by Rachel A. Quinley
Most small business owners today are aware of the importance of forming a legal entity before beginning their business operations. However, there are more individuals and families turning to rental properties as an investment strategy and they do not necessarily think of themselves as small business owners. But that is exactly what they are, and it is critical to ensure that if you or your family owns rental or other investment properties, you protect your personal assets from liability by setting up a legal entity to be the owner of the properties.
The best option for most of these types of small businesses is to form a Limited Liability Company (LLC). Limited Liability Companies require less formality than corporations and are generally less costly to form. They also offer the benefit of pass-through taxation. Though liability insurance offers protection, the one-time cost of setting up an LLC is typically less than the cost of an umbrella insurance policy over time. And with an umbrella insurance policy there are still coverage limits so if your liability exceeds the coverage limits and the rental property is owned in your individual name your personal assets could be at stake. LLCs shield their members from personal liability, when formed and operated properly. If you are going to own multiple properties it may also be wise to form a different LLC for each property to shield each property from the liabilities of the other properties. You will want to consult with an experienced attorney to make certain that you are following the correct procedures in establishing your LLC, such as registering the LLC with the Secretary of State, creating an operating agreement, and obtaining a tax id number for the business.
As you can see, LLCs are extremely useful as a means of asset protection. They are also a great tool for estate planning purposes. If you own property in an LLC and you have an estate plan with a trust you can execute what is known as a beneficiary assignment which transfers your interest in an LLC to your trust upon your death, without having to go through probate. Alternatively, the trust can hold the ownership interest in the LLC, which would also allow the LLC and its assets to avoid probate. If you are concerned about gift or estate taxes, an LLC can be utilized to pass assets down to your family members while avoiding or minimizing estate and gift taxes. A family LLC allows your heirs to become shareholders in the company while you are living, with you maintaining control. Family LLCs are allowed to take a valuation discount of up to 40% on shares transferred to family members.
Whether you already own investment properties or are thinking about purchasing one in the future, you should make sure to consult a knowledgeable attorney to discuss creating an LLC and how the LLC may tie into your broader estate plan.
Rachel A. Quinley, estate planning and probate attorney with Danna McKitrick, P.C., focuses her practice on the creation and administration of trusts and estates, wills, beneficiary deeds, financial and medical powers of attorney, guardianships, and other matters related to estate planning. Rachel can be reached at 314.889.7155 or firstname.lastname@example.org.