Every day I will have conversations with many families that have concerns about passing their assets to their loved ones without any government intrusions, that have concerns about their estate not paying any taxes, and protecting their assets from any unnecessary costs and the probate court process. However, many families fail to discuss an extremely important aspect of estate planning, which is protecting your assets while you are alive.
I was speaking with a family recently that owned a number of rental properties. In fact, this had created a quite comfortable residual income for them each month. However, they also explained that there were many headaches that come with being a landlord. As our discussion continued I asked this family how was their ownership of these rental properties titled? This couple informed me that these properties are titled in their own name.
Owning real estate and rental properties can be a very lucrative investment for a family and create a residual income when the investment is handled properly. However, one of the most dangerous things that you can do for yourself and your family’s future is titling rental properties in your own name. The main reason is that if a tenant were to slip and fall on the property or be harmed in some other way as a result of your own negligence, then you could be sued for damages. In addition, all of your personal assets are at risk. The former tenant that sued you could seize nearly all of your personal assets to satisfy the judgment that was issued against you. Also, another important reason is that should your rental properties be subject to foreclosure, the creditor could go after your personal assets for any deficiency judgment between the amount the rental property sold for and the outstanding balance on the mortgage.
Therefore, when I was speaking with this family regarding their estate planning concerns and needs, I also proposed a solution to set up a Limited Liability Company (LLC) in addition to their Revocable Living Trust, Will, Durable Power of Attorney, Health Care Power of Attorney, and Living Will. I explained to this family that if we set up an LLC, which is a separate legal entity, and the LLC owned these rental properties that only the assets of the LLC would be at risk for loss in the event of a lawsuit. In addition, and more importantly, their personal assets would never be at risk to loss from a lawsuit as a result of liability concerning one of their rental properties.