Published on August 15th, 2023
You’ve worked hard to grow your real estate portfolio, and now it’s time to consider how you’ll share the wealth.
While your portfolio has likely rewarded you through appreciation and regular income, real estate also comes with complex estate considerations.
Understanding a few key issues can go a long way toward smoothing the estate planning process.
From closing out obligations to creating a path of ownership transfer and navigating complex tax matters, estate planning requires special care.
Review these three essential topics every real estate investor should consider to begin getting your estate plan in order today.
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1. The Contents Of Your Real Estate Portfolio
The types of real estate assets in your portfolio will influence how complex or straightforward your estate plan will be.
If you own several single-family homes, it may be easier to divide assets than if you own one multi-family property.
Similarly, if your portfolio is full of commercial real estate versus residential, your property types may vary widely.
No matter the property type, another key component is the current value, potential appreciation, and income rate of your investments.
A single-family home in your portfolio may only be assessed at $250,000, but the whole picture matters. If the same home is owned outright and nets $2,500 in rental income monthly, it may offer an heir more value.
As you consider how best to pass on your legacy, it’s important to comprehensively log your assets.
Start by identifying the type, location, assessed value, debt service, ownership costs, and income stream of your assets.
This exercise may take you back down memory lane, especially as you consider how far you’ve come. One look at your balance sheet could well remind you why you built your portfolio in the first place.
When it comes to investments in real estate, Lifestyle Investing expert Justin Donald says, “Even though it’s a tough business, real estate is probably one of the best-performing asset classes.”
Chances are good you’ll have rewards for your hard work to share – but account for your portfolio fully before building your estate plan.
With accurate records, you can have a clear picture of what you have so you can pass down your investments in the best way.
Remember to account for any ongoing matters, too, which can easily be lost in a transfer. Review emails and make notes of in-person conversations, especially if there is development potential for any of your properties.
Log names, contact information, and any current or proposed laws that may influence the value or future of your properties.
These important pieces of information can help you allocate your assets fairly and set your heirs up for success.
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2. Your Family’s Dynamic
Every family has its unique quirks, problems, and dynamics. When money is involved, even the most cohesive family unit can go haywire.
It’s important to get real with the current state of your family relationships before you firm up estate plans together.
Traditional family units with a spouse and children can present issues between first-born or assumed heirs.
If your children work with you in your real estate portfolio, there may be an expectation surrounding who inherits what.
Have a conversation with your family members individually to gauge, without the influence of others, what their expectations are.
If your relationship with a certain individual is rocky, consider the best way to open up to one another without prompting arguments.
Blended families present a special challenge, particularly if they are combined when children are older.
Even if your kids get along, the concept of inheritance can quickly break even the strongest bonds.
Speak with your spouse and have a candid conversation about what expectations may exist about your portfolio.
Then, speak with your children and stepchildren individually to get their take on the state of things. The key here is open, honest conversation, with more time spent listening than talking.
If you have potential heirs whose life choices create concerns, consider your strategy for their role, too.
For example, you may love your son but believe his risk-taking lifestyle isn’t well-suited to inheriting valuable property. Consider how else you can pass on wealth without putting assets at risk.
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3. Partnership Agreements, Loans, And Taxes
One consistent factor in estate planning is the importance of well-organized documentation. As an individual, you’ll need to ensure that your personal estate is in order before addressing your real estate portfolio.
Depending on how your real estate portfolio is structured, investments may be entangled with your individual assets or elsewhere.
If your assets are in an ownership trust, partnership, or limited liability corporation, it will influence how your estate plan works.
Review the current agreements you have within your portfolio, who is listed as the debtor(s), and any associated tax laws.
Remember, taxes for real estate are different from those for individuals. As of 2023, the individual exemption from federal estate and gift taxes is $12.92 million.
This presents a great opportunity to pass on a property or properties without a tax hit to your heirs. However, time is of the essence, as the current law expires in 2025, when the exempted amount will return to $5 million.
Review your tax strategy and how it relates to your will, revocable trust, and/or living will.
Determine what property-related responsibilities an individual with your power of attorney can have, especially if they are one of your heirs.
Consider assigning this responsibility to your estate attorney, which can reduce family issues in advance.
Keep a pulse on your portfolio’s value, too, especially as you consider passing it on. If values are depressed, you may be able to transfer ownership at a reduced tax rate.
This can give you more flexibility on how much you can transfer and lower your heirs’ tax obligations, too.
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Creating Generational Wealth Through Strategic Estate Planning
Your estate plan can impact more than just your portfolio – it can impact your family’s relationships.
Go into the estate planning process with a clear mind, open communication, and thorough documentation. Commit to reviewing your plan every few years, adjusting as your family situation, asset values as opportunities dictate.
As your portfolio changes, so too should your estate plan. With a well-planned estate, you can enjoy the benefits of your portfolio knowing your hard work will live on.
