Rental property has become increasingly popular in Michigan over the last decade. How do you best position a real estate rental in your estate plan?
An estate plan should address all of your assets. This is very simple for many people because the main assets in the estate consist of a residence, financial accounts, and personal property. These should be put into a revocable living trust for most families. Beneficiary types of accounts such as annuities, life insurance, and retirement funds, typically do not need to be included in living trusts. But those who invest in real estate need to give some serious thought to how to best title their rentals, and how to position those investments in their estate plan for both liability and after you are gone.
Rental property has become increasingly popular in Michigan over the last decade. With the more limited vacation property availability Up North, many individuals have delved into the seasonal or short-term rental business, advertising their cabins and cottages on websites like Airbnb and VRBO.
Others have acquired property and turned them into long-term rentals to grow equity in their investments and create a steady income stream for their families.
How Do You Title Your Rental Property?
But how do you title these properties, and how should they be positioned as part of your estate plan?
First, remember that estate planning’s primary goal is to save your family the trouble of going to probate court when you pass away. A living trust can accomplish that.
Protecting from Liability
Second, know that one of the significant risks of being an owner of rental property is the threat of injury and resulting lawsuits. In that instance, it is crucial to consider who will be liable for that debt. Adequate insurance is a critical element in the plan. However, occasionally, more than the insurance limit is necessary to cover a claim. The potential plaintiff will look at the property owner’s assets to determine if they should pursue legal action against that owner.
“The potential plaintiff will look at the property owner’s assets to determine if they should pursue legal action against that owner.”
Should that owner, therefore, be you individually? Of course not. Should it be your living trust? Absolutely not.
The Use of Limited Liability Companies
LLCs are the most flexible business entity available for rentals, and they do a terrific job protecting your other assets from cross-liability.
LLCs have been the business entity of choice in Michigan since 1993, when the state legislature passed an act allowing the creation of these simple business forms without the annual maintenance that a corporation requires. The idea was to distinguish between companies such as General Motors, with shareholders and thousands of employees, and someone who wanted to start a small business without the threat of exposing personal assets if they just acted as a sole proprietor.
The property owner should be an entity against which there is not much recourse, such as a limited liability company (LLC). LLCs are the most flexible business entity available for rentals, and they do a terrific job protecting your other assets from cross-liability.
Important: Setting Up an LLC
The key is that the LLC needs to be correctly established and maintained. This takes more than just filing the one page form with the State of Michigan. Your LLC needs a carefully drafting Operating Agreement. In most cases, we suggest that the LLC be a single-member LLC, with one spouse chosen to be the owner and registered agent.
Assign the LLC to Your Trust
Regarding your estate plan, the LLC that owns the rental property should then be assigned to your Living Trust through a properly notarized Assignment of Business Interest.
Of course, some circumstances warrant a more creative approach.
Because this often isn’t a do it yourself undertaking, it is important to consult legal counsel before deciding how to protect your assets. It’s not as painful (or expensive) as you think.