Personal representatives and trustees are commonly responsible for distributing real property from an estate or trust to its designated beneficiaries. Such distributions present unique challenges for personal representatives, trustees, and beneficiaries alike. To this end, there are several considerations that should be made prior to distributing real property from an estate or trust.
First, are the beneficiaries interested in liquidating, managing, or occupying the property? Do the beneficiaries live in the same state? Are they able to afford ownership of their interest in the property? In the case of a family cabin, how should the beneficiaries manage their proportionate share of real estate taxes, utilities, and maintenance fees? Some of these issues will be addressed in the decedent’s will or trust documents but if they are not, the personal representative or trustee will need to look outside of the governing documents to identify a solution that will accomodate the varying circumstances of the individual beneficiaries. In the case of real property distributions, a personal representative or trustee should consult an estate planning attorney to discuss the most appropriate way to handle these issues.
Limited liability companies are used quite often when multiple individuals own an interest in a rental property. As Jen Santini explains in Limited Liability Company in Estate Planning, LLC’s can be useful as an estate planning tool. They can also be useful when administering an estate or trust. In an estate or trust administration, the governing documents will sometimes afford some flexibility to the personal representative or trustee to invest and manage the real property assets(s). This flexibility is designed to empower the personal representative or trustee to protect the value of the property. In today’s real estate economy, this flexibility may permit a personal representative to lease the property until market values increase which can, in turn, improve the liquidation value of the property.
When the real property involved produces income (i.e. rental property) a personal representative can organize an LLC to avoid the pitfalls of owning the property as tenants in common. Without an LLC, a distribution of income producing property to multiple beneficiaries creates tenancy in common. As tenants in common, the beneficiaries will need to devise their own property management plan. Conversely, if the property is put into an LLC, the beneficiaries are given membership interest in the LLC and their rights and obligations are governed by a formal written agreement (a member control agreement or operating agreement) which addresses, among other things, capital calls, distributions of rental income, and the sale of individual beneficiary’s membership interest in the LLC. These are just a few of the reasons fiduciaries will transfer real property from a will or trust to an LLC.
Another reason to avoid ownership as tenancy in common is that the interest of each owner is restricted, it cannot be sold without the consent of a spouse and it passes according to each owner’s estate plan – or lack thereof. These issues may affect the other owners’ interests or impede an intended sale of the real property. [For more information on tenancy in common, see Jayne Sykora’s article, Titling Real Estate].
These are just a few benefits of having an LLC to hold title to the rental property that is being distributed from an estate. If it is allowed under the governing documents and it is appropriate based upon the type of property and the situation of the beneficiaries, a fiduciary may consider creating an LLC prior to distribution. If the fiduciary lacks discretion or flexibility in creating an LLC, beneficiaries may decide to create an LLC after the distribution is made. Regardless of when or how it is created, the LLC can be a great tool for managing several individual interests in real property.
