Why An Estate Plan Is Vital for Real Estate Investors

Estate planning is the process of making arrangements for how you want your assets to be disposed of if you pass away or become incapacitated. Sure, it might not be everyone’s favorite topic, but estate planning is nevertheless an important task that ensures your hard-earned assets are passed down to the right people and organizations. By making your arrangements in advance, you can leave specific instructions for which of your possessions are distributed to whom, at what time, and how.

While estate planning is important for everyone, it is especially important for those with a real estate portfolio–or at least in the process of building a real estate portfolio. Below are important documents to include in your estate plan if you are a real estate investor.

Wills & Living Trusts

Wills and living trusts are both tools used in estate planning. These documents are mainly used to designate beneficiaries for your property in the case of your death, but each option has different applications. Many choose to keep both wills and living trusts concurrently, so as to take advantage of the different benefits.

One of the main differences between a will and a living trust is that a living trust ensures that your property is passed on in private without going through probate, and without challenges from the court. A will, on the other hand, must be filed in probate court and becomes a public document. The property included in a will is subject to probate court and claims, which can be lengthy and expensive processes. There are multiple ways in which estate attorneys use these documents in order to ensure that real property is transferred as smoothly as possible upon an investor’s death.

Lifetime Planning For Investors: Powers of Attorney & Advanced Directives

A power of attorney is a document that gives one person (an agent) the authority to act on behalf of another (a principal). The principal may grant a limited or wide range of authority to the agent, depending on the principal’s needs. This document is often used for those who want to make sure someone is designated to make financial and business matters on their behalf in case they ever become unable to do so due to incapacitation or other reasons. Real estate investors may find granting an agent power of attorney useful for carrying out business functions such as collecting rents, making payments and managing tenants in their absence.

While powers of attorney generally allow someone to make business and financial decisions on another’s behalf, an advanced directive allows you to designate someone to make medical decisions on your behalf when you are unable to speak for yourself. Times in your life when you may want an advanced directive include if you have a chronic, ongoing health condition, are planning a surgery, receive startling health news, or have other concerns for your well-being. If this hasn’t happened to you, that’s wonderful. But the reality is we can all get sick.

Asset Protection & Tax Planning

An estate plan for real estate investors should also include strategies to protect your assets as well as provide tax sheltering strategies for your investments. To begin protecting your assets, start by creating an inventory of your assets and break them down based on how they are owned. Next, take the necessary measures to ensure that your assets can legally be passed on to your beneficiaries. This process can get a bit more complicated for real estate investors who purchase properties with partners or through an LLC. They will need to form a plan for how to to transfer the ownership of their investments, including those with a surviving business partner.

Our Office Can Help

Our office has served many real estate investors. We have extensive experience in how the various estate planning documents are used for investors. Contact our office today if you have any questions about estate planning. We will review your personal circumstances and help execute the best strategy for you, your business, and your heirs.

Standalone Retirement Trusts

Nowadays, most Americans hold their wealth in retirement accounts. When it comes to
inheritance and estate planning, special considerations are necessary to ensure that these assets are protected and distributed according to the account holder’s wishes. 

Retirement assets, such as IRAs, are typically passed via beneficiary designation. For example, for a married couple with children, it would be common to designate the spouse as primary beneficiary and children as secondary. However, in almost all occasions it is advantageous to name a trust—rather than a particular individual—as the designated beneficiary. Once the retirement account becomes inherited by a non-spouse beneficiary (i.e. children), it is important to understand that IRS regulations
treat this inherited retirement account differently. Specifically, once inherited, the beneficiary is obligated to begin taking required minimum distributions from such funds within a more immediate time horizon of either five years or over the beneficiary’s life expectancy.  An IRA administrator will also offer the option of receiving the proceeds as a lump sum payment, which is very often discouraged, especially in the case of minor or financially irresponsible children. The preferred goal in planning for inheriting retirement assets is to maximize this window of time so that the tax-sheltered, long-term growth benefits of retirement accounts are maximized.

IRAs and other retirement instruments were designed precisely for a specific purpose: retirement. They were not intended as a savings mechanism for future generations. Tax laws work according to this assumption, and so foresight and planning are necessary when including such holdings in an estate to be passed on to beneficiaries. Trusts can serve as an appropriate conduit to protect and preserve these assets.

Some will consider a standard revocable living trust by default when structuring a retirement trust.  This could cause unfavorable consequences, however, including a more fixed distribution schedule and the lack of creditor protection. Further, the IRS may a not consider the revocable living trust as a designated third party beneficiary, resulting in the assets becoming immediately, taxable income.

A Standalone Retirement Trust is a trust that is created for the sole purpose of serving as the beneficiary of the remainder of your IRA funds (and other qualified funds, e.g. 401(k)). Thus, the trust will be funded after you pass with whatever is left of your retirement assets. Then, the trustee of the Standalone Retirement Trust will oversee the distribution of the funds to your heir(s) in a manner you see fit.

A Standalone Retirement Trust will provide you with significantly greater control over the manner in which your remaining retirement funds are distributed to your loved ones, rather than just control who will receive the funds after you die—as is the case with leaving your IRA through a simple beneficiary designation.

Other potential benefits of Standalone Retirement Trusts include 

  • Asset protection in the event of a divorce;
  • Creditor protection;
  • Generation-skipping tax benefits;
  • Special Needs/Supplemental Trust benefits;
  • Alerts the beneficiary of any tax consequences of an immediate payout;
  • Allows beneficiary’s to thinly stretch tax obligations over time;
  • Alleviates the need for a court appointed guardian for minor beneficiaries
  • Provides a beneficiary with asset protection in the event the beneficiary becomes disabled; and 
  • Allows for successor beneficiaries. 

For more information on Standalone Retirement Trusts contact our office today. 

Where Should I Store My Estate Planning Documents?

One of the most common questions that estate planning attorneys are asked is where original estate planning documents – Wills, Trusts, Powers of Attorney, and Health Care Directives – should be stored for safekeeping.  While there is no right or wrong answer to this question, there are a few things to consider: Continue reading Where Should I Store My Estate Planning Documents?

ASSET PROTECTION PLANNING 101

What is Asset Protection?

Asset protection includes the concepts of and strategies for guarding one’s wealth. Asset protection is a type of planning intended to protect one’s assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors’ access to certain valuable assets, while operating within the bounds of debtor-creditor law. 

Asset protection is one of the most unappreciated topics of estate planning. As a result, many people end up having their retirement account accounts, family homes, insurance policies and other valuable assets either lost or greatly diminished because they’ve failed to put an asset protection plan into place. In order to avoid these types of losses you need the counsel and guidance of an estate planning attorney to explain the legal requirements surrounding asset protection. The Law Office of Rodney Davis, LLC is here to help you make sure that your assets are legally protected. Just give us a call at (205) 578-1597 or click here to learn more about asset protection.

Why Do I Need Asset Protection?

While there are various reasons to consult with an estate planning attorney about an asset protection plan, there are two very common reasons why you should consider asset protection:

Reason #1: Lawsuits

This is one of the main reasons why individuals and businesses need asset protection. On many occasions, frivolous lawsuits are filed by one party knowing full well the other party would prefer to settle out of court rather than go through a lengthy and disruptive court proceeding. To counter, do asset protection planning and implement asset protection strategies.

Reason #2: Probate of Estates

Another reason for asset protection information is that it is difficult to transfer assets to your heirs without excessive loss due to probate and taxation. Not only is probate a lengthy process – it encourages family infighting – it can severely erode your families assets. Did you know that when Elvis Presley died all that was left of his 10 million dollar estate was 2 million dollars? This was definitely a case where no asset protection planning was taken to implement asset protection strategies.

Consider yet another example of how little or no asset protection planning can cause you to lose assets:

An engineer and a nurse lived together for years, but never got married. They decided to purchase a home together and put in the real estate documents that they were buying the home as tenants in common instead of as joint tenants with a right of survivorship. They did this thinking that if one of them died the other person would get the house. However, they were badly mistaken, and when the engineer died without leaving a will his interest in their home went to his sister (who did not get along very well with the nurse). In the end, the nurse was forced to leave the home. Had the engineer and nurse contacted an attorney to implement an effective asset protection plan, the nurse could have remained in her home.

Timing is Key

When you want to protect your assets from future claimants, the more proactive you are the better off you will be. If you believe you are about to be sued, it is likely to late to start the asset protection planning process. If you are in a profession that comes with significant liability, you have accumulated a lot of wealth, or your home is now worth more than the mortgage you have on it, it’s time to do some asset protection planning for your future. The point is, you have to plan to protect your assets before it is too late. It is never too early to implement a plan to keep your assets protected, but it can be too late once you are the subject of a lawsuit or in the event of a loved one’s death.

If you or someone you know is concerned about avoiding the above problems and issues, please contact our office at (205) 578-1597 for a consultation on asset protection planning.