Estate Planning for Your Real Estate Holdings

Image of a house with trees around in the morning light. Captioned: Estate Planning for your Real Estate Holdings.

Real estate can be a fantastic investment. It is often considered one of the most stable money moves that you can make if you are looking for a way to see real return on a business venture, sometimes with little personal involvement.

However, when you hold several properties, you need to take steps to protect that investment. One of the ways that you should do that is by developing an estate plan that works for your unique situation. It is not only a good idea for you personally, but it will also be very helpful for your heirs.

Estate Planning is Especially Important for Real Estate Investors

As a real estate investor, you will likely have more assets to divide upon your death than the average person. It is much easier to divvy out money compared to property, but that property has real value that you do not want your heirs to overlook or misunderstand. If you want to ensure that your heirs get the most out of your hard-earned investment portfolio, then you need to take steps to ensure that they do that.

Proper estate planning can also help your heirs avoid wasting time and money on court fees, accountants, realtors, and related tax obligations. Going through the loss of a loved one is hard enough without also having to administer an estate with little or no direction properly.

The Tools You Need for Estate Planning for Your Real Estate Holdings

Many people make the mistake of assuming that if they have a will, then they have an estate plan. Unfortunately, a will can only do so much for someone who has passed. It may not correctly address every issue that may crop up after your death. Instead, you may need to use a will in conjunction with several other estate planning tools to accomplish your goals and make your passing easier on your loved ones.

Below is a quick outline of some of the tools that you may want to use as you develop your estate plan to address your real estate holdings.

Using Deeds as Estate Planning Tools

As a real estate investor, you know that a property deed shows a transfer of a property from one person or entity to another. It has particular requirements that must be met to be valid under state law. It includes things like:

  • The name of the seller
  • The name of the buyer
  • The purchase price, if any, of the property
  • The legal description of the property
  • The date on which the transfer took place

Someone who is doing estate planning can create a “transfer-on-death deed” to help easily transfer property from one person to another at the time of your death. This type of deed can be especially beneficial for those who have real estate holdings because it allows you to move real property from you to a loved one without having to go through the often expensive and time-consuming process of having a will probated. A quick transfer ensures that the property changes hands fast so that your heirs can immediately take possession.

Not all states permit transfer on death deeds, but many do. The location of the property will have a significant impact on whether this type of estate planning tool is available to you.

Trusts: One of Your Main Estate Planning Tools for Real Estate Investors

An irrevocable trust is often considered one of the most useful tools available for those who have real estate investments. Trusts can be a great way to avoid undesirable tax consequences, but they are also helpful for many other reasons, even if estate taxes are not a concern for you.

Avoiding Probate

Perhaps the most beneficial reason to hold real estate in a trust is that any property owned by a trust, rather than titled in your name directly, will not have to go through the probate process upon your death. Probate can be time-consuming and expensive, but having a trust with real property in it helps avoid all of those potential issues.

Avoiding the entire probate process can also allow you to skirt around having to cover estate taxes as well.

Creativity and Control

You can also set out that the beneficiaries of a trust are different people. If you want one child to have a particular property, you set up a specific trust for them. On the other hand, if you want a child to just have the income from a property and have someone else manage it, you can do that, too. You have a lot more control regarding how the property is used and how long that asset will last for your loved ones if you establish a trust as part of your estate plan.

One unique feature that is worth noting is that you can also create a trust that permits one person to use the real estate (or the income from the real estate) for their lifetime, with the property ownership transferring to another person (or several people) after they pass. The interest in the second “layer” only “vests” upon the death of the person who has the right to enjoy the property for their life. The term “vesting” essentially means that someone has a present right to enjoy the real estate. With a trust, you can dictate who enjoys the property or its income and when.

No Guardianship or Conservatorship Necessary

If you become incapacitated and can no longer manage your affairs for any reason, having a trust will help avoid the necessity of creating a guardianship or conservatorship to manage your real estate holdings as well.

You may need a guardianship or conservatorship for other assets or to deal with health issues generally, but you can be confident that your real estate holdings will remain unaffected in that type of situation.

Asset Protection

Trusts also provide asset protection if they are irrevocable as well. By putting each piece of real estate in a different trust, you limit your legal exposure to just that piece of real estate. That benefit applies while you are living in addition to the benefits that arise after you pass.

Using Entities as an Estate Planning Tool

Another potential estate planning tool that can work well for real estate investors is creating a business entity to hold and manage the real estate. Practically speaking, having an entity like an LLC own your real estate instead of having your name on it outright has a lot of the same benefits as creating a trust for the real estate in terms of asset protection. However, if you want to have control over the real estate after you pass, a business entity may not be the best option for you. The ownership interest in the LLC will also be considered in part of your estate.

Transferring ownership in an LLC after you are gone is easier than passing a piece of property outright. There is no need to actually transfer the real estate because it can remain in the name of the LLC, for example. Instead, you are transferring membership in the LLC rather than the property itself.  

Creating an Estate Plan that Meets Your Needs

Every real estate investor is different. Those differences come in many forms—from their unique property portfolio to their goals regarding their estate plan. Managing your real estate on a daily basis can be a challenge, but you need to stop to think about how it will be handled after you are gone or can no longer keep up with the demands.

Creating an estate plan that is uniquely tailored to you is the best way to protect your assets and provide your loved ones with the support that you want to create for them, even after you are gone.