Log In Sign Up
Home Blog Personal Finance

What Real Estate Investors Should Know About Estate Planning

Scott Smith
9 min read
What Real Estate Investors Should Know About Estate Planning

Planning ahead is always important. And those who invest in real estate should not even think about dying without an estate plan.

Why? An estate plan is a legal document that lays out how a deceased person’s money and other assets will be distributed when they head to the great beyond. Deciding these matters ahead of time is the best thing for them and their heirs.

What is estate planning?

Estate plans are crucial for making sure that family members are taken care of in the event of one’s passing. Dying without a plan and instructions will create hardships for that person’s heirs. Even if someone does not have kids or family members, chances are there is a charity that they would rather benefit from their life’s work than the United States government.

Consider what happens when someone dies without a clear estate plan. Heirs are stuck waiting while the executor, accountants, lawyers, and Uncle Sam duke it out in probate court. Of course, all of those parties are paid immediately. Meanwhile, the family will wait months or years to decide how the deceased’s property and assets will be distributed, with no guarantees that they will get what the deceased wanted them to have.

Benefits for real estate investors

A proper estate plan is vital for everyone, and it can manage investments, debts, and profits when a person is incapacitated and no longer able to manage them.

A plan created by a competent estate planning attorney with real estate experience can help in these ways:

  • Avoiding probate. Probate is the legal process where the validity of a will is proven. Some people believe a will alone is sufficient, but this is a myth. A will must go through probate court—a miserable, emotional experience for everyone involved. An executor is in charge of starting this process, usually through a lawyer, and they will get the will approved by the court. The executor can be chosen and named in the will; otherwise, the court will appoint one.
  • When there is a business that will outlive the client. Depending on what type of real estate investment business it is, it’s fairly easy to make sure it outlives the client using structures like the series LLC, with its potentially unlimited lifespan. A living trust in conjunction with a “pour-over will” (more on that later) can easily transfer ownership of a business.
  • When there is a profitable real estate portfolio. As a bonus, when assets are transferred to heirs over the age of 18, they get the benefits of asset protection and creditor protection.
  • Giving to charity. The deceased’s assets and wealth are divided among charitable or philanthropic acts.
  • Retaining control. Prevent Uncle Sam (i.e., the state where the deceased lived) from getting his greedy paws on the deceased’s life’s earnings and dividing it up as he sees fit.
  • Avoiding inheritance taxes. State inheritance taxes can decrease the amount your beneficiaries receive. Smart estate planning works to avoid

Any real estate investor knows the importance of planning ahead. If supporting family and others is an investing goal, the kindest thing one can do for those heirs is to get familiar with estate planning.

More on estate planning from BiggerPockets

Estate planning and asset protection

Emergencies can happen to anyone. Estate planning is not only about anticipating a person’s inevitable death. Asset protection and estate planning attorneys have many tools to ensure wishes are carried out if there is ever any emergency where a person cannot make decisions. It is a way to protect a business and assets during life and beyond.

The connection of estate planning to asset protection seems obvious to any attorney with asset protection experience. But not all lawyers understand estate planning, so real estate investors must find someone with experience in this area. Many lawyers experienced with estate planning have a go-to strategy that is already legally sound, and then they tailor the forms to clients’ individual needs.

Setting up an estate plan

An estate plan can only work if people bother to make one! So let’s look at some of the tools and structures that are important to know about.

The go-to model that works for most investors with assets valued under $10 million is a combination of the living trust and the pour-over will.

Living trust

A living trust has several benefits:

  • It can transfer assets privately, allowing the deceased to avoid probate and protect their anonymity.
  • It can dictate what happens to the deceased’s property if they are incapable of managing it themself.
  • It is easier to change than a will.
  • It is more difficult to contest than a will.

Pour-over will

A pour-over will essentially states that anything that was not put into the living trust during the deceased’s lifetime is “poured” into the trust and distributed accordingly to the beneficiaries (the heirs). The pour-over helps avoid some of the sadder situations involving confusion regarding heirs and other unique estate planning situations.

For the real estate investor, a pour-over will pairs well with the living trust to ensure a smooth, private transition of assets. Using these tools together is a smart move.

Estate planning while alive

Estate planning isn’t only about what happens after a person dies. The reality is no one is immune from unexpected illnesses or freak accidents.

When an adult cannot make decisions for themselves and there aren’t any named trustees or executors, the court will appoint a guardian to make medical decisions or a conservator that will take care of their finances. The court may appoint a family member or a third party to make decisions on behalf of the incapacitated adult.

Though best known for anticipating death, estate planning can also be important while the person is still alive. That’s why other documents that make up a proper estate plan include the following.

Medical power of attorney

Anyone can become incapacitated as a result of a medical emergency. As several high-profile cases have been brought into the public consciousness, these tragedies can be compounded when no estate plan exists.

Granting someone medical power of attorney permits them to make medical decisions for the person if they become incapable of doing so, such as if they are in a coma or surgery. Typically, this designee would be a spouse, but it may be another person.

A durable medical power of attorney can let a person control who will make their medical decisions if they are ever unable. “Durable” means the document stays in effect if a person is incapacitated.

The times when a medical power of attorney may be needed is if a person has a chronic ongoing health condition, is planning surgery, receives startling health news, or has other concerns for their well-being. If this hasn’t happened yet, that’s wonderful. But the reality is anyone can fall sick without any warning.

This piece of an estate plan gives a person peace of mind that if they cannot make decisions for themselves, someone they trust will do it. Since they pick the person who makes those decisions when they create the documents, they should know that it is important to update the power of attorney if they are experiencing a major life event, such as the death of the chosen shot-caller or divorce.

Financial power of attorney

For a real estate investor, the financial power of attorney has to be granted to a trusted individual. After all, rents must be collected, tenants or management handled, and payments made if the business survives in the deceased’s absence. Financial power of attorney grants these powers and can be created independently or alongside medical power of attorney.

Durable power of attorney

Someone has to pay the bills when the unforeseen happens. A durable power of attorney lets a person designate someone to manage their investments and financial affairs in the unfortunate event of an accident or debilitating illness. This designated person can sell any property and make other arrangements.

Living will

The living will lets a person plan ahead if they have a terminal illness or end up in a vegetative state. What are their preferences for end-of-life care? It is a difficult choice—especially for large families, who can end up fighting over what to do. The living will gives a person the chance to tell them EXACTLY what they want, while they are of sound mind and body.

HIPAA authorization form

This document allows the person(s) named within to access a person’s medical records. A copy of the signed HIPAA is not valid, but it can be provided to more than one doctor; a person just has to print out another blank one and sign it (in front of a notary in some states, like California). For any changes made to a HIPAA form, a new one will need to be given to each doctor.

tax book

Dreading tax season?

Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.

Choosing a trustee

Appointing a trustee is an important part of estate planning. The trustee will have an immense responsibility for handling the assets and affairs of the deceased. What are the things to consider before appointing someone as a trustee?

If the trust is worth $2 million or less, listing a family member as the trustee is probably the best option. However, if the estate is worth over $2 million, it would probably be best to consider listing a lawyer.

If the estate is worth over $10 million, a trust company or bank should be listed as the trustee of the estate. This option will cost tens of thousands of dollars, so it is really only viable for large estates.

Duties of the trustee

The trustee, who may be an individual or even several people, is tasked with determining how money and other assets flow in and out of the trust. A trust owns a person’s properties, cars, family heirlooms, or any other assets that they decide to place within it.

A trustee will tell everyone what they can expect. A trustee will determine the assets and make sure they are distributed to the heirs/beneficiaries of the trust. They will organize these assets for distribution. This may include listing and selling property, transferring ownership of businesses, jewelry, art, bank accounts, insurance policies, retirement accounts, etc.

Dying is expensive. A trustee will pay off creditors and hire professionals (lawyers, real estate agents, etc.) as needed. The trustee will also make the funeral arrangements. The hardest part about this is managing a grieving family. If a son or daughter doesn’t do well with grief, it may be best to consider someone else.

Choosing a guardian for minor children

A great reason for parents to set up their estate is to choose who will become the guardian of their minor children if they cannot care for them or die. There are two kinds of guardians: a guardian of the person, who watches over the well-being of a child, and a guardian of the estate, who takes care of the child’s inheritance until they turn 18.

One person can perform both duties, but it is generally advised that two different people are assigned to provide some balance and oversight.

Estate planning errors

Thanks to the internet, these days it’s easy to create an estate plan from the comfort of one’s own home. This may seem cheap and convenient, but this approach has caused disasters for many families.

Do-it-yourself estate plans fail to provide the kinds of benefits and protections that someone would get in a well-drafted and planned estate. The same mistakes come up over and over when people create wills and other documents without legal counseling. Below are a few.

Improper signatures in wills

Failure to adhere to a state’s signature and witness requirements invalidates the entire will.

Failure to fund the trust

Failure to properly fund a trust will lead to the heirs going to probate court.

Let’s say the deceased wants their home to be subject to the terms in their trust. To do this, they would need to deed the home out of their personal name and into the name of the trust. Otherwise, the property falls outside the trust terms, and the heirs will need to go to probate court to get a judge to approve any transfers of title to the property.

Using ‘one-size-fits-all’ forms

Chances are a person has at least one situation unique to their estate that is not covered by standardized documents found online. Say they have a child who is financially responsible while the rest of their children are not. Or say they have more debt than assets, in which case they would need to structure their estate plan to leave as little money as possible to the creditors.

More “unique situations” include having assets in multiple states or being married to a spouse with children from a prior marriage. The list could go on and on, but these unique situations are rarely handled properly when a person is doing their estate plan independently.

Updating the estate plan

Once there is an estate plan in place, it will allow people to feel a lot better. However, this isn’t a “set it and forget it” deal. There are major life events that are critical times to update an estate plan and make adjustments. These include:

  • Marriage/remarriage
  • Having kids (or additional kids)
  • Divorce/death of a spouse
  • Buying/selling major assets
  • Starting a new business

An estate plan must be updated each time anything with substantial financial value is bought and sold, such as a bank account and real estate, as well as items with great emotional value like family heirlooms.

Wills and beneficiaries need to be updated when appropriate. The same goes for the medical power of attorney (the person who makes medical decisions for a person if they are incapacitated). The person named in the medical power of attorney also needs to know the person’s wishes in case they are ever incapacitated.

This is just a brief overview; there will be circumstances unique to each situation that will probably need to be addressed. It’s always recommended to talk to a qualified estate planning attorney. Again, make sure to put someone with real estate investing and asset protection experience in charge of estate planning.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.