By Julie Martiniello, Managing Director - Dimension Law Group
As we live life, we seldom take time to recognize our mortality which makes Estate Planning an often-neglected topic. Layer on the overwhelming number of available succession options and inherent unpredictability of life 5, 10, or 20 years down the road and it is no wonder that many investment property owners default to less than ideal succession plans or, even worse, no plan at all.
In the following three sections, we will address important considerations in establishing a succession plan, the estate tax rates and key quantitative factors, and propose one approach that a real estate owner could take that can allow for a smooth and equitable transfer of real estate from you to your beneficiaries.
A discussion on proper estate planning for investment property owners
For investment property owners estate planning can be complicated. For many the difficulty comes down to whether you can fairly divide your estate as you wish, if you want to put a succession plan in place to pass down your investment property, or liquidate your estate. For others with more complicated family dynamics, other considerations come into play. Below are some common scenarios discussing the emotional and family dynamics of estate planning.
Simple Family Scenario
In a single unit family with a Husband, Wife, and children, most clients will choose to leave everything to their spouse (either outright or via Trust), and then ultimately have everything go to their children upon the death of the surviving spouse. The main issue to consider here is whether you have one or more children that want to continue to operate the investment properties and if so, do you have the right assets to pass the property on while still allowing equal estate distribution to all children. If you cannot easily divide your assets then advanced planning should be done to try and avoid future conflict between siblings, possibly with insurance or diversification of assets. If you feel that conflict may be unavoidable in passing down your investment property or do not have an heir that wishes to operate the business, diversifying your estate with more liquid assets should be considered. If one chooses to make their estate more liquid while still living, capital gains and other taxes come into play. To avoid these taxes many use a 1031 exchange. However if your goal is to make your assets more liquid, exchanging with a Delaware Statutory Trusts is an option worth considering, which is explained in greater detail in Roger Bowlin’s article.
If you do have an heir or heirs that you wish to pass on the operation of your investment property the issue to tackle becomes succession planning. The successor should be someone who has demonstrated a passion and has the capabilities to operate the business. Once the successor is identified, developing a succession plan is key. If the successor is a family member forming a family partnership or company is usually recommended. This allows for transition while you are living and gives the added benefit of a deduction for estate tax purposes if done correctly.
Complex Family Scenarios
For many property investors family dynamics are not so simple. Below are the most common family scenarios which require special planning.
Blended Family: Second or third marriages have become more prevalent in our world. With them come special estate planning considerations, especially when you have children from prior relationships. Careful steps should be taken to ensure that you are able to provide for your spouse while still making sure your own children receive the bulk of your estate. It is generally not advised to have all assets go directly to your spouse or for assets to become jointly owned between a child and step-parent. These scenarios often create conflict. Proper planning can be done through Trusts, diversifying your assets so they are easily divided between those you want to provide for, or starting the succession of the investment property among other things.
Beneficiaries With Addiction/Special Needs: While you may know where you want your assets to go and have a plan in place, if one of your beneficiaries has special needs or addiction issues it is never recommended to give them assets outright. This circumstance typically calls for a special needs trust or more a restrictive trust to protect the beneficiary from losing governmental benefits or from using the assets unwisely. Similar but less restrictive trusts are also suggested for minor or youthful beneficiaries.
Conflict Between Family Members: Unfortunately not all family members get along, especially siblings. This tension can be exacerbated after the death of a parent. If sibling conflict exists, it is imperative to have a well laid out estate plan. This may involve appointing a third party to serve as the executor or trustee to minimize interaction between siblings. It may also be prudent to ensure that your assets can be easily divided between siblings to avoid prolonged fighting and feelings of inequality.
As one can see developing a comprehensive estate plan that includes taking stock of your assets and planning in the now is important for all investment property owners in making future transitions easier on your family.
*Note, Julie Martiniello and Dimension Law Group are not affiliated with Real Estate Transition Solutions, LLC beyond collaborating to serve to educate the investment real estate industry.