An estate plan should address all of your assets. For many people, this is very simple because the main assets in the estate (which are put into a trust) consist of a residence, financial accounts, and personal property. Beneficiary types of accounts (such as annuities, life insurance and retirement funds) normally do not need to be included in living trusts. But those who invest in real estate need to give some thought to it.
First, remember that a primary goal of estate planning is to save your family the trouble of going to probate court when you pass away. A living trust can accomplish that.
Second, know that one of the major risks of being an owner of residential property is the threat of injury and resulting lawsuits. In that instance, it is important to consider who will be liable for that debt. Adequate insurance is a key element in the plan. However, occasionally, more than the insurance limit is necessary to cover a claim, and the potential plaintiff will look at the assets of the owner of the property to determine if they should pursue legal action of that owner. Should that owner, therefore, be you individually? Of course not. Should it be your living trust? Absolutely not.
The owner of the property should be an entity against which there is not much recourse, such as a limited liability company (LLC). LLCs are the most flexible business entity available for rentals, and they do a terrific job protecting your other assets from cross-liability. They key is that the LLC needs to be properly established and maintained. A living trust can be the owner (called a "member") of the LLC that owns the rental property, and that is adequate. Of course there are circumstances that warrant a more creative approach.
Because this often isn't a do it yourself undertaking, it is important to consult legal counsel before deciding how to go about protecting your assets. It's not as painful (or expensive) as you think.