An important objective in developing relationships with our clients is to better understand their plans for managing their investment real estate assets over their lifetime and then provide advice and assistance to smoothly transfer ownership and management responsibilities in the event of death or disability.
While most of our clients have existing estate plans including wills and trusts, we find that many of these plans need to be updated especially when new investment assets are acquired.
In this blog we’ll discuss why it is especially important for real estate investors to have an updated estate plan.
Estate Planning: What is It?
Estate planning determines how your assets will be divided in the event of your death or incapacitation. In a nutshell, estate planning is choosing who will inherit your property.
Your estate includes all of your possessions. That includes not only vehicles and other valuables but also property such as real estate. Financial goods such as stocks, bonds, life insurance, retirement savings, and bank accounts are also included in your estate. Joint accounts and other things you share are also counted. You should include a bequest even if it is purely sentimental in nature. This guarantees that your assets are distributed to your loved ones rather than the IRS or a probate lawyer.
Wills Versus Trusts
Wills and trusts are the two main instruments used in estate planning. These documents are intended to name heirs to your property in case of your passing and to provide instructions if you become incapacitated.
A trust is a legal contract that permits you to transfer assets to a trustee who manages them in accordance with your wishes, either during your lifetime or after your death. This gives you more flexibility and control over asset distribution than a will alone can provide; in other words, a trust can take effect while you are still alive, whereas a will only takes effect after death. There are various types of trusts. To mention a few, there are testamentary trusts, joint trusts, and living trusts. They may also be irrevocable or revocable, depending on your needs and future goals. All of them, nevertheless, function as an account into which you can transfer certain assets, designating a beneficiary who will get them at a given moment.
Additionally, trusts can keep details of estate plan private and out of probate court, which may lower your estate's overall tax burden. Property placed in a trust can be transferred to a beneficiary generally without any issues or inquiries from governmental agencies.
Differences in Estate Planning for Real Estate Investors
There are significant differences between estate planning for the normal person and estate planning for real estate investors. One difference is that real estate investors frequently own several properties, each with varying debt loads, values, and prospects for growth. Additionally, real estate investors may own properties dispersed throughout multiple states or even nations, which can provide challenges due to disparate tax regulations and legal obligations.
Additionally, long-term capital gains taxes, ownership structures (such partnerships or LLCs), and rental revenue must be taken into consideration by investors. An investor's plan must contain details of how to manage, retain, or dispose of real estate assets in a tax-efficient manner, in contrast to the typical estate plan, which may concentrate on personal assets such as a principal residence, cash, and investments.
All third parties involved in managing your real estate assets e.g., property and asset managers, financial advisors, etc. should be identified including their contact information so that heirs can efficiently obtain needed information to facilitate transfer of ownership and responsibilities.
Succession planning must be carefully considered when estate planning for real estate investors, particularly if the assets are owned by a family business. Making a plan that is intended to provide a seamless transfer and prevent disagreements over the management or distribution of possessions is crucial when there are several heirs involved.
Estate Planning Benefits for Real Estate Investors
A solid up-to-date estate plan well worth the effort and cost to strive to ensure that your assets will be properly managed should you become incapacitated or pass unexpectedly. Furthermore, a well-crafted estate plan addresses the future of your family, including a surviving spouse and heirs who may need guidance when inheriting real estate investments.
For real estate investors, estate planning may provide the following benefits:
- Avoiding probate. The probate process is a court-supervised procedure wherein the validity of the will is established and acknowledged as the deceased's actual final testament. The executor listed in the will is formally appointed by the court, granting them the authority to act on behalf of the deceased. The probate process can be complex, expensive and require between six and eighteen months – or even longer to complete depending on circumstances. As a result, heirs might not gain the benefit of assets for an extended time and be subject to legal costs which could reduce available funds.
- Asset protection. An estate plan can provide asset protection to guard against creditors or unscrupulous individuals from taking away your accumulated wealth. A properly constructed asset protection plan can safeguard your loved ones from creditors, lawsuits, bankruptcy, and divorce actions.
- Charitable donations. Through contributing appreciated assets to charities, investors can generate tax deductions and ongoing revenue to enjoy during their lifetime while fulfilling philanthropic objectives. A common structure is the charitable remainder trust (CRT) which is an irrevocable trust which can help with retirement and estate planning.
- Avoiding taxes. An experienced tax advisor can provide additional tax savings strategies within your estate plan including gifting plans, funding an education account for children or grandchildren, converting 401(k) or IRA accounts to a Roth 401(k), and utilizing life insurance options, among other options.
Bottom Line
Estate planning for real estate investors can be more complex than traditional estate planning. You can potentially safeguard your real estate holdings and facilitate a seamless transition for your successors by utilizing tactics like liability protection, tax-efficient giving, and trusts. By doing this, you can seek to protect your financial legacy for next generations.
Estate planning is an ongoing process, and investors should review and update their plans whenever their financial circumstances materially change e.g., selling or acquiring new assets – or when tax laws are changed. We encourage our clients who have made new investments with our firm to set aside time in the following year to ensure that their plans are updated and continue to meet their objectives.
For more information on estate plans including real estate investment options, please contact us at 408 392-8822 via email at info@fgg1031.com. You can also download Paul's latest ebook here.
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