Posted by JD Esajian // March 17, 2015
What essential moves should every passive income real estate investor be making to ensure the successful passing on of their gains and estate to heirs?
Even with today’s streamlined real estate investment options, individual investors are still making significant sacrifices to build inheritances for the next generation. If it isn’t physical labor in rehabbing and reselling rental homes, or the stress of being a DIY landlord, there is at least the financial aspect. Most real estate investors find that they can quickly scale to having a sizable nest egg that will cover their own financial needs. The rest is usually for heirs and loved ones. This makes it a terrible shame when estates aren’t passed down as hoped, or heirs make a complete mess of decades of wealth building.
So how can today’s income property investors minimize these risks and maximize their legacy?
Start Early: It is never too early to start planning. Besides simply having a plan and the right structures in place, there are many financial advantages to investing right from the start rather than trying to make adjustments at high costs later on.
Have a Will: Passing without a will can create a complete nightmare for those left behind, and is almost sure to mean your intentions for disbursing an estate or providing for others are not fulfilled. Have a will created, and keep it somewhere safe – where it can be executed on when needed. While it is always smart to consult the best attorney you can in these matters, those that are just starting out can now find the forms and instructions online, and can at least have something in place until they are able to get better counsel.
Life Insurance: While no one loves most types of insurance, this is one of those that you may really be glad to have. Life insurance can be a great financial tool to fill in the gaps while you are growing passive income streams and a real estate portfolio. It also provides a cushion and inheritance so that unnecessary risks don’t have to be taken in wealth building.
Holding Title: Keep estate and succession planning in mind with each new investment property acquisition. Consider which is the best way to hold title to each property. Should it be in your name, under an LLC or trust, or your heirs’ names? In some cases, it may be wise to split how properties are owned and to streamline the succession process, at least if you won’t be needing the income and equity being created from a property for yourself.
Have a Tax Plan: Estate and inheritance taxes can take a huge bite out of what investors have built up. The IRS and other taxing authorities might go after even more if investors have been slacking on paying each year. Speak with a tax pro now to come up with an advanced strategy and plan to minimize taxes. Perhaps changing your state or country of residents, or where you incorporate will help. Or maybe you should be transferring income and assets as gifts each year.
Nominate and Delegate in Advance: Identifying who will handle and administer your estate and its liquidation or succession in advance is just smart. You may also need a backup or two.
Age Provisions: Building on from the above; many heirs just might not be old enough or responsible enough to handle their inheritance when you pass. This can be especially true of income property. While you may want them to receive some support while they are young, traditionally age provisions are included in planning to ensure it isn’t all blown by the young and reckless. How will you stagger this? At 18, 21, 25, 35, or even older? Who will be the responsible beneficiaries or administrators until they reach these ages?
Making it Easy to Sort through Stuff: If you’ve ever had to sort through someone else estate you will be all too familiar with how much work it can be. Finances and investment properties aside; just the burden of going through a lifetime’s worth of accumulated stuff can be a major chore. Even if reasonably organized it can take multiple people weeks to go through. Who has that kind of time to take off of work today? How can this process be streamlined and simplified in advance.
Education and Enlightenment: One of the most important things today’s real estate investors can do to ensure their legacy is great is to educate their heirs on finances and real estate. In fact, passing on the knowledge can be far more valuable than just bricks and mortar and a couple sets of keys. It may also be wise to coach them on finding true happiness beyond money so that they aren’t in such a rush to spend everything.
Property Management: Even with all the above boxes checked and an incredible passive income producing property portfolio, how well it provides after you are gone will all come down to property management. Few are really equipped for this. So make sure to have professional property management in place in advance.
