Estate Planning for Real Estate Pros, Part 2: REIU


Our recent three-part installment of the Real Estate Industry Update continues. In this episode, partners John VanDuzer and Suzanne Forbes discussed transition and contingency planning for real estate professionals.

First, something every business absolutely needs—a contingency plan. 

With an aging baby boomer population running businesses, estate planning becomes increasingly important. However, Suzanne says clients are still uncomfortable talking about it and will often put off the work involved. After reminding them of the inevitable fact that, at some point, everyone will transition from their business, she often gets the same response.

“The joke is always (the response of), ‘I’ll transition in five years,’” she said. “That’s because five years is just long enough that you don’t actually have to do anything right now.”

Sure enough, after five years many clients kick the can down the road to another five years, then another five… you get the point. So instead, Suzanne starts with contingency planning—the actions needed to run your business in your absence.

A contingency plan can be applied anytime, not just upon your permanent exit. This makes it a logical first step in your estate plan. It’s also a critical one, since it addresses situations beyond your control.

“I asked a large real estate client, ‘So, what happens if you get hit by a bus tomorrow? What does your family do?’” she said. “And they said, ‘Well, they call you.’ And I said, ‘Well, that’s great. They call me, and then what do I do? Because I don’t know how to run your business.’” Suzanne uses this as a launching pad for the conversation to get the information she needs, from a list of the company’s assets to the owner’s wishes.

She also identifies the person or people who can run the business’s operations. In real estate, this will likely be the property manager. It could also be a family member heavily involved in the business. Whoever it is, make sure you’ve established a trust and durable power of attorney to make sure they can carry out all necessary functions.

Making a contingency plan can also help you spot gaps in your everyday operations. For example, you might realize that you don’t have someone who can step right in if you’re absent. It might also prompt another question in the estate planning process: What if I’m not the only owner of my business?

Buy-sell agreements make the transition process easier.

It’s common for real estate enterprises to have multiple partners. If one passes away, will a surviving spouse or child step in to fill their role? Will this person see things through a different lens than the deceased did? Or will they simply want the value of their portion of the company?

In most cases, the latter situation prevails. A surviving spouse or heir generally won’t want to be in business with the other partners. So the issue becomes the value of the deceased person’s interest in the business. The surviving spouse might think it’s worth $1 million, but the remaining partners insist the correct figure is a fraction of that amount.

The situation becomes further complicated if you have a large number of heirs. Suzanne recalled one client whose husband passed away, leaving not only her behind but ten surviving children and two grandchildren as well.

“It only takes one (heir) to cause a problem,” she said. “And generally if there’s three heirs, one of them is going to think that there’s a lot more money there than what they’re getting, or they’re going to have different opinions.” With a whopping 12 heirs in addition to herself, this client had a complicated situation to hash out.

This is where a buy-sell agreement allows you to proactively avoid such a situation. A legally binding contract, it outlines how your share of the business is distributed if you die or otherwise leave. Areas generally addressed in a buy-sell agreement include:

  • Whether the departing partner’s portion is sold back to the remaining partners
  • How the value of this portion of the business will be determined (for example, through valuations, cap rate calculations, etc.)
  • Payment terms for the sale (paid immediately or over a stretch of time, with or without interest)

Know the importance of liquidity in your plan.

In addition to determining ownership of your business (or your share of it), your survivors also face other financial obligations like estate taxes. So it’s important to protect your heirs by providing the necessary liquidity in your estate plan.

For example, people often take out life insurance policies that help with immediate expenses but aren’t funded well enough to execute the buy-sell agreement. Or surviving partners are “dirt rich and cash poor,” with assets tied up in properties and buildings—leaving little if any cash to actually execute a buy-sell agreement.

This can also come into play with debt covenants. If you’ve personally guaranteed debt, that balance can become due upon your passing.

“I had a client that ended up having to switch lenders, because there was a covenant that said the death of the guarantor was a condition of default, and that debt was in a trust,” said John. “And he said, ‘There’s a 40% loan to value. This is as safe of a loan as a bank can make, and now you’re going to tell my kids—who are grieving the death of their dad—that, ‘Oh, by the way, you’re in default on this property’?” It’s a very tough thing to deal with, but it’s something you want to contemplate in advance.”

While Suzanne stated that banks will generally work with your survivors in such a situation, they’ll want to know your contingency plan and other details. They can also force your survivors to sell assets to pay off the debt. Having cash quickly and easily available will help them settle financial obligations as easily as possible.

Lack of detail and attention in your estate plan can put your survivors in a difficult situation during an emotionally wrenching time. With so many aspects to consider, your best bet is to talk with a real estate CPA about the caveats and unique circumstances of your industry.


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