A comprehensive estate plan should address all of your assets. For most people, an estate plan must include three common categories: (1) your home; (2) financial accounts, like your checking and savings account; and (3) personal property. Other types of assets – such as life insurance, retirement funds, and annuities – should also be considered as part of your estate plan.
If you own rental property, however, your estate plan will be more complicated because there are some unique considerations.
Rental Property & Estate Plans
It is no surprise that one of the risks of being a landlord of commercial or residential property is the threat of lawsuits. An injured guest or tenant, a claim under the landlord-tenant act, or a lease dispute can all end up in the courtroom. However, a well thought out rental property plan and estate plan can hedge against this risk.
Protecting Your Assets: A prudent landlord purchases adequate insurance coverage as the first line of defense. Sometimes, however, the insurance policy’s limit is not sufficient to cover damage awarded by a court. When this happens, the next place the prevailing party looks to for satisfaction of judgment is the property owner’s personal assets, which leads us to the next layer of protection.
Using a Business Entity as Protection: Owning property through a business entity, like a limited liability company (LLC), can protect personal assets against seizure. That being said, merely filing paperwork to create an LLC isn’t enough. The LLC must be treated as a true business entity and all reports, filings, bank accounts, and other formalities must be met at all times in order to benefit from the liability protection of the business entity. Additionally, when meshing your rental property ownership with your estate plan, you must consider who can manage your assets if you’re unable to do so.
Estate Planning Considerations: Let’s start with your Operating Agreement. Do you have one? Does your Operating Agreement address what happens to the business if you become unable to manage it or when you die? Most of the Operating Agreements we have seen do not have an Incapacity or Succession Clause.
If you die or become incapacitated without a plan in place, you will leave your heirs without clear instructions on how to run your company. This can jeopardize the business you worked so hard to build. The right plan along with adequate insurance can help keep your business running regardless of what happens.
It is important to think ahead about who will be in charge of the day-to-day operations because a ship without a captain can be dangerous. Not only does this individual need to understand the business, he or she needs to have the respect of your employees, and be confident in making tough decisions in your absence. Without this planning, everyone could jump to the conclusion that he or she is in charge, or alternatively, no one will step up, resulting in chaos either way.
If you have family members working in your business it is also important to explain to them what will happen in your absence and who will be in charge so that someone does not assume they are in charge just because they are family. Importantly, remember that just because your family is involved with your business does not mean that he or she is the best choice to succeed you.
We can help you develop a plan to keep your business running while you may be unable to manage it or when you die. From choosing the right individual to putting processes in place for your incapacity and death, we are here to help.
Take advantage of our 30 minutes free consultations – see flyer here for more information or give us a call at (405) 857-8231!
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