policy’s limits. Any damages beyond that may become a personal liability to the owner, depending upon how the property is titled.

If the property is owned by a limited liability company (LLC) instead of by the individual(s), then the individual (take out this word) member(s) of the LLC may have some additional protection if the liability insurance coverage limits are not sufficient to cover the total amount of financial liability. It is important to note that in order to receive liability protection through the use of an LLC, the entity must be formed correctly and managed properly. If the entity is viewed as merely an “alter ego” of the member(s), the court may not uphold the liability protection, placing the property owner(s) back on the hook. To ensure that you have the most protection available, you need to consult with an attorney.

Estate Planning Considerations

Beyond liability in the event of an incident, deciding how an asset will be passed from generation to generation is an important part of estate planning. This is particularly true if such property is lucrative – like income-generating rental property. If the real estate is held in an LLC, you have options. You may choose to divide up the membership interest of the LLC among the multiple beneficiaries. With an income producing asset, such as a rental property, it is important to consider your family’s situation and your ultimate goals for the property. By distributing LLC membership interest, you are not dividing up the actual property itself. The property belongs to the LLC, and the membership interest would belong to the beneficiaries.

Using an LLC is also helpful for estate planning because you can: 1.) Gift some of the membership interests during your lifetime without losing control. 2.) Transfer it at the time of your death to the beneficiaries. 3.) Have it held by a trust for the benefit of the beneficiaries. Regardless of your personal situation or goals, there is a solution for everyone.

To avoid probate, your revocable living trust, or another type of trust, may be a member, or the sole member of the LLC. The Trustee of your trust, or you individually, can be the manager(s) of the LLC. This way, even if the LLC membership interest is divided, you or your trustees may maintain control of the business and keep it running. If an LLC is a functioning business and the membership interests must go through probate, then special permission must be obtained from the Court to keep running the business during the probate proceeding. Completely avoiding the time, cost, and public records aspects of probate should be a main objective of any estate plan.

Determining whether or not to use an LLC for rental property is just one aspect of the overall estate planning process. We can guide you through your legal options, and we can help ensure your property is protected and distributed at your death according to your wishes. Do not leave this to chance, contact us today to learn more, 501-221-7776.

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