Airbnb and similar alternatives to hotel stays are growing in popularity among homeowners and vacationers. If you’re considering opening your home to travelers, or if you have a home or other rental property that generates income, the following asset protection and estate planning considerations will be helpful.
Owners Need Protection from Liability
In any rental relationship, property owners assume a certain level of risk. If anyone is hurt on the premises during their stay, a property owner can be held legally and financially liable for injuries suffered.
General liability insurance can be the first line of defense– assuming owners have proper and sufficient coverage on the property. In the case of a lawsuit, the insurance company should step in and defend the claim up to the policy’s limits. Any damages beyond those limits may become a personal liability to the owner, depending upon how the property is titled.
If the property is owned by a limited liability company (LLC) instead of the individual(s), then the individual member(s) of the LLC may have additional protection if the liability insurance coverage limits don’t sufficiently cover the total amount of financial liability. But in order to receive liability protection through an LLC, the entity must be formed and managed properly. If the entity is viewed as merely an “alter ego” of the member(s), the court may not uphold the liability protection, placing the property owner(s) back on the hook. Consult an attorney to make sure you have the most protection available and your LLC is setup and maintained properly.
Estate Planning Considerations
Beyond liability issues, owners need to determine how an asset will be passed from generation to generation. This is particularly true if the property generates lucrative income. If the real estate is held in an LLC, you have options as an owner. You may choose to divide up the membership interest of the LLC among multiple beneficiaries. With an income producing asset, such as a rental property, you’ll need to consider your family’s situation and your goals for the property.
Using an LLC can also allow you to gift some of the membership interests during your lifetime without losing control, transfer the property at the time of your death to your beneficiaries, or have it held by a trust for the benefit of the beneficiaries. A variety of estate planning solutions are available, regardless of your personal situation or goals.
Using an LLC for your rental property may or may not be the right move for your overall estate planning process. In either case, our team can guide you through your legal options and help ensure that your property is protected and distributed at your death according to your wishes. Do not leave this to chance! Contact our office to learn more.