One question that comes up often in estate planning is: How should I own my Real Property (or Real Estate)? Last July I wrote an article on this very topic. The focus of that article was simply how to avoid probate with a slight mention of asset protection. However, today I’m going to 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: In general, your revocable living trust should own your home. If you are married or are a reciprocal beneficiary, you should own your home as Tenants by the Entirety inside of your revocable trust(s). This Tenants by the Entirety within your trust is a new protection provided by the State of Hawaii as of July 2012. If you set up your revocable trust before July 2012 and your trust owns your home, you SHOULD (in almost all 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 protection from creditors of one (but not both) of you very inexpensively.
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), then you may enter into a reciprocal beneficiary relationship with that family member and enjoy the protections of Tenants by the Entirety with your reciprocal beneficiary, even if you are not married nor a romantic couple.
If you have a close friend who is not a close family member for whom you would like to provide, and you would like to enjoy the benefits 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 the same gender, and you can enjoy the protections of Tenants by the Entirety law as well as all other benefits provided under the law to married couples.
Finally, if you have transferred your property to an Asset Protection Trust or an Irrevocable Trust for Medicaid Planning purposes, you do not need to worry about Tenants by the Entirety protections (…as long as your lawyer prepared the trust correctly—we have seen quite a few irrevocable trusts prepared by other attorneys with the intention of protecting client’s assets from nursing home costs by preparing the client to qualify for Medicaid after a 5-year lookback period, but the trust prepared does not accomplish the client’s desired intent because the lawyer has 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 in 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 can 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 both liable. Also, it’s 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, go talk to your property and casualty insurance advisor right away and get a quote for umbrella insurance.
Even if your investment real estate is owned by an Asset Protection Trust or a Medicaid Protection Irrevocable Trust, an LLC for your investment property is still recommended because any and all other assets in those trusts could also be lost to a claim by an injured visitor or tenant. To further 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 don’t have any trust, you could own the LLC in your individual name, but I do strongly recommend having rental properties owned by an LLC. We can set this up in a way that you don’t have to file a separate tax return for the investment property even if it’s owned by an LLC which 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 April 2013 article in the Hawaii Herald or on the Okuralaw.com website). We can structure this technique in such a way that you don’t have to pay any interest, you don’t have to make monthly mortgage payments, and it’s relatively painless to implement—yet it will provide you with far better protection of your hard-earned assets.
© OKURA & ASSOCIATES, 2014
Honolulu Office (808) 593-8885
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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.
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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.)
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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.