Real Estate Generational Wealth Transfer: Planning Strategies for High Net Worth Families

“You have these competing tradeoffs with all of these decisions. You’ve got to look at who’s involved in the real estate, how the next generations want to benefit from the real estate.”

— John Thompson, Wealth Advisor, Congruent Wealth

In this episode of the Real Estate Industry Update, Daniel Roccanti of James Moore & Company sits down with John Thompson, wealth advisor and owner of Congruent Wealth, to discuss the growing challenge of transferring real estate wealth across generations. From entity structuring and estate tax exposure to family governance and liquidity planning, the conversation covers the tools and decisions that matter most for families building a lasting legacy.

Real estate is one of the most powerful tools for building and maintaining generational wealth, but it also creates some of the most complex planning challenges high net worth families face. Illiquid assets, low cost basis, depreciation recapture and competing family interests can all work against even the best intentions.

Daniel Roccanti and John Thompson walk through a hypothetical family scenario that many real estate owners will recognize: baby boomer parents in their mid-70s, three adult children with different levels of involvement in the business, and five grandchildren. Using that example, they break down how the right structure, the right team and the right conversations can make a generational transfer work.

Watch the Episode

Resources

• Real Estate Accounting and Advisory Services – James Moore & Company
• Real Estate Industry Update – Full Video Series
• Watch This Episode on YouTube

Full Transcript

[00:00] Daniel Roccanti: Welcome to the Real Estate Industry Update. Today we’re going to talk about the generational wealth transfer in real estate and we have a special guest today with John Thompson, wealth advisor and owner of Congruent Wealth. This is a really good gift for us today. I’ve known John for a little bit of time here and when it comes to this space, John is the best.

I’m just going to be honest with you here. And when you hear wealth advisor, a lot of times you think financial adviser and things like that. A wealth advisor is so much more than a financial adviser. They’re the true quarterback when it comes to your wealth and your planning here. He’s the one that’s able to put all the team together to really give you the most chance of success.

John, great to have you here today.

[00:45] John Thompson: Thanks so much, Daniel. Glad to be here. Glad to work with you. The work that you do in tax planning for high net worth families and business owners and real estate investors is really special. The approach you take, the relationships that you have and the work that you’re doing — we’re just glad to be a part of it.

[01:05] Daniel Roccanti: Thanks again, John. This episode is just to help those people that have done a great job of building that real estate wealth but maybe haven’t yet figured out how to get their transfer system worked out or haven’t really thought about estate planning for the next generation. Coming in here, we just want to talk about why does real estate really matter here. It’s because real estate is one of the greatest generational wealth-building tools out there.

There are a lot of people out there that have accumulated a lot of wealth through real estate. And then once they have accumulated wealth, it’s one of the greatest tools to maintain your wealth. So it’s good on both ends. Usually once you’re dealing with high net worth families, real estate comes into the picture at some point, but there are problems with it.

It’s usually illiquid. It’s operational. It’s not just like putting money into a stock. It’s a business and you don’t just have free access to cash. And so when you’re dealing with a lot of the issues of high net worth families — I have all this real estate, this wealth, and I have potential estate planning problems for 2026.

The estate tax exemption is at $15 million. Married, it’s at $30 million. And that basically means that once my net worth gets over those amounts, I’m going to have to pay estate tax, which is at 40% at the top tax bracket, and it gets there very quickly. So you can see how once my net worth gets over that $30 million, it actually starts becoming a very real cash problem for these high net worth families. I want to give this to the next generation and as much of it as I can without having a huge tax burden once I pass away.

[02:30] John Thompson: It’s a major issue even with the limits going up so much. We’ve seen incredible wealth creation even in the last five years since COVID and certainly in the last ten years. We’ve seen the folks in this category — the number of families running into estate tax issues — double in the last decade.

We’re running into this more and more. I was talking to a local estate attorney and asked him how many hundred million dollar clients his firm has now, families worth $100 million or more. He said ten years ago he could tell them to you off the top of his head. Now it’s such a long list they can’t even keep up. We’ve seen it grow not only nationally but also in Florida and in particular in the North Florida area.

[03:15] Daniel Roccanti: And I think this is an important time right now, just with how the baby boomers are mostly retired these days and have accumulated a lot of wealth. Gen Xers are on the way up. They’ve accumulated a lot of wealth getting to the higher stages of their careers. Millennials are kind of in the middle of their careers for a lot of them. These are real issues that people are dealing with right now that John and I are able to help with.

So John, why don’t you kind of help us set the stage here?

[03:45] John Thompson: I thought it’d be a good idea for us to consider a hypothetical family that we would work with together. We work very hard to help coordinate — working with the CPA, working with you, working with the estate attorney. We would theoretically be in a meeting with this family and all of us would be there. We would have done discovery. We go into 60 to 100 questions to get to know a family, develop a mind map, gather all of the information to then document and put into our estate planning software and look at what the estate is going to look like based upon the current tax picture and the current structure of the estate.

What we’re really looking to do is get in with each of the professionals and support them, provide illustrations and information and everyone shares what would be the best ways to make this work for a family.

The family that I think we decided upon is a family that has baby boomer parents in their mid-70s. There are three adult children and those adult children have five grandkids — two of them have two kids each and one has one kid. There is one adult child who is actively engaged in the real estate business with the father, but the other two are off in their own careers. That creates complexities and some misalignment in terms of responsibilities. But these are the types of situations we run into.

[05:00] Daniel Roccanti: I like this example a lot because this actually hits home with a lot of my clients. This is real. Everything you said, I’m literally picturing numerous clients that are almost in the same category. You’ve got the father or the mother, someone built a real estate empire. They’ve got kids, some want to be involved, some don’t, and then there are grandkids in the picture. So you’ve really got a complex family situation.

What we’re trying to do is figure out how to transfer this to the next level. We have estate tax to worry about, but we also just want to make sure that we’re getting the next generation ready to take this over and not just dumping a huge problem on them at the end of your life with no plan moving forward.

So one of the things we can talk about is entity structuring for this large wealth transition.

[05:50] John Thompson: And if I could back up a little bit — to describe the problem around why entity structuring is really important, Daniel. The issue is that with major real estate holdings, these families have depreciated the real estate over the years and that affects cost basis and depreciation recapture. So if the real estate were sold in their lifetimes, there are significant tax implications. Many of these families have had tax-free exchanges of the real estate into more real estate, depreciated more and borrowed from it to buy other real estate. There are huge tax implications to selling the real estate and they are passing on a very complicated basket of assets to the kids.

So we’re balancing two issues. How do you manage the opportunity to step up the basis when the parents pass away so the kids can take advantage of a lower capital gains or unrealized gain issue at death? They may want to get out of underperforming real estate or do something different from an investment standpoint. And then what do they want to gift and get out of the estate to avoid the estate tax, and maybe give up the opportunity to step up the cost basis?

You have these competing tradeoffs with all of these decisions. You’ve got to look at who’s involved in the real estate, how the next generations want to benefit from the real estate. Do they want to have their inheritance in real estate? There are a lot of factors that go into that decision-making process. It is not done lightly. That is where deep discovery with the family and understanding the goals and interests of each of the family members — and having family discussions, family meetings, maybe even a family constitution, which we would really promote — is so critical.

Siblings often had rivalries growing up, maybe disagreements. What happens when they’re left with wealth, and not just wealth but complicated wealth like real estate? It creates a lot of conflicts. There are inherent conflicts of interest if you have one of the adult children managing the real estate and the others aren’t, and they should be compensated for that. But then they get to decide — does the sister who picked on them their whole childhood get this nice compensation, or is that going to be a subject of debate?

There’s a lot of understanding the family dynamics, the relationships, the personalities. Sometimes personality assessments can be helpful. Really getting an understanding on our end so we can inform the accountant, inform the attorney and think through some alternative solutions to the structuring is really important.

[08:00] Daniel Roccanti: John made a lot of good points here and we can’t cover all of this in one 30-minute episode, but the reality is that this is very complex and there’s not a one-size-fits-all. You need to really sit down and figure this out.

This is why it’s important to have that quarterback for your team. Without a great quarterback, you could have some really good members on that team but they’re not getting utilized. I like to think I’m part of that team. I’m not the quarterback, but I could be like a Justin Jefferson — a great wide receiver. But without a good quarterback, I’m just an underutilized wide receiver.

So let’s get into some of the things that can be done here. Let’s talk about some entity structuring you can do for this wealth transfer. Let’s say the family owns a bunch of real estate. Standard entity structuring for something like this — you’re probably going to have an LLC for your property level. I own a property, that property is in an LLC. Sometimes it’s multiple properties, sometimes it’s one property. It depends on what kind of asset protection that property needs. That’s really there to contain the liability and make bookkeeping easy.

A lot of individuals might just own that LLC directly and there’s nothing wrong with that, but that becomes difficult when you start thinking about transferring. So when you start dealing with higher net worth families, what a lot of times they do is they create a holding company or a family LLC. What this does is it becomes the transfer container for everything. That holding company then owns the property-level LLCs. The individuals, trusts or whatever wrapping you want to have on it then owns that family LLC.

That way you can start bringing in family members — the kids, things like that — when it’s time, and we can start going into gifting. You’ve got the property LLCs, you’ve got the holding company, and then you have the true owners, which come down to potentially trusts or the individual. That really all depends on your specific needs.

[10:15] John Thompson: What I would add there is that the property-level LLC contains risk within the property if it’s managed well and you don’t do anything to pierce the veil, like having personal expenses on the finances of the LLC. It’s really important to have the accounting clear and work with your accountant to make sure you know how to manage the finances, because you can lose that protection.

It also protects the ownership of what’s in that property from your personal risk. If you own that outright in the LLC and you’re in a partnership in the state of Florida — so let’s say the husband and wife are partners on these LLCs, which is what we would recommend — you actually have a lot of asset protection from personal liability, car accidents, slip and falls at your home, boating accidents, things that can come up.

We are major proponents of partnership LLCs in the state of Florida. That does give quite a bit of protection. The family limited partnership that owns each of those LLCs is really a great tool because you can have a number of partners in the family LLC and those minority partnership interests can create discounts in the valuation of all of the properties.

So when you’re trying to get, say, $20 million of a $50 million estate out of your estate to avoid estate taxes, you can actually take that $20 million and get up to 40% in discounts for marketability discounts and minority discounts on the valuation of those LLCs within the family limited partnership. Then take those discounted shares — maybe you’ve got $20 million you can move out at the price of $14 or $15 million — and put that into trusts for the kids. They don’t automatically get all of the voting rights and all of the control. You can still control these through gifting to trusts that the parents are then in charge of, and create a number of different scenarios around which children are going to be responsible to make decisions.

Everyone may be a beneficiary but not everyone may become a trustee of these trusts. You’ll have operating systems that go back to the family conversations and family constitution about how that’s going to work.

[12:30] Daniel Roccanti: I like that you mentioned control here, because control is the biggest thing. I want to find a way where we can actually transfer ownership, but the people who still have control — usually the parents — maintain it until the kids are ready. That’s the biggest thing here.

The holding company and the family LLCs are a really easy way to start gifting, inheriting, putting things in trust, because you’re doing it at the partnership level, not at the actual real estate. You can transfer smaller segments of that. And then it really comes down to control.

I want to start shifting the economics without giving away the steering wheel. This is when you start bringing in managed member LLCs, voting and non-voting interests. There are a lot of ways you can start transferring without losing that control.

Another strategy I wanted to introduce — when you’re moving these shares into an irrevocable trust, you lose the opportunity for a step-up on cost basis at the death of the first generation parents. They have acquired these properties, depreciated them, have low cost basis. We’ve seen a huge increase in the value of real estate, particularly since COVID. So they’ve got all these unrealized gains. You move out to the trust and the trust still has to honor that and will owe the IRS if these are ever sold.

If the family ever wants to get out of real estate, there’s going to be a big price to pay. You’ve got two adult kids here that are not really interested in being in the real estate business, and they may have interests in private equity or the stock market.

[14:00] John Thompson: What we would offer are ideas to keep the real estate in the estate. One of the ways you can do that is by leveraging the real estate and borrowing on it, but taking the cash out and putting that into the trusts. You can then invest in something different in the irrevocable trust. It’s going to have its own cost basis, and perhaps you’re looking at more tax-efficient investing there.

When you think about two kids not being in the real estate business, it might make sense to take future leverage from that real estate portfolio to put into those trusts for them. The kids that are going to take over the real estate business may get the step-up in cost basis. They may have less equity — they’ll still owe the bank on those properties — but they then get to manage the real estate portfolio. And you’ve taken out assets that can be non-real estate for the kids that may not want that.

[15:00] Daniel Roccanti: John makes a great point here. With real estate specifically there are some huge tax advantages on the income side, like step-up in basis. You just want to make sure you have a plan. If I start moving stuff, how does that affect things? Do I lose step-up in basis? Is that more important than avoiding estate taxes, or are there other ways to get around that?

I think for a lot of these families, this isn’t usually a single event. This is more like a runway where you’re setting out a plan and then implementing it over many years, even decades. We’re not just transferring everything at one time.

And then it’s getting the next generation ready. That’s why setting up these family LLCs, making sure you understand who has control, having operating agreements, making sure you have transfer restrictions so you don’t have unwanted partners come in or a sibling wants out — what’s the buy-sell language? What happens when cash needs to come in? Who gets management replacement or signature authority if there’s an unexpected death? These are really important things we have to understand when we’re looking at this generational wealth from a bigger picture.

[16:30] John Thompson: Another opportunity in terms of dividing assets between real estate and non-real estate — for debt-averse real estate investors that built a portfolio and don’t owe much, they’re proud of not having that debt and may not be living on all of the cash flow. They can use some of the cash flow from the real estate to contribute to a trust that buys life insurance. It’s another form of leverage and it is a cost, and not everybody loves life insurance. But if you don’t love debt on your portfolio and you’re concerned about an economic downturn and what would happen with vacancies or whatever the risk may be, you can then commit to a cash flow and with a second-to-die life insurance policy and an irrevocable life insurance trust be able to buy more insurance than you could as an individual policy. That can also offset the real estate holdings for the kids that don’t want the real estate.

[17:30] Daniel Roccanti: Absolutely. That’s a complex thing but we’ve seen it work really well with real estate. So I want to move on to pitfalls when it comes to estate tax gifting. These are things I’ve seen on my end that are always potential problems.

The first one sounds simple, but it’s really just that the title doesn’t match what your plan is. You set up all these trusts, all these holding companies, but you never actually move the title. How many times have you seen this, John?

[18:00] John Thompson: That’s the major issue with planning. You go to your attorney, they put together an incredible plan for you, and then the complexity of changing ownership of many assets and the beneficiary designations is where things fall apart. That’s one of the areas where clients often don’t want to go back to their attorney or CPA.

We come in and part of our review is looking at beneficiary designations regularly. We’re looking at titling and reviewing that every year or every other year. Most wealth advisors aren’t looking at all of that — they’re primarily investment-focused. Working with someone who has this understanding and is coordinating these efforts is really important. That ongoing communication we’re having with Daniel and with the attorney is the key that makes it work.

Leaning on your attorney to handle changes in titling of real estate and all of that — we think it’s worth it because it’s done right. These are documents that need to be organized with lists of beneficiaries and titling ownership that needs to be reviewed. That is part of the ongoing family board meeting each year.

[19:15] Daniel Roccanti: Absolutely. And that’s why having a quarterback is great — they’re making sure the plan actually gets followed through on.

John already mentioned this, but a bad or missing valuation is another common pitfall. The value of the property is not the same thing as the value of the minority or non-controlling interest. It can have big discounts that you can take advantage of, and a lot of times people miss this on valuations when they’re transferring their partnership ownership.

[19:45] John Thompson: And you have a lot of opportunities if it’s done right with the attorney and they’re going to a reputable valuation company. They’re going to be aggressive in getting valuations that really benefit you — to move into trusts and out of your estate and maximize that unified credit exemption that you’re getting, that $30 million per couple.

[20:10] Daniel Roccanti: I think also a lot of people forget that when you are gifting or when a property is inherited, a lot of times there’s debt associated with that as well. Sometimes you get property outright but a lot of times there’s debt. So what happens when that happens? Is there a guarantee on this? Is the lender going to call in the note? What happens when it’s refinanced? A lot of times when we’re inheriting, there’s debt involved as well.

[20:40] John Thompson: Structuring that on the front end is really important. And there’s another kind of debt we didn’t talk about, and those are self-canceling installment notes that can be put into a trust where the trust can buy the real estate asset from the estate for anything that was not able to get out with unified credit exemptions. Essentially the trust is doing that through a borrowing relationship. They’re a debtor to the estate, paying the estate back interest and ultimately paying off that loan. However, you delay the principal so it balloons until the death of the first generation who are selling that to the trust, and that can be a very effective way to get assets out as well. That debt automatically cancels at the death of the grantor.

The other opportunity is grantor retained annuity trusts, also called GRATs. Once you’ve used up all these mechanisms to get assets out of the estate, you can use a GRAT by placing the assets in it. Over rolling periods of years it allows the growth and value of those assets to move into the trust outside the estate. So you may have $20 million in a portfolio you can’t get out of the estate after you’ve used all $30 million of unified credit exemption out of that $50 million example, but you can have the growth of that $20 million each year going into the trust and at least freeze that. The growth is going to limit some of that estate tax as well.

[22:15] Daniel Roccanti: GRATs are a great tool for anyone to be using and John has a great understanding of them.

Coming back to a tax point I want to make sure gets covered, because it unfortunately gets missed sometimes — we were talking about how the estate tax exemption is up to $15 million, and $30 million for a married couple. You don’t just automatically as a married couple get $30 million. You actually have to do portability. So normally one spouse passes away before the other. When that happens, you actually have to file an estate tax return, Form 706, and elect to transfer the unused exclusion to the spouse so they get the $30 million. This is due with the tax return, just like a normal return would be — April 15th, with an extension out to October 15th. It’s very important that this actually gets filed. If you don’t file it on time, you lose out on portability.

And I would say probably the biggest issue with real estate, John, is liquidity. Real estate is great, but if you have no liquidity plan, that’s a real problem. Real estate rich, cash poor — that’s a situation a lot of our clients face. You can have a massive amount of wealth and feel like you have no cash. When people pass away, if you have a huge estate tax bill it’s going to be very expensive. But it goes beyond that. All of the administrative expenses and everything that happens once someone unfortunately passes away — it’s actually very expensive on its own. When you have a substantial amount of real estate, you really need to make sure you have a liquidity plan.

[24:00] John Thompson: Absolutely. And to your point, Daniel — if life insurance can work for a family, that can create liquidity so that properties don’t have to be sold or businesses don’t have to be sold. There are a number of ways to have that liquidity available.

[24:20] Daniel Roccanti: Absolutely. And I want to go into our last part here, and I think this is one of the more important ones — all of this doesn’t matter if you don’t engage the next generation. So how does this look, John, when you’re working with your clients? How do I engage the next generation in governance and financial oversight?

[24:40] John Thompson: The first thing we do in discovery with a family is really understand what the parents’ goals are for their children. What they’re doing for them now, what they want to do for them in the future. We want to understand those important relationships and how the family operates. Every family’s different.

Once they determine what is going to be an appropriate responsibility for each of their children at their passing, designing a strategy and coming up with an approach that they would like to discuss with their children is an effective way to go. We often think it begins with one-to-one conversations between a parent and each child to prepare them to have a family meeting, to make sure they’re okay with how this is going to be approached and to get feedback from the adult children. Parents can often be surprised at which children may or may not want to be involved, or what they want or don’t want for their own children.

So I think that’s really the first step. Then you discuss what’s an appropriate strategy based upon the feedback you’ve gotten from your adult children in addition to what you would like to accomplish. Then you can have an effective family meeting. The key to a great family meeting is the preparation that goes into it ahead of time. Everyone comes into that meeting with a pretty fair expectation of what is going to be discussed and what the responsibilities of each family member will be. That makes it far more productive.

What you also want to really consider are the family values. That starts with the first generation thinking through the values with which they raised these children — how the family operates, their financial values, how they view money and wealth, what were the financial goals of the parents and what do they think would be valuable to pass down to the kids.

Once that is clarified, when they meet with the kids and discuss what their values are as a family, it’s very much like you might see in a leadership team for an organization. You determine what the driving values of the family will be going forward, including rules of engagement. How do we treat each other? How do we communicate? How do we make decisions around important things for the family? That is where you start to lower the air pressure in the room and work through some of the conflicts that may have occurred before, to smooth out how you’re going to put this together.

Then you develop a mission statement to go with those values. What’s our mission as a family? What do we want to pass down? What do we think is important in life? This could be spiritual. It could be based on the role of the family in society or within their community. Really discussing and determining who they want to be as a family and what they want to represent is a critical element in building that foundation — the family constitution and operating system for that wealth going forward.

This applies whether the next generation works together on a real estate portfolio, a business or if everything is sold and they go their own way with their own children. They now have an operating system to consider passing down. This is how great families build — whether it’s the Rockefellers or other very successful families. They have developed ways that they operate together. It’s often a blend of altruism, philanthropy, thinking about others and about the world.

Once that foundation of values and mission is determined, you get into the operations of how they may work together or how they may divide everything. You build these traditions that pass down among the generations that help the kids understand what success came from and how to maintain and protect that for the family going forward.

[28:30] Daniel Roccanti: John, you nailed it right there. Defining your mission, defining your roles going forward is a key part of setting up here. Then making sure that you start educating the next generation, bringing them in on the operations and on the meetings so that they can truly understand and develop over time and realize that one day this is all theirs to take over.

So thanks for joining our video today. This was a pretty extensive topic and John and I are actually going to talk more about it in a webinar after tax season. We’re going to get together and go into even more detail. I look forward to doing that webinar. If you enjoyed what we heard today and want to hear more about it, join our webinar. Thanks for coming and have a good one.

[29:15] John Thompson: Thanks so much for having me, Daniel.

[29:18] Daniel Roccanti: Thanks, John. Take care.

Watch the full episode here: Real Estate Generational Wealth Transfer. To connect with a James Moore professional about your real estate planning needs, contact us today.

 

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.