Succession Planning for Real Estate Owners: Could Your Portfolio Run Without You?

“If you have great estate planning without good succession planning, you’re actually setting up your wealth for failure.” — Daniel Roccanti, CPA

Succession planning for real estate owners answers a question most estate plans leave open: who actually runs the portfolio when the owner can’t? In this episode of Your CPA’s Take on Real Estate, Daniel Roccanti, CPA and Kyle Paxton, CPA follow up their earlier estate planning episode with the operations side of passing on a portfolio.

Daniel and Kyle start with the owner’s actual job, from lender relationships to capital projects, and explain why that knowledge needs to be documented and handed off now. They talk through how to decide who should be owner, manager or beneficiary, whether that’s a child or a key employee. They also explain why equal ownership among siblings can lead to gridlock.

The second half covers governance, entity structures that separate economics from control and buy-sell provisions for owner exits and disputes. It closes with the mistakes they see most often: no liquidity plan, outdated operating agreements and family dynamics that get ignored until it’s too late.

Resources

Your CPA’s Take on Real Estate

Your CPA’s Take on Real Estate on YouTube

Could Your Real Estate Portfolio Run Without You?

Transcript

[00:03] Daniel Roccanti: Welcome to Your CPA’s Take on Real Estate. I’m your host Daniel, back with my co-host Kyle here for another video. In today’s video, we’re going to talk about succession planning for real estate owners. Back in June, I think it was, we did a video on estate planning. So this is kind of like part two of that.

[00:25] Daniel Roccanti: There’s quite a bit of a difference between them. Estate planning, what we talked about the first time around, is talking about where your assets go. Where are my assets? We’re talking about inheritance tax and how to avoid that as much as possible. So that’s a lot of planning around the tax side of it and asset succession planning.

[00:44] Daniel Roccanti: This is more about having a plan that says who’s actually making the decisions, who’s managing my portfolio, who’s truly just going to be the beneficiary and who’s going to be the one managing all this stuff when it’s done. So it’s really about, as the owner, if the owner disappeared tomorrow, who could keep the portfolio operating without them?

[01:07] Kyle Paxton: Yeah. And Daniel, this is more on the operations side, right? But you and I both have tax backgrounds. I bet we’re going to dive into a little bit of tax as we get through here. We can’t help ourselves. To frame this conversation, we’re talking about how many successful business owners spend decades accumulating properties but comparatively little time preparing someone else to operate them, right? So it’s that next generation conversation.

[01:30] Kyle Paxton: Daniel, this is something I’m talking about every week with clients, and it’s not just in the real estate space. It’s across industries, but it does feel a lot more prevalent at times with real estate. In the estate planning conversation, we talked about how real estate is a very good tool to build family wealth. If you’re completing like-kind exchanges, you’re building your portfolio, you’re deferring gains down the line. When you pass away, you can get a step-up in basis, pass those properties to the beneficiaries and then you’ve negated years and years of appreciation for tax purposes. That’s all wonderful, but making sure we properly frame what happens in that next step is overlooked sometimes.

[02:20] Kyle Paxton: A lot of people talk about a real estate portfolio. It feels very passive, but in reality you have to deal with the tenant relationships, property managers and financing, which is a huge one you and I have beaten to death. The capital projects, banking relationships, top to bottom. If you have not transitioned those responsibilities, you could be in big trouble.

[02:39] Daniel Roccanti: Yeah, I mean, ownership can transfer to an estate plan relatively quickly, but that management knowledge, it doesn’t transfer as quickly. So this moves us into our second topic, which Kyle already started on: transitioning management responsibilities. In succession planning, we really need to start with identifying, as the current owner, what do I actually do? What are my tasks?

[03:05] Daniel Roccanti: What tasks belong to the owner and what tasks belong to the manager? This is a big difference, because when you’re talking about succession planning, those could be two different people. Examples of this would be: who’s approving the major repairs? Who’s negotiating finances? Who’s reviewing properties for poor performance, financial statements, things like that? Who’s making the acquisition or disposal decisions?

[03:34] Daniel Roccanti: Who’s meeting with the outside professionals? Kyle and I see this all the time when we’re working with a client. Usually there’s one go-to person that works with us as the CPAs. Maybe a group, maybe a team. So who’s working with them? Who has those relationships with your CPAs and with your attorneys?

[03:54] Daniel Roccanti: Who’s handling the tenants or the day-to-day property management? These are a lot of questions you need to be asking yourself right now as the owner so that you can realize what responsibilities need to transfer in your succession plan.

[03:54] Kyle Paxton: Yeah. And Daniel, I want to dig a little deeper here on that key person risk in a closely held real estate business. A lot of times these are set up as a family office, right? Maybe it’s mom, dad and kids, who are on the younger side and teed up as the next generation on the operations side, all operating in-house.

[04:25] Kyle Paxton: However, there are components of this, to your point, like the CPA relationships. Maybe it’s the accounting function. Maybe it’s more of that bank relationship and capital markets type of functionality that mom has always done, and there isn’t a natural successor to mom within the family in those spaces, or nobody wants it.

[04:52] Kyle Paxton: Something I’ve seen, and we’ve had to navigate a lot in these family office real estate entities, is that it’s not just transitioning those relationships in some of these structures. It’s getting comfortable with someone that’s not your core family managing your money. That’s huge. I’m using the money example, but you can extrapolate that to anything else.

[05:15] Kyle Paxton: In that family office setting, you can get comfortable with the tight relationships you have within your family, and you feel fully confident in this person. You’ve known them for 70 years, whatever it is. But bringing someone new in can be scary and intimidating, and there’s a lot that goes into making sure that transition goes smoothly.

[05:34] Kyle Paxton: So I think the biggest takeaway point here is start transitioning those responsibilities before that succession becomes necessary. You and I both like our operating playbooks, right? Having a playbook where you’re documenting your key functions, your accounting controls, all of that good stuff.

[05:51] Kyle Paxton: Bringing in a third party to look at those things and help map out what those controls are in your accounting systems. Sometimes it’s helpful to get that fresh perspective and help coordinate documenting all of that. I think that’s huge in these conversations. Daniel, anything you want to touch on there before you take us through preparing the next generation?

[06:14] Daniel Roccanti: Yeah, I agree, Kyle. The centralized documentation is key here. A lot of times we get stuck with, “All this knowledge is up in my head.” And if something were to ever happen, it doesn’t always have to be death. It could just be something like I’m away on vacation or I’m in the hospital.

[06:32] Daniel Roccanti: Is there somewhere people can find this information if you’re unavailable? There needs to be some kind of central documentation that lists all the important information we need to know, because a lot of times your family, your children, they might know about your real estate. They might even know about the portfolio value.

[06:51] Daniel Roccanti: They might know things about that, but then they don’t know who the lender is. They don’t know who your insurance broker is. They’re not sure which properties have major capital projects coming out. So with some kind of centralized documentation, they can at least go and find it.

[07:10] Daniel Roccanti: But the true key when it comes to succession planning is that we should be transferring this knowledge and not just the property. So this goes into our next area, which is preparing the next generation. We don’t want to just assume that all children just want or even qualify to operate your portfolio and your real estate here.

[07:33] Kyle Paxton: A time or two.

[07:33] Daniel Roccanti: Yes, all the time. Just because you did it doesn’t mean your kids are doing it. And if you have multiple kids, obviously they all have different opinions. There are really three main potential roles when you’re talking about real estate. You’ve got the owner, you’ve got the manager and you’ve got the beneficiary.

[07:53] Daniel Roccanti: You can be all three, or you can be one of the three. So we want to make sure that any of our kids, they’re the right person to run our business. They’re the ones that are qualified. So we want to make sure we’re starting this conversation early with our kids. Who actually wants to be involved? Who has the skills? Who has the financial responsibility?

[08:22] Daniel Roccanti: Can they work with their other siblings or other owners, especially if you have owners outside of the family? It’s very common nowadays that maybe a family runs the real estate, but we have investors. Can you work with those as well? And it’s important that if you decide that they do want to be involved, then we need to start gradually increasing their involvement.

[08:44] Daniel Roccanti: Have them get into the properties. Start reviewing the properties, reviewing the financial statements, meeting the lenders, being in those meetings, understanding the entity structure and taking on responsibilities, whether it’s helping manage the properties or something else.

[09:02] Daniel Roccanti: They have to start gradually learning this. It can’t just be handed over at any time.

[09:02] Kyle Paxton: All good points. Something I want to emphasize here that plays off what you’re talking about: we were talking about family and kids, but sometimes this naturally happens with a key employee. I was having a conversation with a client last week who had the revelation in the last year, like, “Nobody comes to me for the stuff they historically have come to me for anymore. It’s Johnny over here.”

[09:41] Kyle Paxton: “I’m trying to pull back from my business. Johnny’s the guy. Johnny clearly likes this. Johnny’s taking ownership of this stuff. I’ve got to start getting Johnny prepared.” So this is a great time to have this conversation, when you’ve found that right transition plan and you’re starting to frame your thinking around what it means for you to pull back and bring other people in. The biggest thing we went through in that conversation is do not promise that person anything before talking to all of your consultants, for lack of a better term, the professionals around you, on how this process goes.

[10:11] Kyle Paxton: We can slice these transitions in a lot of different ways. Equity interests in entities, pieces of underlying real estate, a profits interest, certain waterfall allocations. There are many things we could do to shape what this transition looks like. So be careful with those conversations before pulling in the right people to really frame what a transition might look like, whether that’s within your family, to a key employee or to someone outside of the core family.

[10:43] Daniel Roccanti: Yeah, I think it’s important that our listeners understand fair doesn’t always mean equal. If you have three children, one of the children might want to run the real estate business full-time, and the two other children might be in unrelated careers, doctors or other things.

[11:10] Daniel Roccanti: So equal ownership without clearly defining management authority can actually create conflict. That leads us into governance, which is very important, especially if you have multiple kids you’re leaving this to. So what is governance here? Governance is really just who has the authority to make the decisions. Who gets to decide?

[11:34] Daniel Roccanti: A succession plan should address this. Who approves sales? Who approves refinancing? Who determines distributions? Nothing makes people more upset than distributions, how much I get and when I get them. Who approves capital expenditures? Who chooses the property manager?

[11:59] Daniel Roccanti: It’s just these simple questions. In my example of three kids, if you give everyone one-third ownership, how are they going to make decisions? That could be a huge conflict, because none of them have real control. They have to work together. So that might actually not be fair. We might need to create a situation where one of the children has the right to make the decisions, instead of trying to make it up for all the kids, some of whom are not even involved in the actual real estate portfolio.

[12:28] Kyle Paxton: And again, this comes back to bringing the right people into the conversation, right? A lot of this is rooted in entity structures and, again to my point before, intentionally making that transition. We can separate economics from control with several different tools in our toolbox around entity structuring, estate planning, all that good stuff.

[12:52] Kyle Paxton: So being intentional about that is huge. Whether that’s through the LLC operating agreement, where you have different tiers of voting and non-voting interests. You have manager-managed entities. That’s a pretty frequent one, where there’s a separate entity that gets a management fee that funnels down to specific partners and beneficiaries. There are different trust structures or models of boards around operations and control.

[13:18] Kyle Paxton: There are a lot of different ways we can slice this, and this gets back to just making sure we’re having the right conversations. At a high level, I think it’s important to emphasize that the entity structuring, the estate planning we talked about in our prior video, income taxes and governance all need to work in one package.

[13:34] Kyle Paxton: What I see sometimes in the real estate space is that our real estate investors and family offices get so hyperfocused in the CPA conversations on reducing income tax that operational problems can arise if no one is actually being intentional about how decisions are made. We’re filming this video in 2026, and on average your real estate investor pays a very, very low effective tax rate.

[14:07] Kyle Paxton: It typically comes in connection with a sale or a big trigger event. But if you’re spreading that tax over the lifespan of the investment, that average tax rate is very, very low. So in my conversations with clients, especially in this space, I try to remove myself from that a little bit and really look at the economics and the control. Once we get past that, then we figure out tax.

[14:34] Kyle Paxton: How can we tweak this to optimize the tax? In that order, it tends to be how these transition conversations go the cleanest.

[14:34] Daniel Roccanti: Yeah, as Kyle mentioned, real estate’s one of the best wealth planning tools out there. Even if you don’t initially make your money in real estate, almost all wealthy families eventually put money in real estate just because of how great it is to keep your wealth.

[15:04] Daniel Roccanti: So this is important, because what we see a lot of times is that if you have great estate planning without good succession planning, you’re actually setting up your wealth for failure for that next generation. You built this empire and now your next generation is going to see it crumble because you didn’t set it up to succeed. You set it up to fail.

[15:25] Daniel Roccanti: So we just want to make sure that when you’re doing your estate planning, you think about your succession planning. It’s not just about making sure your assets transfer. It’s also about making sure the next generation can run it. So what happens when we do have some disputes or differences? Good succession planning should anticipate this.

[15:52] Daniel Roccanti: What happens if an owner dies? What happens if the owner becomes disabled, wants out or gets divorced? In today’s day and age, divorce is very common. If you’ve got a big family with four kids, the chances that all four of them never get divorced are very low. Unfortunately, that’s just how it is.

[16:12] Daniel Roccanti: What happens when financial problems come up? Or just what happens when everyone disagrees? You need to make sure you have all the mechanisms in place right now so they can deal with this. One of those is a buy-sell mechanism, or a buy-sell provision. This just establishes rules for situations where owners want or need to exit.

[16:41] Daniel Roccanti: So I have one of my kids. They take over the properties, and they just want their money. They want out. They don’t want to deal with it. But the other ones want to keep it. Well, now we have an issue. So this buy-sell mechanism helps with that. It deals with important issues about what events trigger this.

[17:03] Daniel Roccanti: What are the rights to buy it? How is it valued? How will it be funded? Real estate is great for generating wealth, but not always great liquidity-wise. So if someone wants out but I want to keep the building, they still want their cash, but I have a building. I don’t have cash. How do we get that to them?

[17:24] Daniel Roccanti: And then, can ownership be transferred outside the family? We see this happen a lot of times. If you don’t have some kind of provision that prevents that, then what’s preventing a child from saying, “Oh, I’m going to sell it to a friend”? Now you just have a random outside investor. You don’t have the family.

[17:40] Daniel Roccanti: There should be some provision that if you want out, you have to sell it back to the family, so the family still retains the true ownership of this.

[17:40] Kyle Paxton: Daniel, this is so important. I’ve had these conversations so many times, and it’s uncomfy every time because I’m a CPA. I’m not your therapist. But I’ve seen this show play out time and time again. Daniel, say you and I are brothers. We live nice and happy. We have a great relationship. Everything’s great. The proverbial patriarch of our family passes away, and then all of a sudden the dynamic between you and I shifts, my friend, and the claws come out. To your point, you want the building, I want the money, regardless of what we talked about a year, two years, three years ago. The dynamics just shift. It’s natural.

[18:28] Kyle Paxton: We’re talking about death in this example, and death is a huge thing. We’ve seen time and time again where that tight-knit family falls apart. The kumbaya falls apart when the older generation passes away and that glue comes apart, and then everyone’s just trying to pick up their slice of the pie. So I have these conversations a lot where clients say, “Oh, my kids get along great. I’m not worried about it.”

[19:01] Kyle Paxton: We still have to worry about it. I don’t know how to emphasize that enough. And again, those conversations are tricky because I’m injecting myself into your family dynamic. But we’ve seen that go awry too many times.

[19:20] Daniel Roccanti: Oh yeah. When money’s involved, believe me, it doesn’t matter that you’re family. There always seem to be some issues. So the worst time to negotiate these rules is after the family is already in dispute. We want to make sure we’re getting out in front of this. We can’t just expect that there will always be perfect harmony.

[19:40] Daniel Roccanti: I’ve got three siblings and I love them all to death, and I could never think that we would have a problem, but we all have different personalities. We were raised in the same household by the same parents, and we’re four quite different people. It just shows that even if you have the same experiences in life, that final product can be pretty different.

[20:01] Daniel Roccanti: So what does that look like when one sibling really sees that real estate property as a legacy and never wants to sell, and the other’s like, “I don’t care about this property, I just want my cash”?

[20:01] Kyle Paxton: Your CPA’s Take on Real Estate is taking us deep today.

[20:01] Daniel Roccanti: Deep thoughts. Another common mistake we see is just no liquidity plan.

[20:24] Daniel Roccanti: We’re talking about passing this on, but we also talked about how real estate is a great wealth-building tool, but a lot of times it doesn’t come with a lot of cash. You have a big building worth a lot of money and you have a lot of options, but you need to make sure there’s some kind of liquidity plan in your succession plan.

[20:43] Daniel Roccanti: Taxes, debts, distributions, all of this is going to require cash that maybe the portfolio doesn’t have.

[20:43] Kyle Paxton: Definitely overlooked.

[20:43] Daniel Roccanti: Absolutely. Outdated entity or operating agreements. You need to make sure you’re looking at all of this. When you’re doing any kind of succession planning, they need to be updated.

[21:06] Daniel Roccanti: At the end of the day, if there is a problem, they’re going to come back to the document. What does the document say? It doesn’t matter what your intentions were if the documents say something else.

[21:06] Kyle Paxton: And those intentions change frequently, right? So revisiting these every couple of years is a good practice to be in. At times it feels like it’s do it once and drop it, and that’s not how we should be handling these matters.

[21:28] Daniel Roccanti: Absolutely. And then just don’t ignore the family dynamics. A sophisticated structure unfortunately does not solve interpersonal conflict. That’s just life. That’s people. There are going to be problems. So make sure you understand what those family dynamics are so that you can plan around them.

[21:49] Daniel Roccanti: So Kyle, why don’t you take us to close here?

[21:49] Kyle Paxton: Where we need to be as business owners and real estate professionals is asking: if I couldn’t make another decision for this portfolio starting tomorrow, for whatever reason, who would take over and would they know what to do?

[22:16] Kyle Paxton: A lot of our clients and folks we talk to in the industry don’t have this answer figured out, and that’s a huge problem. Practical succession planning really brings together a CPA, an estate planning attorney, a business attorney, financial advisors and then that next generation of future owners or managers. Maybe the conversation starts without them, and then we gradually start bringing them into the fold as we get comfortable with the general framework of the plan.

[22:38] Kyle Paxton: But ultimately, we have to make sure it aligns with their expectations and their desires too. That’s where I really think we need to root this conversation: being mindful that even if we have that estate plan settled, have we worked through it all on the succession side, more toward the operations and how we continue as a business?

[23:03] Daniel Roccanti: Absolutely. So don’t treat succession planning as something that happens at the end of your real estate career. Remember, the strongest plans are actually built while the current owner is still available, still able to transfer those relationships and still able to pass on that decision-making experience.

[23:22] Daniel Roccanti: That’s the best time for succession planning. So thank you for listening. I hope you enjoyed this content. We still do videos every two weeks here, so if you enjoy our content, subscribe below. We’ll see you in our next video. Take care.

 

Watch the full episode of Your CPA’s Take on Real Estate to hear Daniel and Kyle walk through each step of building a succession plan. Subscribe on YouTube for a new video every two weeks, or contact a James Moore professional to start planning for your portfolio.

 

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