Estate planning isn’t something you necessarily want to approach at the end of your life. It’s actually going to serve you and your beneficiaries better if you start planning while you are healthy, well, and thinking about your current financial status and the wealth you expect to accumulate over the coming years and decades.
Any good financial planner will tell you that while you’re planning what becomes of your estate and your assets, the property you own will be a big part of your legacy. You’ll make plans for your own home, of course, but what about your investment properties? Assuming you exit this world with a portfolio of rental homes that continue to earn money, you’ll be handing off some valuable assets that will provide a lot of potential for your heirs and beneficiaries in the future.
Plan wisely.
We are not financial planners, nor are we professional estate planners. The information we’re sharing with you today is focused specifically on the property that you’ll leave behind in your estate, and our area of expertise is property management. We strongly encourage you to seek professional help from attorneys, tax planners, and estate planning experts.
As you think about your future and the future of your children, grandchildren, and other heirs make sure you’re planning for your properties. By incorporating your real estate into your overall estate planning, you can enjoy financial security now, and provide the same level of security to others for the future.
Let’s look at some specifics.
Key Benefits of Estate Planning for Real Estate Investors
Estate planning is a crucial step for anyone who owns property, and statistics tell us that not enough people are doing it in a timely manner. For real estate investors, having a solid estate plan can ensure that your investments are managed and distributed according to your wishes after you’re gone. Without a plan in place, your real estate could be subject to lengthy probate processes, significant tax liabilities, and possible disputes among heirs.
The main benefit to estate planning early is that you avoid all of that risk. Here are some of the other benefits that should nudge you towards making your plans early:
- Asset Protection. Safeguard your properties from creditors and legal challenges. You won’t be able to control who comes after your assets once you’re gone if you don’t have some kind of plan in place for how they’re to be handled.
- Tax Efficiency. Death and taxes are the two things we can always be certain of, the old idiom goes, and you definitely don’t want to have your heirs dealing with both your death and your taxes. Avoid all of that now, while you can. It’s the only opportunity you have to minimize estate taxes and maximize the value of the real estate that you’re passing on to your heirs.
- Continuity. A solid estate plan will provide both continuity and a sense of security. This ensures a smooth transition of your real estate investments to your beneficiaries. Peace of mind is important for both you and them. You want to be assured that your properties will be managed according to your wishes.
Steps to Incorporate Real Estate into Your Estate Planning
If you’re ready to start the planning process, we have some steps that will help you get going. It does not have to be over-complicated, and the amount of time and resources this takes will depend on the number of properties you have and what the value of your portfolio happens to be. Those things will also dictate what types of structure will work best for you.
Here’s what to do first.
1. Inventory Your Assets
This is the obvious beginning of any process. What do you own? What are you working with? Don’t worry about including assets that may be sold by the time you pass on; your estate planning is not meant to be a single static document. You’ll make changes to your plan as life changes, assets change, and circumstances evolve. As you begin your estate planning now, include all of the property you own in the present day.
Begin by making a detailed list of all your real estate holdings. Include in this list your property descriptions, precise locations, current market values, mortgage information, and any other relevant details. If you have tenants in place, note that as well as what they’re paying in rent and how much you’re holding in a security deposit. This inventory will serve as the foundation for your estate plan.
2. Determine Your Estate Planning and Property Goals
Once you know what you have, it’s time to think about your personal preferences and the ideas that may be formulating about what should be done with those properties. What do you want to achieve with your estate plan? Every real estate investor is different, of course, but some common goals include:
- Providing for your family’s financial security after you’ve moved on.
- Preserving the value of your real estate investments for the long term.
- Ensuring a fair and equitable distribution of assets among heirs and beneficiaries.
- Supporting charitable causes and giving back through philanthropic endeavors.
Having clear goals will help guide your planning process and make it easier to communicate your wishes to your advisors and heirs. It also provides peace of mind for you, and a sense of control that you’re still maintaining the agency of your assets even when you’re not here.
3. Choose the Right Legal Structure
Consider the best legal structure for holding and transferring your real estate assets. For some people this is easy and obvious. For others, a little more research and education is necessary. For example, not everyone is familiar with the differences between a will and a trust. Take the time and ask the questions. You want to know exactly what each option means for you and your real estate investments. Some of the best ways to structure the passing on of your assets include:
- Living Trusts
Living trusts are popular because they allow you to manage your properties during your lifetime and transfer them to beneficiaries without probate. There’s also more privacy involved in a living trust, leaving your information outside of the public record. You won’t have to worry about the segregation of assets, and it provides flexibility. You can adapt your living trust to any change in financial status or if you buy and sell new properties between establishing the living trust and passing away.
- Limited Liability Companies (LLCs)
You might get the advice to put all of your real estate assets into an LLC as you begin or move through your estate planning. Financial advisors are fond of this move because it offers liability protection and can simplify the management and transfer of real estate. Ownership interests in an LLC are also easy to transfer.
- Family Limited Partnerships (FLPs)
This type of legal structure during your estate planning enables you to pass on real estate assets while maintaining control and reducing estate taxes.
4. Designate Beneficiaries
This is a big step: decide who is going to inherit your real estate after you die. Clearly identify who will receive your real estate assets. This can include family members, friends, or charitable organizations. Be specific in your designations to avoid any potential disputes. Do a little pre-planning so you can be sure your real estate holdings are going to people who will follow through with what you want to become of them. If there’s someone in your life who is especially interested in becoming a real estate investor, for example, get them started on a path towards success by passing on a property or your entire portfolio.
5. Draft a Will
A will is a fundamental document in any estate plan. It outlines how your real estate and other assets should be distributed after your death. Ensure your will is up-to-date and reflects your current holdings and wishes.
6. Plan for Taxes
Work with a tax advisor to understand the potential tax implications of transferring your real estate assets. Consider strategies such as gifting properties during your lifetime, setting up trusts, or using life insurance to cover estate taxes. This is one area of estate planning that can be particularly surprising, so make sure you’re working with a tax professional who can best position you for success.
7. Communicate with Your Heirs
Openly discuss your estate plan with your heirs. Explain your decisions and provide guidance on how to manage and maintain the properties. This can help prevent misunderstandings and conflicts down the line. It can also make sure that those who are receiving your real estate will understand how best to manage it, protect its value and condition, and appreciate the wealth it can provide moving forward.
Incorporating real estate into your estate planning is an excellent way to secure your legacy and protect your investments. By taking proactive steps now, you can ensure that your properties are managed and distributed according to your wishes, providing peace of mind for you and your loved ones.
We are not estate planners, but we would be happy to help you prepare your real estate investments for what might come next. Let’s talk about this. Contact us at Anchor Down Real Estate & Rentals.
