We receive a number of phone calls at our office weekly concerning clients asking for advice concerning how residential or commercial rental property should be owned by them. We first start by explaining the options for the ownership of the rental. Those options are as follows:
- The individual can own the real estate in his or her own name.
- The real estate can be owned by the client and his or her spouse as joint tenants with the right of survivorship. This tilting mechanism would allow the property to pass to the surviving spouse outside of probate upon the death of either spouse.
- The individual could own the real estate in their own name with a transfer on death beneficiary designation affidavit recorded at the recorder’s office which states who the beneficiary would be upon the death of the owner.
- The individual can establish a revocable trust which would be the owner of the real estate and thus would avoid probate upon the death of the individual.
- The real estate could be owned by a limited liability company which the individual would establish with the Ohio Secretary of State.
The first four options can satisfy a number of goals of the client most notably the ability to avoid probate upon the death of the individual. However, those options do not provide the most asset protection for the individual. For example, if there was an incident at the rental real estate and individuals were injured, and the damages were in excess of the amount of the liability insurance that the client had on the property, then the client’s personal assets would be at risk. Those assets could include the individual’s residence, bank accounts, or stocks and bonds.
Therefore, the establishment of a limited liability company may be the way to own the rental real estate. This provides the most asset protection in this type of situation. The individual simply needs to come up with a name for the limited liability company to determine whether or not that name is available. If our office is involved then we look this name upon the Ohio Secretary of State website. If the name is available, we then prepare the necessary documentation called the articles of organization in order for the limited liability company to be established with the Ohio Secretary of State and forward the documentation to the Ohio Secretary of State. If the name is not available then a new name must be selected. After filing the articles of organization, the process usually takes between one to two weeks to be approved by the Ohio Secretary of State. After the limited liability company is established, the deed for the ownership of the rental real estate should be changed to the name of the limited liability company. This is a very critical aspect of the process. The main benefit of establishing this limited liability company is that if a liability situation at the rental real estate occurs and the damages are in excess of the client’s liability insurance, then the only assets at risk would be the assets that are owned by the limited liability company.
We have a few clients who have dozens of properties owned by one limited liability company and we have other clients who have a separate limited liability company for each of their rentals. The norm, however, is somewhere in-between where an individual would have approximately five to ten properties owned by one limited liability company. Even in these types of situations, it is always our recommendation that individuals also have liability insurance as well as an umbrella policy which can be very valuable in these types of situations.
Therefore, when trying to determine what your options are concerning the ownership of the rental real estate, please contact an attorney who is familiar with this area of the law and they can assist you as well as your accountant and insurance provider to make sure that you understand all of your potential options and the risks and benefits associated with each of these options.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
158 North Broadway
New Philadelphia, Ohio 44663