Commercial Real Estate
Estate Planning Fundamentals for Commercial Real Estate
With the right team and preparation, property owners can comfortably plan and navigate the future handoff of their portfolio.
Deciding how your assets—including commercial real estate—will be passed on may seem too complex or distressing to delve into. But that’s why it’s so important to start.
Don’t Wait to Start Planning
There’s no right time to start estate planning according to Dina Friedman, Wealth Advisor for J.P. Morgan Private Bank. But the earlier you begin, the more effective your plan will be and the more options you will have.
Dina Friedman, Wealth Advisor for J.P. Morgan Private Bank
While it’s never too soon to start, it’s also never too late. Friedman has clients who have set up trusts years before they have children, but some estate planning can even be done after death.
Real Estate as a Gift Asset
“Commercial real estate is both an estate planning challenge and opportunity,” Friedman said. There are 1031 exchanges and other unique tax strategies to consider, as well as long-term management and business succession issues.
However, real estate is a uniquely advantageous asset for gift and estate tax planning because it can be divided and given away. “When we fractionalize a piece of real estate, the value of it can frequently be discounted for gift tax purposes,” Friedman said. “Effectively, we can share a piece of real estate among family members at a lower cost than the value of the entire piece of real estate, and different types of trusts can be created to hold fractional interests in real estate.” This may also create management structures for the real estate, which may solve succession concerns.
Who to include
Estate Planning Is a Team Effort
Before you and your family sit down to plan your estate, you should have the right people at the table:
- Wealth advisors can help you gather the necessary asset and balance sheet information
- Trust and estates attorneys can offer insight on the estate and gift tax ramifications of assets
- Accountants can help you understand the income, estate and gift tax features of assets
It’s especially important that these professionals work together. Individually, they may overlook critical elements.
For example, a lawyer might look at the legal aspects of estate planning without marrying them to the portfolio and title structures. As a result, the will may appear fine, but it’s disposing of assets not actually controlled by that will.
What to Avoid
Top 4 Estate Planning Mistakes
Many commercial real estate owners make the same mistakes when estate planning. Frequently, Friedman sees people who:
- Avoid planning: Although estate planning can be daunting, it is also necessary. By planning ahead, you can do more gifting over your lifetime, which generally results in future estate tax savings.
- Don’t plan for estate taxes: People are often surprised to learn that estate taxes are due within nine months of the date of death, particularly if the estate is largely composed of illiquid assets such as real estate. As such, it’s important that estate plans consider the liquidity necessary to pay this tax.
- Poorly document transactions: Often, individuals fail to properly document estate planning transactions, particularly valuations, which can undermine their tax planning and cost them money.
- Don’t update their plan: Your estate plan shouldn’t be created and then forgotten. Friedman recommends revisiting it every three to five years, or after a major life event (marriage, divorce, new children), purchase, sale or change in liquidity.
You also may want to include a psychologist or other mediator in the estate planning process. This is especially helpful if there are challenging family dynamics. Without a plan in place for orderly succession when the wealth creator in the family is gone, familial discord may amplify, and in some cases lead to litigation that can strain relationships and erode family wealth. Friedman has witnessed this happen firsthand. A son was upset that his mother inherited the family business after his father died. The son had spent his entire adult life working at the business and sued his mother to obtain control of the company. The litigation resulted in costly damage to the mother and son’s relationship and the family’s wealth.
What to Prepare
The Big 4 Documents
In estate planning, necessary documents are often referred to as the big four:
- Revocable trust
- Living will and healthcare proxy
- Power of attorney
Any prior estate planning documents, as well as balance sheets, gift tax returns and life insurance information are also helpful to bring to estate planning meetings.
1 Process, 3+ Meetings
Friedman emphasized the importance of revisiting your estate planning regularly. And while the initial process varies from person to person, it generally takes place over three or more meetings:
- First meeting: The main purpose of this meeting is for the estate planner to gather as much information as possible. That includes getting to know your family and reviewing your goals, relevant documents and prior estate planning experience.
- Second meeting: From there, the planner will offer initial notes and observations and suggest proactive estate planning strategies that might be suitable for you.
- Third meeting and beyond: This is when you and your planner will refine your plan. Your estate planner will work with your attorney to advise on execution, monitoring and ongoing transactional requirements.
By engaging in the complex and necessary process of estate planning, commercial real estate investors often come away with newfound knowledge.
- Estate taxes are not the same as income taxes. “Clients tend to be surprised by how estate tax works and how much they may ultimately owe,” Friedman said. The current federal estate tax is 40 percent of the value of your net worth.
- Planning—or not planning—can impact family relationships. By using an integrated professional team to craft your estate plan, you can avoid creating or intensifying difficult relationships, as well as litigation.
- Estate planning is an ongoing process. Initial meetings lay the groundwork for your estate plan, but it’s vital that you revisit the plan after major life events and asset changes.
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