Estate Planning for Investors: Avoid Probate, Minimize Taxes, and Preserve Control
Estate Planning for Investors: Avoid Probate, Minimize Taxes, and Preserve Control
Michael J. “Mick” McGirr – Phocus Law
As members of AZREIA, we all have goals of achieving wealth through the acquisition, development, rental, or sale of property. At what point, though, do you pause to protect the assets you’ve acquired? It’s important to take stock of your ultimate goals and make sure that you have a plan in place. A big part of that should be an estate plan. Estate planning is setting up a way to make sure that whatever assets you’ve acquired are transferred smoothly and inexpensively to your heirs or beneficiaries. It can also include other things that deal with your care or end-of-life decisions, but for the purposes of this article, we’ll limit our discussion to the asset part of estate planning.
The main tools of estate planning are wills, trusts, and beneficiary designations. Each comes with pros and cons, so knowing which one is right for you will likely require discussion with an estate planning attorney. Let’s talk about each one:
Wills. The purpose of a will is to specify how your properties and other assets are distributed upon your death. Wills are generally less expensive to set up, and in some cases a simple, hand-written will can be enough to establish your wishes. Wills are generally subject to probate, though, which means that they have no legal effect until after you die. If you rely on this type of document as your central approach, you likely will have a simple estate administration with a low risk for disputes or creditor claims. As a special consideration for a real estate investor, if you own multiple properties, we generally don’t recommend that you rely on a will as your central document, but if you do, make sure you clearly identify each property in your estate and how they are to be distributed by your executor.
Trusts. A revocable living trust is ideal for real estate investors because it allows you to transfer ownership of the properties to your trust during your lifetime, thus avoiding probate. In addition to avoiding probate, you also have substantial control over how the property is managed long after your death, which may be necessary if your beneficiaries are young, disabled, or even just inexperienced at managing property. An added, and often overlooked, benefit of trusts is that they are private agreements that do not become public records, whereas probated wills are accessible to the public. If you have multiple properties, we generally recommend a trust because of the high degree of control over your assets. This control does come with a higher cost of setup, but that cost is usually much less than the cost of a probate.
Beneficiary Deeds. There is a third option that both avoids probate and is low cost, and that is the beneficiary deed. A beneficiary deed is a way to convey property, but it’s delayed until after the death of the grantor. The grantee simply records the death certificate of the grantor and becomes the owner by operation of law. There is no court involvement required. The downside of a beneficiary deed is that if you need to exert control over assets, you won’t be able to do that with a beneficiary deed. Title will transfer in its entirety to the beneficiary upon presentation or recording of the death certificate. We often couple beneficiary deeds and wills in our estate planning strategies to get a low-cost, simple estate administration that stays out of probate.
Tax Implications. Whatever approach you use, you will want to explore the possible tax liability for your estate. Generally, estates under $13.99M in value will not have any estate tax in the state of Arizona. Although most states do not impose any estate taxes, there are 17 states that have estate or inheritance taxes, Washington, Oregon, Minnesota, Nebraska, Iowa, Illinois, Kentucky, Pennsylvania, New York, New Jersey, Maryland, Washington D.C., Connecticut, Rhode Island, Massachusetts, Vermont, and Maine. Everywhere else only has a federal estate tax to worry about. If your estate is at risk of being taxable upon your death, you may want to consider additional estate planning options, such as irrevocable trusts, that can help manage or reduce your tax exposure.
Creditor Protection. The last consideration I want to cover is making sure that your income-generating properties are not exposing you to personal liability. For protection against personal liability, consider employing strategic uses of limited liability companies or family limited partnerships. These types of entities provide liability protection and centralize management of multiple properties. LLCs are very easy and inexpensive to establish, as well as easy to include in a trust.
If you’re interested in establishing an estate plan, reach out to Phocus Law today to get started!