Estate Plan

How to Create an Estate Plan as a Real Estate Investor

It is not a secret that anyone who is alive and owns anything at all, has children, or has pets, should have an estate plan. An estate plan, in general, helps create a line of succession when you die. Even if you do not have any living relatives for which you are aware, estate plans help you determine who will obtain your remaining assets, who will handle your affairs when you pass, and who will care for your loving pet in your absence. Without a plan of succession, the state may obtain all of your property or, even worse, there could be an all-out war amongst your family as to who deserves what items are in your estate, leaving the most important people and items out to pasture.

However, having an estate plan is not enough if you are a real estate investor. Not only do you need to have a valid estate plan for your personal assets, but you must have a well devised estate plan for your investment properties which are likely your source of income, as opposed to enjoyable vacation spots. Here are three helpful tips to ensure that your estate plan is properly equipped to handle your investment properties without leaving your beneficiaries with a business or taxes they never wanted or intended for.

  1. Buy Commercial Property Through a Holding Company

If you are investing in commercial real estate, whether it is you investing alone, or a group of partners investing together, it may be a good idea to create a holding company. This holding company can be the legal entity that owns the property. Shares of the holding company can be purchased by the partners and can be distributed through your estate, whether these shares are distributed to relatives or sold back to the other partners of the holding company. Either way, this can help make the process easier when you are no longer alive to handle the business end of real estate investing.

Forming a holding company is the same as forming any other business entity. There must be a partners’ agreement and the company must be registered with the state. You may wish to consider forming he company in a State like Delaware, where the tax laws are more favorable to business owners. However, you would then need to file the company as a  foreign entity in Maryland to purchase properties and continue to do business.

  • Form a Limited Liability Company to Purchase an Investment Property

As with the holding company (which is an LLC for the purchases of commercial properties), forming an LLC to use as the buyer of investment properties can help in planning for your estate as well as any tax issues that come with investing in real estate. The LLC owns the property, which means the LLC can be responsible for any taxes and other financial issues relating to the property. In addition, when the member of the LLC passes, the LLC can be sold as an entity or a new member can invest into the LLC, making it easily transferable as well. In addition to making the process easier, LLC’s have registered agents. The registered agent can be named as the business executor in your estate plan, giving him or her the authority to handle the affairs of the LLC, separate from your personal estate.  

As with the holding company, the LLC can be formed in another state and then registered as a foreign agency in Maryland in order to conduct business. This will help when planning for taxes in general. However, it is always best to consult with your attorney to determine the best possible tax planning options for forming your real estate LLC.

  • Create an Irrevocable trust

An irrevocable trust is a trust that can be accessed while the grantor is alive and is unable to be changed. Forming an irrevocable trust to hold real estate investments takes the ownership of the investments away from the grantor and puts it into the trust, making the passage of the trust the fundamental process to deal with the investment properties when the grantor passes, as opposed to dealing with individuals transferring ownership of the actual properties.

The irrevocable trust is a wonderful way in which to handle all assets related to your real estate investments. With an irrevocable trust, the grantor is the owner of the business and the owner of the trust. The grantor chooses a trustee and a beneficiary. With this type of estate plan, the grantor can choose to allow the trust and its trustee to run the real estate business and provide earnings to the appointed beneficiaries, even in death. The trust can even be transferred to a new owner in the event of the grantor’s death.

This is among the most complicated of the three options to form. It is necessary to work with a trusted estate attorney to create an irrevocable trust, as there are many intricacies that must be addressed to ensure the trust is legal, follows all necessary tax laws, and is virtually unbreakable. If formed properly, the irrevocable trust can help alleviate any financial worries associated with eh estate planning of real estate investors, under most circumstances.

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John E. Reid

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