If you own real estate, chances are you have purchased insurance to protect your assets against damage or loss. But have you taken the necessary steps to protect your assets against lawsuits or probate?
If you own rental properties, there is likely a nagging fear in the back of your mind about being sued by one of your tenants. And if there isn’t, there probably should be. It’s a major risk.
And while it may be heartbreaking to think about, there is always a chance your death could trigger a family feud over your home, vacation home or other real estate investments.
Two common estate planning tools for real estate asset protection include limited liability companies (LLCs) and trusts:
- LLC. If you have income-producing property, then an LLC probably makes sense for you, since it protects your personal assets from lawsuits or claims that result from your ownership of the real estate. LLCs may also offer owners privacy since the property can be listed in a company name, not in your name directly. However, you must be sure you maintain the LLC properly so the planned for protections remain intact. It’s not too difficult though, especially with counsel.
- Trusts. If you own vacation home property that you do not rent out on a regular basis, then a trust may be a better choice for you. There are several options: a Qualified Personal Residence Trust (QRPT) is an irrevocable trust (meaning it cannot be changed without the consent of the beneficiaries) that allows an owner to use the property for a fixed term, and then pass the property on to heirs. This is a commonly used structure to reduce the size of your estate for estate tax purposes.
- Land Trusts. A land trust is essentially a private agreement, whereby one party (the “trustee”), agrees to hold title to property for the benefit of another party or parties (the ”beneficiary(s)”). The creator of the trust (often called the “settler” or “trustor”) is the original titleholder to the property and often remains the beneficiary of the trust for his/her lifetime. Land trusts are revocable, and may be changed, modified, or terminated while the trustor is still alive. An uncooperative trustee may be removed. Since the trustee holds title as a fiduciary, they incur no personal liability for being on the title, nor can the trustee lose the property to their personal creditors.
The land trust is comprised of two legal documents:
- A trust agreement between the trustor and the trustee, which establishes the rights, powers, duties, and obligations of the parties; and
- A deed from the trustor to the trustee.
When the trust agreement is executed and the trustee deed recorded, the world will no longer recognize you as the owner of the property. In addition, since the trust agreement remains private (in your file cabinet at home), no one need ever know that you retain an interest in the property. The public records will not reveal this information.
A revocable trust is more flexible and, if you choose a dynasty trust, can last for multiple generations. The major benefit of the revocable trust, besides control of what happens to the assets after the death of the grantors, is that it keeps your assets out of the hands of the Court after your death, and totally within the control of your family.
You can also use a combination of LLCs and trusts to protect real estate assets if you have a combination of primary residence and rental properties. We can help you decide on the best course of action for your individual circumstances.
Call our office today to schedule a time for us to sit down and talk about a Family Wealth Planning Session, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security.