Essential Estate Planning Strategies for High Net Worth Real Estate Investors

Financial Tid-Bits

Executive Summary

Estate planning for clients with large real estate holdings requires a comprehensive approach that considers both tax implications and property management intricacies. Key factors to consider include challenges related to retained interest and estate inclusion, valuation discounts, estate liquidity, basis and capital account planning, passive loss rules, multigenerational planning and generation-skipping transfer tax (GSTT), carried interest gifting valuation issues, and the necessity for periodic estate plan reviews. Each aspect requires careful strategizing to mitigate potential tax liabilities, ensure estate liquidity, manage the basis and capital account, maintain compliance with passive loss rules, effectively handle GSTT, correctly value carried interests, and keep estate plans updated to reflect current circumstances and tax laws. Collaborative efforts involving attorneys, accountants, and financial advisers are crucial to navigate the complexities of wealth transfer and craft effective estate plans.


Essential Estate Planning Strategies for High Net Worth Real Estate Investors

Estate planning is an essential part of wealth management, especially for high net worth individuals with significant real estate holdings. Crafting a resilient estate plan that considers real estate’s unique tax-related intricacies requires a strategic and comprehensive approach. Here are the top eight factors that high net worth real estate investors need to consider when developing their estate plans.

1. Retained Interest and Estate Inclusion

Real estate investors often prefer to maintain control over their assets, which can complicate transfer tax planning. Under certain tax laws, a property can unexpectedly be included in a taxpayer’s gross estate if they retain the right to enjoy or control it. Therefore, it’s crucial to review such scenarios carefully to mitigate potential estate inclusion.

2. Valuation Discounts

Valuation discounts, considering factors like lack of marketability and control, play a critical role in transfer tax planning. However, transferring a portion of assets subject to discounting comes with its set of considerations, including upfront costs, annual administrative expenses, and potential tax implications.

3. Estate Liquidity

Real estate investors often face a potential liquidity issue at death since they typically reinvest their cash. Identifying alternative options such as specific tax code elections and loans can help address these liquidity concerns.

4. Basis and Capital Account Planning

Long-held real estate often has a low tax basis. Retaining these assets until death can provide a unique advantage: a step-up in basis. Careful consideration of asset basis and tax basis capital accounts can provide opportunities for significant income tax savings.

5. Passive Loss Rules

Real estate investors who actively participate in their activities or are considered real estate professionals enjoy preferential income tax treatment. At death, determining whether certain activities are active or passive can become complex, making the selection of an executor or trustee crucial.

6. Multigenerational Planning and GSTT

For ultra-high-net-worth families with extensive real estate holdings, estate plans should strategically pass down assets across generations. This process involves the complex application of the generation-skipping transfer tax (GSTT), which is in addition to the gift and estate tax.

7. Carried Interest Gifting Valuation

Transferring carried interests, which are often held by real estate investors and can appreciate significantly, outside the estate can be an effective strategy. However, under certain tax laws, these transfers could be valued differently than expected, necessitating expert advice and careful planning.

8. Periodic Estate Plan Review

Estate plans should be regularly reviewed and updated to reflect changes in life circumstances, shifts in the value of assets, and changes in tax laws. This will ensure that the estate plan aligns with the investor’s current wishes and financial situation. 

In conclusion, estate planning for high net worth real estate investors is a complex task that demands a team approach involving attorneys, accountants, and financial advisers. Regular reviews and updates of the estate plan are essential to align with the investor’s life changes, changes in asset values, and tax laws. Through a collaborative effort, a comprehensive, effective, and tailored estate plan can be crafted to achieve the client’s goals.

For over 100 years, Packer Thomas has served generations of business owners, families, and others with tax, auditing, accounting, and information technology services. But we didn’t last that long by standing still. We’ve evolved to meet the needs of our clients who are also facing challenging changes in their financial, tax, and information technology environments.

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