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There are certain legal and financial considerations unique to real estate investors that can complicate the estate planning process. If you’re in this field, an experienced lawyer can walk you through estate planning tips for real estate investors to help you protect more of your wealth and efficiently pass your estate on to your loved ones.

Contact Pennington Law, PLLC, for a free initial consultation, and let us advise you on suitable estate planning methods to help you reach your goals.

Why Do Real Estate Investors Need an Estate Plan?

Real estate investors should have a comprehensive estate plan to ensure that their assets and wealth are distributed to the beneficiaries they intend to inherit from them. Furthermore, estate planning can manage or mitigate the tax consequences of passing real estate through inheritance.

How Does Estate Planning Differ for Real Estate Investors?

Real estate investors face various financial, legal, and tax issues that other individuals do not have to consider when undertaking estate planning, such as:

  • Retained interest rules, which can unexpectedly include real estate in an investor’s gross estate if they retained the right to enjoy or control the property
  • Liquidity crunches caused by having most of the estate’s value tied up in real estate, leaving insufficient cash to cover estate taxes
  • Calculating the cost basis in real estate holdings
  • Utilizing preferential income tax treatment under passive loss rules and net investment income tax under real estate professional designations
  • Undertaking multigenerational estate planning, which requires consideration of the generation-skipping transfer tax
  • Valuing carried interests, which may trigger special valuation rules

Is a Will Enough?

Depending on your real estate investments, a will may not be sufficient to adequately protect your legal and financial interests. Passing real estate wealth through a will may cause you and your loved ones to incur significant estate or inheritance taxes. Furthermore, trying to pass real estate through a will can become cumbersome and challenging.

For example, let’s assume that you choose to bequeath specific properties to beneficiaries. To do so, you will need to update your will each time you buy or sell properties in your real estate portfolio.

Conversely, leaving your beneficiaries shares of your estate may require the executor or administrator of your estate to liquidate your real estate holdings, which could have adverse financial and tax consequences.

Estate Planning Strategies to Protect Your Investments

Real estate investors may pursue other estate planning strategies beyond wills to protect their investments and pass their wealth on to their loved ones. Common methods used by real estate investors include:

Living Trusts

With a living trust, a real estate investor transfers ownership of their properties into a trust. However, a revocable trust allows the investor to retain control over the assets. Living trusts can pass assets to an investor’s heirs and beneficiaries without the need for probate, thereby saving time and expense. Avoiding probate also provides privacy, allowing investors to keep the nature of their wealth out of the public record.

Family Limited Partnerships (FLPs)

Real estate investors may organize their holdings into a family limited partnership, which facilitates ownership transfers while allowing investors to retain control over assets. FLPs can help structure ownership transitions and may also mitigate estate taxes.

Qualified Personal Residence Trust

A qualified personal residence trust allows a homeowner to transfer ownership of a personal residence or vacation home to heirs at a reduced gift tax value, while retaining the right to continue residing in the property for a specific period.

Corporations and Limited Liability Companies (LLCs)

Investors may organize their real estate holdings into corporations or limited liability companies. Holding real estate in corporate entities provides limited liability protection for investors and/or their families, making it easier to pass on real estate portfolios through estate planning.

Gifting Strategies

Real estate investors might consider gifting some of their real estate holdings to heirs to reduce the size of their estate, which can help avoid or minimize estate taxes. Annual and lifetime gift tax exclusions enable individuals to make gifts without incurring gift tax liability.

Related: Useful Types of Trusts in Estate Planning in Arizona

Navigating Taxes When You Have Substantial Real Estate Holdings

Real estate investors with substantial holdings may have complex tax issues in Arizona to navigate. Some of these issues include:

  • Capital gains taxes – Selling real estate for a profit can trigger capital gains taxes, although various legal tools and strategies can manage or mitigate the tax consequences of a sale.
  • Estate taxes – Real estate investors with significant holdings may incur estate taxes after death if their estates exceed available exemptions. However, careful estate planning can minimize estate taxes.
  • State and local transfer taxes – Transfers of real estate holdings may trigger state or local transfer taxes or fees.
  • 1031 exchanges – Many real estate investors rely on 1031 exchanges to defer capital gains taxes when selling one property to reinvest capital into another. However, the strict rules for 1031 exchanges create a risk that an exchange may fail, potentially exposing an investor to significant capital gains taxes.

Does Having an LLC Affect Estate Planning for Real Estate Investors?

LLCs provide limited liability protection to investors, which means that a lawsuit involving the properties in the LLC can only reach the company’s assets, not the investor’s personal assets. Furthermore, owning a real estate portfolio through an LLC may simplify the process of passing on inheritances. An estate planning attorney can walk you through the pros and cons of having an LLC for estate planning purposes.

What Pennington Law, PLLC Can Do For You

Are you ready to develop an estate plan tailored to your real estate investment holdings? If so, the legal team at Pennington Law, PLLC can help you protect the wealth you’ve built and pass it on to your heirs and beneficiaries by:

  • Discussing your financial needs, concerns, and objectives with you during a free consultation
  • Reviewing your current real estate holdings to evaluate potential estate planning strategies that could help you achieve your goals
  • Explaining the pros and cons of various legal options to help you make informed decisions
  • Structuring your chosen strategy to ensure you obtain the intended tax and financial benefits

Contact Our Estate Planning Attorneys For a Free Consultation

As a real estate investor, an effective estate plan can protect your interests and help you pass on the wealth you’ve worked hard to build. Contact Pennington Law, PLLC today for an initial consultation with an estate planning attorney, and let’s discuss your needs and goals in detail.