What do house hackers need to know about estate planning and protecting their assets? Strategic Partner Pam Maass Garrett is a lawyer who specializes in estate planning and shared the most important things house hackers need to consider when it comes to wealth preservation and protecting themselves.
She gave us her top 5 tips house hackers need to know to protect themselves, their families, and their property.
- Listen to the podcast “#414: Is Your House Hack Protected? 5 Moves You Can Make Right Now” Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
How Is Estate Planning Different for House Hackers?
Before we dive into the tips, it’s important for house hackers to understand that estate planning looks different for them compared to other real estate investors.
Even though you’re living in the property, you need to look at your house hacks as a business. In many ways, house hacking is analogous to owning an apartment complex. There are multiple tenants and common areas, and you need to consider the specific liability that comes with both of these.
1. The Time to Start Planning Is Now
You don’t want to put your asset protection or estate plan in place after something bad happens. Making moves after the fact can be considered a fraudulent transfer, and Colorado has a harsh fraudulent transfer act.
Pam once represented a woman who was sexually assaulted by her doctor. The woman reported it to the medical board, after which the doctor started moving his real estate assets into his wife’s name. When Pam found out about this, she went to a judge and was able to freeze the doctor’s assets by arguing that he was getting rid of assets in a way that would deprive her client from being able to collect what she was due. Although they settled the case, Pam could have further pressed for additional damages because of his actions.
Moral of the story: create a plan ahead of time and never move things around after the fact.
2. Get the Right Insurance in Place
Because you’re running a business, you want to get insurance that reflects that fact. A typical homeowner’s insurance policy won’t cover everything, such as tenant injury or flood damage. Work with a broker who’s familiar with commercial insurance and can provide you with the necessary coverage.
As the property owner, it’s your responsibility to be aware of potential dangers on the property. Whether it’s an unsafe stairwell or a dog who bites, you are on the hook if something happens on your property. Make sure you resolve potential issues, screen tenants thoroughly, and get the proper coverage.
Finally, it’s important to make sure your tenants have renter’s insurance. Because you’re in a situation where one tenant has the potential to damage other tenants’ property, everyone needs to be covered. You don’t want to be responsible for a tenant who left the water running and ruined other people’s belongings.
3. Plan for Disabilities
Here are some sobering statistics: 1 in 4 people will be incapacitated at some point. 30% of all people ages 35-65 will suffer a disability for at least 90 days, and at least 1 in 7 will become disabled for at least 5 years or more.
What does this mean? It’s vital that you get long term disability insurance, and have a plan for someone to step in and take care of your property if you are unable. Loved ones can’t automatically step in and pay bills, which means you could end up losing your property.
Create a plan and get insurance to protect yourself against this outcome.
4. Plan Ahead for Death and How to Preserve Your Wealth
A lot of house hacking clients are young and don’t think about dying. But the reality is that if something were to happen, having no plan means your assets go through probate. Probate is a long, messy process and many people end up losing assets after going through it.
Often, young house hackers put their property in an LLC and think they’re protected. Even with an LLC, however, property goes through probate unless the assets are in a living trust.
It’s common for young, unmarried couples to house hack together. And if something were to happen without a plan in place, they could be unintentionally disinheriting their partner.
On the flip side, if you want to keep your assets for your family, make sure your partner could not argue that you had a common law marriage. In Colorado, there’s a multifactor test for common law marriage that includes living together, holding out as married for insurance purposes, and other factors. The state looks at the relationship holistically to make its decision.
Either way, make sure you have a plan for both death and incapacity, as well as a cohabitation agreement that details how assets will be divided if you break up.
5. Set up a Limited Liability Entity and Assign Ownership to a Living Trust
In a perfect house hacking world, you would be able to put every bedroom in its own LLC. But since that’s not possible, the next best step is to create an LLC that separates your personal and business interests.
We’ve covered LLCs in-depth in our Real Estate Wealth Preservation series and recommend you use that as a starting point.
Because you’re living in the property that’s also your business, it can be a complex process to figure out when and how to set up the LLC. Many people wait until after they move out of the property, which is perfectly acceptable. If you own multiple properties, make sure they’re each in their own LLC to shield them from each other.
While some house hackers put their homes in LLCs while they’re living there, remember that this may risk the due on sale clause in your mortgage paperwork.
Being a house hacker is similar to a hotel owner or GM who lives on the property. In and of itself, this isn’t an issue. Where problems can arise is if work you’re doing to the property causes harm to someone else. For example, a landlord was sued over a CO2 issue because he was doing a lot of the work himself, which made him responsible for the outcome. In that case, having assets in an LLC doesn’t prevent you from being able liable for your actions.
Bottom line: protect your personal assets by setting up an LLC, and be cognizant of how your actions are directly impacting tenants.
Start Planning Today
I highly recommend everyone get an estate plan in place as soon as possible. Pam has a great process for educating and walking clients through the estate planning process. The best way to get started is to schedule a complimentary 15 minute call on her website.
If you’re ready to start your house hacking journey or build your house hack stack, reach out to us for a free investment consultation.