People have owned and rented their property for centuries. Being a landlord and having tenants is nothing new. However, services such as Airbnb have grown in popularity in recent years. Indeed, these alternatives to hotel stays are popular among homeowners and vacationers alike. Regardless of what type of rental property you have, if it is generating income, you should understand the following asset protection and estate planning considerations.
What if Someone Gets Hurt While on Your Property?
In 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.
The first line of defense is general liability insurance ? assuming there is proper and sufficient coverage on the property. If the property owner is sued, the insurance company should step in and defend the claim up to the policy?s limits. But what happens if the damages are greater than those policy limits? This can happen if a court awards general and/or punitive damages for instance. Regardless, any damages beyond the policy?s limits 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 the individual(s), then the individual 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. If you have multiple rental properties, you should also consider forming individual LLC?s for each property so that any liability exposure can be compartmentalized. 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
Aside from liability in the event of an incident, there are estate planning decisions you need to make – like how will your property be passed from generation to generation? This questions is particularly important 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.
Using an LLC is also helpful for estate planning because you can gift some of the membership interests during your lifetime without losing control, transfer it at the time of your death to the beneficiaries, or 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.
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 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.
