Estate Planning for Real Estate Pros, Part 1: REIU


For obvious reasons, people often don’t like the prospect of estate planning. Facing our own eventual demise is emotionally difficult not only for ourselves, but our family members as well. But the lack of a plan can jeopardize everything you’ve worked for, from the real estate business you’ve built to the family legacy you’ve established.

In a recent three-part installment of the Real Estate Industry Update, Partners John VanDuzer and Suzanne Forbes discussed the basics of establishing your estate plan. Part 1 focuses on wills, trusts, insurance and asset protection.

Where there’s a will, there’s a trust—or at least there should be.

Nearly everyone knows the importance of a will. But while a will specifies what happens to your assets when you’ve died, your case still has to go through probate—a court proceeding that makes your assets public knowledge as they are transferred. It’s a process that can drag on for months (or even years!) and require extensive attorney fees.

You can avoid this delay by setting up a revocable trust (AKA living trust) as part of your estate plan. A trust transfers your assets by matter of law, skipping the probate process. You’ll designate a person in charge of the trust, called a trustee, to oversee your assets for your beneficiaries.

“When you pass away, the trust kicks in. There are no court proceedings,” said Forbes. “The trustee can take a death certificate and the trust agreement and take control of bank accounts and everything else. It really provides a much more seamless transition as your heirs take over.”

The revocable part of the name means you can change the terms of the trust while you’re still alive. This allows you to tweak your arrangements based on what happens in your life and family. A trust also allows you to place conditions on how your assets are distributed. For example, you might not want to leave money outright to a family member who isn’t terribly responsible with it. You can establish milestones (such as age) that must happen with that family member before they can receive it.

What steps should you take in setting up and maintaining your trust?

First and foremost, title your assets in the name of the trust. For example, your trust is called the John Doe Family Trust. Your real estate, however, is in an LLC owned by you individually. Those real estate assets will not be controlled by the trust after you die. Instead, they take the will-and-probate path—which is exactly what you tried to avoid with the trust.

This often happens in the years after the trust is established. As business and personal assets accumulate, you might forget to put them in the name of the trust. So it’s critical to keep on top of those additions. All of your bank accounts, holdings, etc. should be owned by the trust.

Forbes also emphasized the importance of giving your estate plan trustee durable power of attorney. Because while they can make decisions after you pass away, it’s a different story if you’re incapacitated. She recalled one client, a business owner, who was in a serious car accident and fell into a coma. It turns out he was the only person at the business who could sign anything related to the bank account—including paychecks. It took weeks to get a court date to appoint someone so the business could make payroll.

Forbes explained that the pandemic brought this realization to the forefront for many. “What if you were put on a ventilator? You were put in ICU and you couldn’t function,” she said. “Is there somebody else in your business that can pay bills, and make payroll, and access your bank account, and keep your business running while you’re incapacitated?”

What else should you consider?

Insurance plays a significant role in your estate plan, and it starts with life insurance. Assess your total estate value and look at the life insurance you have intact. The goal is to make sure your survivors can cover your funeral expenses and their living expenses for a certain period of time, which in turn protects your assets.

However, too many people stop there. The prospect of disability or incapacitation is often overlooked.

“My law professor at Stetson asked us, ‘What’s the most important insurance you can have?’ And of course we all said life insurance,” said Forbes. “He said, ‘No. You’re dead. You’re not costing anybody anything.’ When you become disabled, you have a loss of income and you typically have more expenses.”

Disability insurance and long-term care insurance can help fill the income gap created if you’re unable to work. Forbes also mentioned a newer life insurance product with a long-term care component. If you go into a long-term care facility, you can draw on that life insurance while you’re alive to help pay for your care.

Forbes also encourages real estate professionals to make sure assets are titled correctly. Are your real estate assets in an LLC? Should it be a multi-member LLC? Are they joined with survivorship? While an attorney can and should help with these questions, the decisions you make can also trigger an adverse tax consequence. So it’s important to bring a real estate CPA to the table as well when establishing your estate plan.

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.