by Attorney William Bronchick
Estate planning for real estate investors involves distributing your assets after death to such people or causes according to your wish with minimum legal complications and the least tax incidence. Estate planning is not just for the wealthy; nor is it something to be contemplated when you reach the ripe old age of eighty.
Anybody, irrespective of age, with considerable assets and the desire to provide for dear ones even after death would be doing a great service by planning one’s estate. And the best time to plan your estate is now when you are still alive (hopefully healthy) and have the requisite mental health to make rational decisions. An estate plan made during an illness affecting contracting capacity can be challenged, complicating matters for beneficiaries. Remember, death or a debilitating illness affecting your legal capacity to contract might strike you any day; therefore, you should prepare for that eventuality beforehand.
The first step in planning your estate is to take stock of all your material possessions (technically referred to as “estate”), and then determine their value. Typical items comprising the estate include: house(s) and land; motorcycles, cars, planes and boats; cash-in-hand; savings accounts, pension accounts; certificates of deposits; stocks, bonds, and mutual funds; insurance and annuities; employee benefits; jewelry, furniture, art collections; ownership rights/interests in businesses; and claims against others. Mind you, the list is not exhaustive and your debts and obligations to others are also a part of your estate.
Next, line up the details of your beneficiaries’ names, addresses, and ages. You should also determine who should be the trustees/guardians just in case the beneficiaries are minors at the time of planning the estate. Additionally, you must identify a personal representative of the estate. It would be easy if you would line up pre and post-nuptial agreements, divorce decrees, previous wills, deeds of real estate property, and the latest tax returns before you consult a professional estate planner.
Though small estates might be easy to plan, it is advisable to take the help of professional estate planners, including attorneys and CPAs, to explore all the possibilities to reduce tax incidence. This is particularly true if you own one or more business entities or businesses, rental properties, and/or assets in multiple states. Make sure you use the services of a professional that is versed in estate planning, real estate, and tax ramifications.
Will vs. Living Trust?
A will or “Last Will and Testament” is a document that lays out who’s in charge of your estate, who’s the guardian of your minor children and who gets what from your estate. A will must be “probated”, which is a legal process in court that can be expensive and time-consuming, depending on which state you die in. And, if you own assets in multiple states, you may have to open probate proceedings in those states as well.
A living trust is a document that appoints a trustee to handle your affairs when you (and your spouse) are gone. Assets can be held in trust for prolonged periods of time if a beneficiary is a minor at the time of your death. Also, a trustee may have the discretion to distribute or not distribute assets based on the needs and particular situation your heirs are in. For example, many of my clients request the trust have a provision that if an heir is a habitual drug user or in jail for a felony, the trustee will not give that heir any money. There are endless options you can place in a trust, and I haven’t told you the best part… a living trust avoids the probate process. This only works, however, if all of your assets are titled in the trust. Many clients forgot that step and end up in probate court anyway.
How Do You Hold Assets in a Living Trust?
Many attorneys who do estate planning will advise the client to re-title all of their rental properties in the trust. While this avoids probate, it does not offer any assets protection for the other assets in the trust. Instead, it makes more sense to own real estate and other assets in various entities (LLC, for example), and then have the ownership of the entities in the trust. This will give you both asset protection AND probate avoidance.
Remember, estate planning for real estate investors is not a one-time affair. Any change in your marital status, the death of beneficiaries, the birth of a child, or changes in the law may require a review of the plan. In short, if you have no estate plan or your plan is over 5-10 years old, it may be time to revisit with an estate planning attorney.