Estate Planning for Rental Properties

In my experience, more and more individuals are investing in rental properties. Rental properties—real estate that is rented out to other individuals for a period of time—can have multiple benefits, including: wealth development, tax benefits, etc. Additionally, the owner can serve multiple roles—landlord, manager, investor. Because a rental property is an investment, it is important to ensure it is incorporated in a person’s estate plan. Below is a quick summary of how rental properties can be included in the estate planning process.

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Place Property in an LLC

One method of protecting your rental property is by placing it in a limited liability company ("LLC"). Putting a rental property in an LLC ensures that the investor is shielded from personal liability. This can be a crucial initial step in ensuring that your rental real estate assets are protected in the event of a lawsuit. Creating an LLC for your rental property does cost money, but it can save you more money in the long run. Once the property is held by the LLC, the LLC is the owner of the rental property; you, in turn, are the owner of the LLC. Moreover, for an owner of multiple rental properties, you may find it beneficial to hold each rental property in a separate LLC.

For more information on LLCs, please refer to Starting a Limited Liability Company in Texas and Common Issues When Setting Up An LLC.

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Transfer Property into a Trust

Another method of protecting your rental property is by transferring it into a trust. By doing this, you can avoid probate because the trust owns the rental property. While creating the LLC is not required, in order to enjoy protection of your assets and avoid probate, you can: (1) create the LLC that holds the rental property, (2) create the trust, (3) transfer the rental property to the LLC, and then (4) appoint the trust as the owner of the LLC. Because the rental property is in an LLC that is owned by a trust, you can have liability protection, asset protection, and probate avoidance.[1] However, you should be careful of the order in which you pursue the steps, as transferring a rental property (with a mortgage) from your personal name to an LLC can trigger an acceleration of the underlying mortgage.

For more information on trusts, please refer to Creating and Funding a Trust.

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Create a Contingency Plan

When it comes to estate planning for rental property, it is also important to have a contingency plan in place. This contingency plan names another trusted person to stand in your place, in the event that you become incapacitated. The plan may incorporate a power of attorney, which is the legal document giving the legal authority for someone else to act in your place for legal and financial matters. A power of attorney is necessary if the rental property is not in an LLC. However, if the rental property is in the LLC, and the LLC is owned by the trust, the trust has a successor trustee who will act on your behalf if you become incapacitated or die.[2]

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Conclusion

Placing your rental property in an LLC and/or a trust can be an effective estate planning tool. Also, having a contingency plan in place if you (the investor) become incapacitated and need someone else to make decisions regarding your rental property can be a helpful, if not crucial, additional step. If you would like more information on estate planning, contact Provident Legal Counsel today. Schedule a Consultation or call (214) 432-6100.

[1] Mitch Mitchell, LLC vs. Living Trust: How to Protect Your Assets, Trust and Will, available at https://trustandwill.com/learn/llc-vs-living-trust.

[2] Id.

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