Important Considerations: Real Estate Ownership Structure & Asset Protection
Real estate can be a significant asset on the family balance sheet and often holds a large emotional place within a family’s legacy. Oftentimes sentimental value becomes attached to properties, therefore, it is desirable to pass them down to the next generation.
Unlike other tangible property such as jewelry or art, real estate ownership and transfer can be much more tailored. The primary function of the real estate and desired long-term objectives will help guide the decisions around ownership and titling, insurance and asset protection, along with the level of privacy desired.
Whether real estate is purchased as a primary residence, a vacation home, an investment property, or purchased for other members of the family, will help guide the decision around how to title the property; there are many options to consider.
Ownership Options for Privacy or Liability Considerations
Nominee (“Realty”) Trust
This structure is recommended to protect the homeowner’s privacy and makes transferring the real estate much easier in the future. The only details that get listed in public record are the name of the trust and the trustee. The actual owner of the property is listed on a schedule to the trust, which does not get recorded. Updating the schedule of beneficiaries is a simple legal document and does not require an updated deed or recording to document the change. Some states do not recognize these types of trusts.
Limited Liability Company
This structure is best for an investment property as it makes other assets of the family harder to reach by creditors or lawsuits. It is also easy to update ownership without needing to record a new deed. LLC’s require ongoing administration and have nominal annual fees.
Individually or Jointly
For those not concerned with privacy or not wanting additional complexity, owning as an individual or joint tenants is a viable option.
Ownership Options for Use and Legacy Considerations
Irrevocable Family Trust
For property being purchased for the primary benefit of others (such as children or extended family), it may make sense to purchase the property with assets that are already outside of one’s estate using vehicles that are already set up for the benefit of those beneficiaries. Any appreciation will grow outside of the estate and the beneficiaries are typically able to enjoy the property without paying rent (which they otherwise may need to do in order to avoid gift tax issues). A possible downside here is that anyone who is not a beneficiary of the Family Trust (you) would need to pay rent in order to use the property.
Limited Liability Company
This structure also works when purchasing real estate for family, but with the desire to retain ownership. By adding family as a minority interest member of the LLC, they would need to make an initial capital contribution for the property purchase (which could be gifted to them), but they would not need to pay rent for use of the property since they would be owners.
The table below highlights the pros and cons of each ownership structure:
|Privacy||Ease of subsequent transfer of full/partial ownership||“Free” use by other family members||Liability protection|
|Individual / Joint||No||No||No||No|
Insurance and Asset Protection
Insurance is the easiest way to protect against risk of loss, damage, and liability claims. Homeowners insurance covers the dwelling, other structures on the property, personal property, and liability, while excess liability will add additional coverage limits. It’s important to review named insured and additional insured to ensure proper entities are listed for coverage.
- Named insured: Entitled to 100% of the benefits of the policies’ coverage
- Additional insured: Not the owner of the policy but could be entitled to some of the benefits
Additionally, Homestead Exemption can be used in some states for a primary residence. This shelters a certain amount of money from creditors when the primary owner dies or files for bankruptcy. Declaring a Homestead Exemption should prevent the forced sale of a home, ensuring physical and financial protection.
As demonstrated above, there are many factors to consider when it comes to structuring the ownership of real estate, and there are also state specific nuances to consider. Working with an advisory team can help you think through these different scenarios and understand which strategies make the most sense for you. Please don’t hesitate to reach out, our experienced advisors are ready to help!