Many seniors have real estate holdings that include residential units, commercial properties, or a combination of both. Most even have these assets in their wills for distribution to children or grandchildren. Often careful consideration is given to minimizing tax implications in transferring these assets.
The concern that most seniors do not evaluate closely enough is what will happen when their heirs receive the properties. This oversight often causes serious family conflict in an emotionally charged time after the passing of a loved one.
Unlike stocks, bonds and cash, real estate holdings are not liquid assets and are not easily dividable.
Let’s use an example of a family with three adult children who inherit the family home together. The financial needs, capabilities, and emotional attachment of the 3 siblings are unlikely to be in perfect alignment. One may hope to sell the home to help with personal debts, another prefers the cash flow of renting the home to tenants and the last simply can’t imagine either of those options and would prefer to keep it and make it a primary residence.
The larger the legacy, in terms of number of real estate holdings, the more complicated the untangling of heirs’ interests post inheritance. Managing multiple properties takes knowledge, skills and teams of tradespeople and financial professionals. And again, heirs and their spouses often have very different interests, desires, time availability and capabilities.
There are multiple options to minimize family friction when passing on generational wealth. The best way to determine the correct path is communication with heirs and a team of specialized professionals.
I’ve seen where larger assets are sold and then using an IRS tax deferral process (1031 Exchange), several properties are purchased, placed in individual trusts for each of the heirs. The eventual heirs could participate in the property selection process and be mentored by the elder in property management and investment strategies.
Another option that can be utilized in conjunction with the tax advantageous 1031 Exchange is investing in Delaware Statutory Trusts. Investors have a beneficiary interest in the property(ies) owned in the trust with other investors but without management necessities.
The complexity of these investments varies, along with risks, potential upsides, management / time requirements, tax implications, and liquidity of assets which makes it crucial to develop a team of professionals that you feel comfortable with and that communicate and work well together. A typical team would include an estate attorney, a certified public accountant, and an experienced real estate agent specializing in working with investments and seniors.
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