Your Private Lending Portfolio Needs Estate Planning Too

Your Private Lending Portfolio Needs Estate Planning Too

By: Michael J. “Mick” McGirr, Esq.

Phocus Law

In prior AZREIA articles, I’ve written a lot about entity structures, deal mechanics, and how investors can protect themselves on the front end of transactions. Last month, I shifted gears and talked about estate planning, specifically how trusts and entities should work together.

This month, I want to zoom in on one asset class that is frequently overlooked in estate plans: private lending and note portfolios.

Arizona has a large and growing community of private lenders. Many of you hold promissory notes, deeds of trust, guarantees, and other loan-related rights that generate steady income and are often a meaningful portion of your net worth. Unfortunately, these assets are also some of the most commonly mishandled when an investor passes away or becomes incapacitated.

Notes Don’t Manage Themselves

When a real estate investor dies owning rental properties, most people at least understand that there will be leases, tenants, and physical assets to deal with. Notes feel “simpler” by comparison, but they create their own set of problems if they are not planned for properly.

Here are issues we see regularly:

· No one is clearly authorized to collect payments

· Borrowers don’t know who to pay

· Servicers receive conflicting instructions

· Heirs don’t understand the loan terms or collateral

· Notes end up liquidated at a discount simply to “clean things up”

None of that is inevitable. It usually happens because the note portfolio was never properly integrated into the estate plan.

What Happens If You Do Nothing?

If notes are held in your individual name and you pass away, your executor (after court involvement, if probate is required) will eventually gain authority to administer those assets. That process can take months. During that time, payments may stop, default issues can arise, and leverage is lost.

Even worse, if there is no clear plan or documentation, heirs often choose the fastest exit available: selling the notes at a discount, even if the underlying loans are performing well.

How Proper Planning Simplifies Everything

A well-structured estate plan can make note administration seamless.

Common solutions include:

· Holding notes inside a revocable trust, so a successor trustee can step in immediately and continue collecting payments

· Using an LLC owned by a trust to hold multiple loans, creating centralized management

· Clear documentation that tells trustees or successors exactly what exists, where records are kept, and who services the loans

· Defined authority so someone can enforce rights, negotiate payoffs, or handle defaults without delay

When done correctly, borrowers often don’t even experience a disruption. Payments continue, servicing continues, and the portfolio remains intact.

Final Thought

Estate planning isn’t just about houses and bank accounts. For Arizona investors, notes and lending activity deserve the same level of attention as rental properties and operating businesses.

A small amount of planning on the front end can preserve income, prevent confusion, and save your family from making rushed decisions later.

If you’d like help reviewing how your private lending portfolio fits into your overall plan, or you want to make sure an existing trust actually accomplishes what you expect it to, our team is happy to help. Sam Richardson, who leads our estate planning group at Phocus Law, can walk you through the process. Sam can be reached at 602-457-2191 or [email protected].