A comprehensive estate plan should address all of your assets. Most people’s estates include the following: a home, bank accounts, and personal property (furniture, clothes, golf clubs, jewelry, etc.). Many families also have 401(k)’s, IRA’s, life insurance policies, and other assets which should also be included in your estate plan.
Some families, and especially here in Colorado, own rental property, and these kinds of assets have many considerations that are unique to them, complicating your estate plan.
Rental Property & Estate Plans
You would not be surprised to learn that one of the largest concerns landlords have is the possibility of being sued. A dispute over the lease, as well as any injury to anyone on the premises can lead to the landlord being in court. A good plan to address the property itself as well as its role in your estate plan can protect against lawsuits.
Protecting Your Assets:
A landlord’s first line of defense is the correct type and amount of insurance. If the insurance proceeds are not enough to cover any required payment, the winning party will look to the landlord’s personal assets to satisfy the claim. Therefore, having enough insurance and the following strategy are essential.
Using a Business Entity as Protection:
A rental property should be treated as a business. Some business entities, such as a limited liability company, separates business property from personal property. This means that if a landlord is sued, the worst that can happen (assuming the business was administered correctly) is that the business will have to declare bankruptcy and sell off the property to pay the lawsuit, but the landlord’s personal property will not be vulnerable. Correctly administering the business means keeping separate accounts and records, tax filings, etc. There must be a total separation, otherwise personal assets may be vulnerable. Deciding who can manage your assets if you are incapacitated or passed away is the next consideration.
Who Is Managing Your Assets:
Who will manage your property after you are gone? This is a vital question to ask. This would be an agent acting under a power of attorney, the personal representative of a will, or the trustee of a trust. These individuals manage the property after you can no longer do so or sell it, depending on your wishes and the situation. If you want the rental property to be kept, putting the LLC into a trust and the trustee manage the monthly income as you predetermine is probably the most desirable option.
Tax Advantages Through 1031:
A 1031 exchange is a tax strategy that allows you to defer taxes when the rental property is sold. 1031’s are complicated and must be done correctly, but the income tax savings can be quite large. Working with an estate planning attorney or an attorney specializing in 1031’s would be important in this situation.
Bottom Line
If you have rental property among your financial assets, you need to know that this kind of property behaves differently and has different demands than your other assets. You need to work with a team of professionals to make sure that everything is in order and done correctly to protect your rental property and your other assets.