Estate Planning: What Landlords Need to Know

By: Michael Safren, Esq.

With the recent rise property values and new legislation affecting capital gains here in Washington, comprehensive estate planning is more than just signing a Will and calling it a day.  A comprehensive plan considers your current life situation and accounts for the goals you have for your assets and for your family.  These considerations can be especially important for people who own investment properties because of the possible tax burdens, questions over the administration of the investment property, and the potential liability involved in operating an investment property.  Failing to make a plan for your rental property could lead to significant difficulties and conflict over the operation of the investment property, additional taxes, and confusion for your loved ones when it comes time to administer your estate after you die.

Protecting Your Assets During Your Lifetime

An essential part of your estate plan is making sure that all your assets are protected during your life so they have a chance to grow, and continue to grow even after you are gone.  One effective strategy is to shield your personal assets from your business liabilities by holding the rental property in a separate business entity such as limited liability company (LLC).  Putting each of your rental properties in a separate LLC not only helps shield your personal assets from any liabilities arising out of your properties, it also shields each property from the liabilities that may arise out of the other rental properties.

Making a Plan for After You Are Gone

After protecting your assets while you are alive, the next step is to make a plan for how to best pass along all that you have worked for.  Investment property owners are often at a heightened risk of owing estate taxes upon their death.  The current Washington estate tax level is $2.193 million, which means that all assets over that amount are taxes at a rate of between 10%-20%.  Estate taxes are based on the value of all the assets in the estate including  your primary residence, the value of any stocks, bonds, or brokerage accounts, vehicles, and the value of all the rental properties you own. 

Failing to properly plan could result in estate taxes that could have been avoided with a comprehensive plan.  Further, a lack of planning may result in the need for your estate to sell estate assets to raise liquidity to pay taxes, maintain other estate assets, or to broadly administer the estate after you are gone.

Two Estate Planning Strategies for Investment Properties

As we develop comprehensive estate plans for our clients that own investment properties, we discuss a myriad of strategies.  Two such strategies include: gifting portions of the ownership of the LLC throughout your life, or placing your LLCs into a Trust.

Gifting Portions of Ownership of the LLC.

When you create an LLC, you will designate the Members (aka owners) for that LLC.  An LLC can have one member or many members and their ownership in the LLC is reflected in ownership of membership units within the LLC.  Throughout your life, you can gift a portion of your ownership in the LLC to your beneficiaries by transferring your membership units.  You can make this gift once or many times, like on birthdays, special occasions or when certain goals are met. 

One of the advantages to this strategy is that it will allow you retain control over the management of the LLC, while your beneficiaries can be given the opportunity to grow in the business as they own a larger and larger share.  Further, if successfully employed, the LLC, the income that the LLC generates, and the assets contained within the LLC will be entirely outside of your estate and thus immune from estate creditors and completely beyond the scope of probate administration.

However, there can be draw-backs to this strategy. First, this gifting strategy can cause gift tax issues. There is a limit on the amount of tax-free gifting you can do each year without paying gift taxes.  Any gifts that exceed this limit would be subject to the federal gift tax.  Second, you will likely incur additional expenses to make these transfers, first in obtaining an appraisal each year to determine the value of the gift and any administrative or legal fees associated with the transfer.  Finally, despite your best efforts to create a plan for gifting all of your ownership in the LLC over your lifetime, you may pass away unexpectedly prior to transferring the entirety of your interest in the LLC to your beneficiaries, thereby subjecting your beneficiaries to the same estate tax issues and administration questions that you sought to avoid by employing a gifting strategy.

Putting your LLCs into a Trust.

For many families, a Trust is a sensible way of protecting your assets, both during your life and after you are gone.  A Trust can help your family avoid the probate process, avoid  administrative and operational questions should you become incapacitated, and provide a heightened level of control in exactly how your assets should be distributed upon your death. 

Once you create a Trust, you can name the Trust as a member (aka owner) of the LLC.  The beneficiaries of your Trust will ultimately benefit from the income and assets of the LLC.  Your Trust can be the sole member or a co-member of your LLC.  The Trust can be the manager of the LLC (with you as the Trustee making all day to day decisions) or you individually can be named the manager so you can personally retain management of the LLC.

The benefits of your Trust being the member of your LLC are many.  First, the LLC, it’s income, and the assets contained within the LLC will become a non-probate asset of the estate, which may by-pass the probate process. If your LLC has to go through the probate process, your executor may need to petition the court for approval to keep running the business while probate is being completed.  This can be complicated and time-consuming, especially if the property is generating needed income.  Further, the Trust will have a plan for how to manage and distribute the income and assets of the LLC to the beneficiaries, which is particularly helpful if your beneficiaries are minors are young adults.  Finally, the Trust can help you avoid estate taxes by managing the timing, allocation and distribution of the Trust assets, one of which will be the LLC. 

Make a Plan for your Investment Properties

If you own investment properties, the most important thing you can do for your family is ensure that you make a comprehensive plan.  Dying with no plan in place can mean exposure to Washington estate taxes, significant difficulties and conflict over the operation of the investment property, and confusion for your loved ones when it comes time to administer your estate after you die. The Law Offices of Jenny Ling, PLLC, has experience in both estate planning and helping property owners protect their assets.  Contact Us to find out how we can help you make a comprehensive plan.

Michael Safren is a Partner at The Law Offices of Jenny Ling, PLLC.  His practice focuses on probate, business, real estate, and civil litigation.