Here is a question that comes up frequently in estate planning: How should I own my real property (or real estate)?
Last July, I wrote a column addressing this topic. It covered the process for avoiding probate and briefly mentioned asset protection. In this column, I’ll get into the nitty gritty of what to do, especially if you are trying to protect your assets from future nursing home costs or lawsuits and/or have an irrevocable trust.
Your Home: Generally speaking, your home should be owned by your revocable living trust. If you are married or are a reciprocal beneficiary, you should own your home as Tenants by the Entirety within your revocable trust(s). Tenants by the Entirety within your trust is a new protection of the state of Hawai‘i as of July 2012. If you set up your revocable trust before July 2012 and your trust owns your home, you SHOULD (in most cases) have your residence real property transferred to you and your spouse by a simple deed and then transferred right back into the trust(s) as Tenants by the Entirety. If you don’t already have a trust, you should consider getting one. But even without a trust, married couples and reciprocal beneficiaries should generally own property as Tenants by the Entirety. This provides you with tremendous yet inexpensive protection from creditors of one (but not both) of you.
If you have a close family member for whom you would like to provide, and both you and the family member are not married (widowed, divorced or never married is fine), you may enter into a reciprocal beneficiary relationship with that family member and enjoy the protections of Tenants by the Entirety, even if you are neither married nor a romantic couple.
If you have a close friend who is not a family member and you want to provide for this close friend under the law of Tenants by the Entirety, or other benefits of marriage, you may marry this friend even if you are not a romantic couple and regardless of whether you are of the same gender and enjoy the protections of the Tenants by the Entirety law and the other benefits provided by law to married couples.
Finally, if you already transferred your property to an Asset Protection Trust or an Irrevocable Trust for Medicaid planning purposes, you need not worry about Tenants by the Entirety protections (as long as your lawyer prepared the trust correctly). We have seen a few irrevocable trusts that were prepared by other attorneys that were intended to protect the client’s assets from nursing home costs. They did this by preparing the client to qualify for Medicaid after a five-year look-back period. However, the trust that was prepared did not accomplish what the client wanted because the lawyer drafted the trust incorrectly, even though he thought it would work for Medicaid.
If you own a life estate in your residence (for example, if you transferred the remainder interest to an irrevocable trust or to your children or other heirs), then you should own the life estate as Tenants by the Entirety with your spouse or reciprocal beneficiary.
Investment Property: You should almost always own investment real property as an LLC to protect you and all of your other hard-earned assets from liabilities created by tenants or their guests (or even by trespassers).
If one of them were to get injured on your property, they could sue the owner for their injuries. Tenants by the Entirety ownership does not protect you and your spouse from a claim like this, because you both own the property and are thus both liable. It is also possible that the claim could exceed the value of your umbrella insurance policy and your assets could be exposed. If you do not know what umbrella insurance is, talk with your property and casualty insurance advisor right away and get a quote for umbrella insurance.
An LLC is recommended for your investment property even if your investment real estate is owned by an Asset Protection Trust or a Medicaid Protection Irrevocable Trust. Why? Because any and all other assets in those trusts could be lost to a claim by an injured visitor or tenant. To advance your estate planning goals, your LLC (which owns your investment property) can be owned by your regular revocable trust, your Asset Protection Trust or your Medicaid Protection Irrevocable Trust. If you do not have a trust, you can own the LLC in your individual name, although I strongly recommend that you have an LLC own your rental properties. We can set this up in such a way so that you will not have to file a separate tax return for the investment property even if it is owned by an LLC that is owned by an Irrevocable Trust or an Asset Protection Trust. This helps to keep things simple.
Finally, if you would like to protect the equity of your investment property within the LLC from being lost to a creditor, you can use a technique called equity stripping. (See my article on the okuralaw.com website.) We can structure this technique so that you will not have to pay any interest or make monthly mortgage payments. It is relatively painless to implement, yet will provide you with far better protection of your hard-earned assets.
© OKURA & ASSOCIATES, 2014
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Ethan R. Okura received his doctor of jurisprudence degree from Columbia University in 2002. He specializes in estate planning to protect assets from nursing home costs, probate, estate taxes and creditors.
This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)
This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.