Real estate, if you own it, is a large part of your entire estate. If you’re thinking about what your legacy is going to be for your family members and heirs, and what you’re going to leave behind for them, the property you hold will play into that entire inheritance.
For California real estate investors, understanding how to effectively incorporate property into your estate planning is an important step in securing your future and that of your beneficiaries. Estate planning with real estate in mind can seem like more than you want to think about right now, in the present moment, but it should be part of your ongoing review of investment goals and asset holdings. With the right strategies and considerations, you can ensure that your investments continue to provide value for generations to come.
Today Bell Properties talks about how to make your real estate investments work for you now, and as you move forward with your estate planning.
Why Include Real Estate in Your Estate Planning?
Most people will include the home they live in when they think about planning their estate. It’s only natural that you’ll pass that asset onto your children, grandchildren, or some other beneficiary or set of beneficiaries.
Real estate investments that are not your specific home are a little different. Not only is there less of an emotional attachment, these types of assets have substantial value, and they’ll continue to carry a lot of potential for appreciation. You’ll find there are legal complexities involved in their transfer.
If you don’t have a proper estate plan in place, your heirs could face unnecessary taxes, legal hurdles, and disagreements, which could significantly diminish the value of your real estate holdings.
Include all of the real estate you own when you’re planning your estate, not just the homes you live in.
Strategies for Incorporating Real Estate into Your Estate Planning
If you’re not working with an attorney or a financial professional who can help you plan for your estate, you’ll want to partner with someone. Depending on what you own, this could be extremely complex, and you’ll need someone who not only knows the law in California, but can provide solid advice based on your financial position and your desires for the future.
Here are some of the steps you definitely don’t want to miss.
Establish a Will
Hopefully, you have a will in place. If you have not already created one, there’s really no better time. You can’t do it too early; if you own even a single asset, you’ll want to leave specific directions about what’s to be done with it. So, the first step in estate planning for real estate investors is to have a will. A will provides clear instructions on how your assets, including real estate, should be handled and distributed upon your demise. It ensures that your property goes to your chosen beneficiaries and can help prevent disputes among heirs.
This is perhaps the easiest step, especially if you only have one or two properties and they’ll be handed off to an obvious person or people in your life.
Wills can become complex, however, especially if you come from a family who may be ready to dispute and argue and sue. Work with your attorney to anticipate every potential challenge.
Consider Establishing a Trust
A will is a simple and relatively easy-to-produce legal document that provides instructions on how to distribute any property you have to beneficiaries after your death. A trust, however, is a complex legal contract that allows you to transfer your property to an account to be managed by another person.
If you want to ensure there are no gaps in your estate plan, you would be well-advised to have both a living trust and a will. Creating a living trust is an especially good option for those with a complex estate. If you have multiple properties, investment accounts, and/or sizable assets, you’ll want to make sure that they transfer easily to your heirs. And, setting up a trust is a good idea because it can offer more control over your real estate assets than a will.
A living trust, for example, allows you to transfer the ownership of your properties into the trust while you're still alive, with directions on how they should be managed or distributed after your death. Trusts can help avoid probate, offer privacy for the estates, and provide tax benefits. You’ll want to assign a trustee to be responsible for the assets in the account on behalf of the beneficiaries. The assets within the account, including your real estate, will be distributed after death or at any other time you choose.
Utilize Joint Ownership
Are you a married real estate investor? If so, you’ll have an easier time with the transfer of real estate assets to your spouse after your death, as long as you own those properties jointly with your spouse. Joint tenancy with the right of survivorship means that if one owner dies, the other automatically becomes the sole owner of the property, bypassing the probate process.
Tax Considerations with Estate Planning
Understanding the tax implications of transferring real estate is critical and may impact how you decide to incorporate real estate and other assets into your estate planning.
Estate taxes can take a significant portion of your estate’s value, including real estate investments. However, planning strategies such as gifting portions of your property to heirs or placing them in a trust can mitigate these effects.
Creating an effective tax plan for your real estate doesn’t have to be a difficult part of your estate planning process. When you take the time to work with professionals and gather the right knowledge, you’ll find that coming up with a tax plan can save you money and protect your assets from excessive taxation before they reach your beneficiaries.
You’ll need to know the state and federal laws, which is where a professional partner can help. Before you make plans for your real estate, you’ll want to know what kind of exemptions, deductions, and credits will be available.
Your financial planner or tax attorney can provide advice on how best to manage your real estate assets now and which options will result in the most efficient use of your resources while minimizing taxes. Conduct periodic reviews of your plan with your tax and financial professional in order to maximize its benefits. With an effective estate tax plan in place for your real estate assets, you will gain peace of mind knowing that you are taking reasonable steps to protect your legacy.
Keep Updated Documentation
Bell Properties does not have to tell you how important it is to document everything. Today, you’ll want to make sure you have both paper files and digital files.
Ensure that all documentation related to your real estate holdings — including deeds, mortgage information, and lease agreements — is accurate, up-to-date, and easily accessible. This documentation will be vital for executing your estate plan smoothly.
Communicate with Your Heirs
No one likes surprises when a loved one passes. While it can be uncomfortable to have discussions like this, you’ll want to have everyone in agreement about what will happen to your real estate once you pass.
One of the most overlooked aspects of estate planning is communication. Discuss your estate plan with your heirs to prepare them for the responsibilities they may inherit. Explaining your decisions can help prevent misunderstandings and conflicts after you're gone.
You want to gather the interest levels of the people who stand to inherit your real estate, as well. There’s no point in leaving apartment buildings and rental properties to someone who does not care to be a real estate investor.
Consulting with Professionals
Estate planning, especially when real estate is involved, can be complex. It requires careful consideration and a clear understanding of legal and tax implications. Consulting with professionals, including estate planning attorneys, tax advisors, and financial planners, can provide invaluable insights and help craft an estate plan that aligns with your goals.
It doesn’t hurt to bring your property manager into the discussions as well. If there’s going to be a sudden change of ownership or management, your California property management partner can put some processes and systems into place to prepare for that eventuality. This can help the entire process move along much smoother in the future.
There’s not much we can tell you about your other investments or about the will-making and the setting up of trusts, but when it comes to how your real estate assets are performing and expected to perform in the future, Bell Properties can be a valuable resource.
Incorporating real estate into your estate planning is a fundamental step in securing your financial legacy. By taking the time to develop a comprehensive estate plan, you ensure that your investments continue to benefit your loved ones according to your wishes.
You have to remember that estate planning is not a one-time task but an ongoing process that must be reviewed and updated as your circumstances and the laws change.
Questions about this or how to start? Contact us at Bell Properties.
