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Estate Planning for Rental Property Owners

Estate Planning for Rental Property Owners

If you own a rental home – or several – in addition to your primary residence, incorporate those assets into your estate plan. Owning rental property can be a great investment vehicle for growing wealth and supplementing income. But failing to plan ahead for investment properties can create some real problems for your heirs. We’re here to help with some pointers on estate planning for rental property owners.

Planning for the future

Your property is an investment – one you’ve probably put a great deal of time, sweat, and money into. The last thing you want is for all that effort to go to someone other than a loved one. Determining what happens to the property after you’re gone is an important place to begin estate planning for rental property owners. 

The conversation can be a bit awkward, but it’s also a good idea to talk to the person, or people, to whom you intend to leave the property. Financial considerations, like whether the investment operates at a profit or a loss, and mortgage information are good pieces of information to pass on. You should also ask if the beneficiary intends to continue operating the property or to sell it. If there is more than one beneficiary, there may be competing interests to discuss, as well. 

These are three common ways of handling your rental property in an estate plan:

  1. Limited Liability Company (LLC)
    Placing your real estate in an LLC offers you liability protection and allows you to direct rental income to your beneficiaries. When an LLC, rather than an individual, owns property, the property is not considered part of the individual’s estate. This distinction offers significant tax advantages because the property avoids federal taxes. If you use this option, be sure the LLC is set up correctly and the property managed properly. Otherwise, the protections offered by the LLC may not hold up in court.
  1. Living Trust
    You can put your rental property into a living trust now and name yourself the trustee of the trust. When you do, the assets in the trust, including income from the property, will continue to benefit you. You’ll also maintain control over the property while you’re sound of mind and body.

  2. Use Your Will to Leave Property to Beneficiaries
    This is the simplest option, but it has fewer protections and benefits than putting your rental properties into either a living trust or an LLC. Simply leave your rental homes to beneficiaries named in your will. During your lifetime, you’ll continue to own and manage the investment.

Related: Insurance Concerns for Landlords

Hope for the best, plan for the worst

Every real estate owner needs a plan for what happens in case of emergency. If a serious health condition, or other event, intervenes and you’re not able to manage the property yourself, you need someone who can do so on your behalf. Consider a trusted friend or relative to act as a power of attorney, giving them legal rights to make decisions and sign documents in your name.

Estate planning is complicated. There are many factors to consider, both now, while you hold the property, and when setting it up for your heirs. Greyhaven can help. 

Before you finalize your estate plans for your rental property, talk to your attorney and tax advisor. They’ll know the most current regulations and tax laws and can help you make the best decision for your situation.

You may also be interested in learning about emergency preparedness for landlords