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A good estate plan will address all of your assets – your home, personal property, financial accounts, retirement funds, annuities, life insurance, as well as, any rental property you own. The ownership of rental property, however, requires some unique considerations with respect to asset protection and estate planning. This article explains why proper planning is essential for the owners of rental property because of these unique considerations.

Asset protection for Owners of Rental Property

As a landlord, one of the biggest financial risks you face is the threat of being sued by someone, for instance, a tenant or guest who has been injured on your property. If you don’t have the right plan in place, a lawsuit of this type can threaten your rental property and any other personal assets you own. Fortunately, there are asset protection and estate planning tools at your disposal that can limit your exposure to such a lawsuit.

First and foremost, anyone who owns rental property should purchase adequate liability insurance to cover themselves for any lawsuits that arise from owning this property. But, even then, if you hold the property in your own name and your liability insurance does not fully cover the damages awarded in the lawsuit, the claimant can hold you personally liable for the rest. This means that your home, cars, personal financial accounts, etc. will be exposed to satisfy the debt. This brings us to your next line of defense.

Using an LLC For Asset Protection

Owning your rental property in a Limited Liability Company (LLC) can protect your personal assets from debts and liabilities that arise from your ownership of that rental property. If you hold your rental property in an LLC, only assets owned by the LLC will be exposed to a lawsuit. So, while you may lose the rental property to the lawsuit, your personal assets will be protected.

But, this will require more than simply forming an LLC and transferring your rental property into it. You will need to run your LLC as a separate business entity. This means keeping your LLC’s finances separate from your personal finances and meeting all other legal and tax requirements necessary for operating the LLC. Otherwise, you will still be exposed to personal liability.

It is extremely important that when you form an LLC to hold your rental property that you not only file the requisite paperwork with the Secretary of State’s Office, but that you consult with an experienced attorney who can help you draft an operating agreement for your LLC that contains the necessary provisions that will entitle you to the asset protection afforded by a properly formed LLC.

Some Things to Consider

Before you form an LLC and transfer your rental property into it, here are a few considerations to keep in mind:

  • Taxes – California LLCs enjoy pass-through taxation. This means that your tax obligation will not change when you transfer your rental property into the LLC. You will still report income and losses from your interest in the LLC on your individual tax return.
  • Liability Insurance – Sometimes, if you transfer a rental property from your name to the name of your LLC, the insurance company will want to switch you to a commercial policy, which will be more expensive. This is not always the case, but it is something you need to be aware of.
  • Giving Away Interest in Your Rental Property – Gifting and giving away interest in your rental property, perhaps to your children for estate planning purposes, is much easier to do when the property is held in an LLC. You can simply give them membership interest in the LLC, which is much easier than giving them a fractional undivided interest in the rental property itself.
  • How Many LLCs? – If you own a number of different rental properties, you need to choose whether you want to hold all of these properties inside one LLC, or if you want to form a separate LLC for each property for a greater level of liability protection.
  • Avoiding Probate – If you hold your rental property in an LLC, you can then transfer this LLC into a trust. Once your LLC is transferred into a trust, it is removed from your estate. This means that it will not only be out of the reach of any creditors, it will also not be subject to probate.

Thus, the transfer of your interest in the LLC to your heirs will not have to be supervised by the court. The trustee can immediately transfer your interest to the beneficiaries of your trust when you die. This will, in turn, save your successors a tremendous amount of time and money and help to ensure the smooth transfer of your rental property to someone who can continue to manage it properly for the benefit of your family.

Contact Jennifer E.S. Martin a Qualified California Estate Planning Attorney

Your rental property may be your biggest asset and you have probably spent a lot of time and resources acquiring this property. You should, therefore, spend just as much time and effort protecting it. Proper planning can give you this protection. Speak with Jennifer E.S. Martin to learn more about protecting your rental property from creditors by calling us at 925-750-7795.

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