​Property Ownership Can Be Profitable But Risky

If you own income-producing property, one of the ever-present concerns you face is the possibility of being sued by a tenant. If you own the income-producing property individually (not in and LLC or corporation), personal assets, such as your home and other investments could be subject to the Court judgment, should you be found guilty in the lawsuit. Additionally, have you considered what will happen when you die? Will your family fight over your home, vacation home, or investments properties? 

If you haven’t taken the necessary steps to protect your assets from lawsuits or probate, you or your heirs could face a nightmare of legal fees and court dates. Two commonly used tools to protect real estate assets include limited liability companies (LLC) and trusts:

LLC: In a nutshell, an LLC protects your personal assets from lawsuits or claims that results from your ownership of assets in the LLC (in this case, real estate). You must comply with Kansas LLC laws in order to receive those protections, but with the assistance of an experienced attorney, this is easily accomplished. Your attorney should prepare the LLC formation documents, file your LLC with the State and advise you on your compliance duties with the State. Formation documents should at least include: Limited Liability Articles of Organization and an Operating Agreement detailing who the members are and what their 

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ownership in the entity is. Many attorneys also prefer for an LLC’s organizational documents to include membership units and a Banking Resolution. When you own membership units in an LLC, your operating agreement will often provide details on what restrictions, if any, you have on how you can leave units to your beneficiaries at your death. The estate plan that you have in place then dictates who the units go to. This will often allow your beneficiaries the ability to either sell their units to other members for cash or continue as an owner of the LLC. If your LLC is more complex in nature, your attorney may also prepare a Buy-Sell Agreement. A Buy-Sell Agreement is a more comprehensive document detailing restrictions and terms required for the transfer of ownership interests both during the lifetime of a member and after the death of a member. Buy-Sell Agreements will often include conditions for the sale of a membership unit, procedures for establishing the value of a unit, what happens to an individual’s membership if they are no longer employed by the company, if they are incapacitated, become bankrupt or are divorced, if a member dies, and much more. By having these documents in place, you not only protect your personal assets from lawsuits, you ensure a smoother transition of ownership if and when one of the aforementioned scenarios occurs. 

Trusts: Not all properties are best suited for placement in an LLC. For example, if you own a vacation home and simply want to pass the property on to your heirs without court involvement after your death, but would like to have more control over how the property is used or who uses it, you may wish to establish some type of trust. Two options you may want to discuss with your attorney include: a revocable trust (Donor can change the terms during their lifetime and retains control of the assets.); and an irrevocable trust (Terms cannot be changed during donor’s lifetime and donor no longer has any control over the assets. This is often used to reduce the size of the donor’s assets for tax purposes.). 

You may want to consider using both LLCs and trusts if you own multiple properties. Your real estate or estate planning attorney and your tax professional should be consulted to determine the best course of action for your individual circumstance.

For more information on Real Estate and Business Formation matters, contact Davis & McCann, P. A., Dodge City, KS. We are members of Wealth Counsel, a national consortium of Estate Planning Attorneys and focus our practice on providing clients with the best legal advice on estate planning, Medicaid and Long-term Care Planning, Family Business/Small Business Formation and Succession Planning, Probate, Trust Administration, Real Estate Transactions, and related matters.