Coordinating Landlord’s Estate Planning With Asset Protection

 Posted on November 17, 2022 in Estate Planning

Owning rental property can be a great benefit to a landlord, as well as a way for an individual to generate additional income. But there are substantial risks that an individual assumes when taking on the role of a landlord. The risk of a lawsuit against a landlord is high, as there can be claims brought based a lease dispute or an injury that occurred on the property. If a tenant brings a claim against a landlord, judgment creditors will be able to access the landlord’s personal assets to pay off the judgment. In order to protect personal assets, it is crucial to include rental property in an estate plan as a way to structure a workable asset protection plan.

The best way for landlords to eliminate the risk of creditors reaching personal assets is to take the rental property out of the landlord’s individual name and place it into an entity. There are two ways that are most effective at doing so, establishing an LLC or putting the property into a land trust.

Pros and Cons of an LLC

An LLC, or a Limited Liability Company, is an entity that can be used to protect an individual’s personal assets from creditors. A landlord should always consider placing any rental property into an LLC because the LLC is then the owner of the property, which takes the property out of the landlord’s individual name. Since the landlord is then shielded from liability, a creditor is (for the most part) not able to go through the LLC to reach the landlord specifically. While an LLC can be a good estate planning tool for landlords, there are some precautions that the landlord must consider to ensure the utmost protection of their assets.

In order for an LLC to actually fulfill its purpose of asset protection, the landlord must treat the LLC as an actual entity, rather than simply a name to put on rental property. To meet this purpose, the LLC must enter into lease agreements with the tenant, not the landlord individually. Additionally, the landlord should not accept rent to themselves specifically. In accordance with creating an LLC, a landlord should also create a separate bank account in the LLC’s name and instruct tenants to make their rent payable to the LLC. By taking these precautions, the landlord is placing themselves in a good position to avoid creditors reaching their personal assets. 

When a rental property is in the LLC’s name, a creditor can reach the assets that are placed in the LLC specifically, such as the rental property and the bank account associated with the LLC. However, there are times when landlords have multiple rental properties. If every property is placed into the LLC, a creditor from one property will be able to access the other properties in the LLC in order to pay off a judgment. In this instance, a Series LLC would be the best option for the landlord. A Series LLC is essentially one main LLC, otherwise thought of as a parent LLC, with individual LLCs within it. By doing so, each Series LLC will manage its own property, have its own bank account, and be separate from the other Series LLCs and the properties within them. This ensures that the landlord, through the parent LLC, is the true owner of each Series LLC, but there is also added protection by separating each property into its own Series.

Land Trust

Rather than putting the rental property into an LLC, a landlord can choose to put the rental property into a Land Trust. The benefit of a land trust is that the landlord’s property interest is shifted to a personal interest, because the landlord is the beneficiary of the Land Trust, and the land trustee, which is typically an entity, holds title to the property. Since the landlord would be a beneficiary of the Land Trust, they retain full discretion on how to operate the trust.

A benefit of a land trust is the privacy associated with it. It is very difficult for a creditor to uncover a land trust, and, since the trustee is the entity that holds title, the landlord’s individual name is protected from being uncovered. This way, if a claim was brought in court in accordance with the rental property, any creditors would only be able to access the actual property, and none of the landlord’s personal assets. 

A Land Trust can be used in conjunction with a living trust, to provide both asset protection and seamless transfer at the time of death. If a landlord already has a living trust established, they will be serving as the trustee of the living trust. The landlord can then create a Land Trust and, instead of the landlord individually being the beneficiary, the landlord acting as trustee to their living trust would be the beneficiary. This means that, at death, the landlord’s interest in the property will automatically be placed into the trust and distributed according to the terms of the living trust. In essence, the landlord’s assets are protected while also helping his surviving family members avoid a lengthy and expensive probate process.

Experienced Estate Planning Attorneys

When it comes to protecting assets and planning for the future, landlords need an attorney they can trust. The staff and attorneys at Peace of Mind Asset Protection, LLC are devoted to assisting individuals plan for the unexpected. We specialize in asset protection and can help determine the best business plan and tailor it specifically to your needs. We offer free initial consultations in the form of in-person, virtual, and in-home visits. To inquire about all the services we have to offer, give our office a call at 630-780-1034.