Estate Planning: Everything Real Estate Investors Need to Know

Estate Planning: Everything Real Estate Investors Need to Know

7 min read
Scott Smith

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real estate investors and entrepreneurs in all 50 states protect more than $1.2 billion in assets. Since 2014, he has published over 1,000 posts and articles on BiggerPockets and has appeared on hundreds of podcasts.

Scott fell in love with real estate when his commercial property investment allowed him to graduate from Albany Law School debt-free. He immediately began practicing at the trial and appellate court with the district attorney, placing him in the top 1 percent of lawsuit attorneys in the county in terms of professional experiences. He also worked in private practice, suing insurance companies for denying valid claims (which is surprisingly common!).

After his friend lost $3 million in real estate from a single lawsuit, despite having ample insurance, Scott dedicated himself to educating real estate investors on the importance of affordable asset protection, specifically when it comes to folk knowledge and misconceptions that still exist in the investment and legal community. The solutions Scott recommends for his clients are the same ones he originally created for himself and has been refining on his mission to help people protect themselves from frivolous lawsuits.

Follow Scott as he deconstructs the litigation game and shows you how to free your time, protect your assets, and create wealth that lasts for generations.

Scott regularly appears on shows with folks like Grant Cardone, BiggerPockets, Entrepreneurs on Fire, Wheelbarrow Profits, and his own real estate investing podcast. He frequently interviews industry experts on his Facebook and YouTube accounts and has published thousands of posts and articles on BiggerPockets and his blog for real estate investors.

Scott graduated from Albany Law in 2014.

He has passed both the Texas and New York bar exams.

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Halloween is just around the corner, so that means it’s a great time to talk about everyone’s favorite subject—death!

Just kidding. But planning ahead is always important. And if you invest in real estate, don’t even think about dying without an estate plan.

Why? An estate plan lays out how your money and other assets will be distributed when you head to the great beyond. Deciding these matters ahead of time is the best thing for you and your heirs.

If you have family, estate plans are crucial for making sure they are taken care of. Dying without a plan will create hardships for them. Even if you don’t have kids or family members, chances are there’s a charity that you’d rather benefit from your life’s work than the United States government.

Consider what happens when someone dies without a clear estate plan. Heirs are stuck waiting while accountants, lawyers, and Uncle Sam duke it out in probate court. Of course, all of those parties are paid immediately. Meanwhile, your family will wait months or years for decisions, with no guarantees that they will get what you wanted them to have.

Benefits for Real Estate Investors

If you invest in real estate, a proper estate plan can manage your investments, debts, and profits when you are no longer able to.

Related: Land Trusts, Living Trusts, and Making Smart Estate Planning Decisions

A plan created by a competent estate planning attorney with real estate experience can help you:

  • Avoid probate. 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.
  • Leave behind a business that will outlive you. Depending on what type of REI business you have, it’s fairly easy to make sure it outlives you using structures like the Series LLC, with its potentially unlimited lifespan. A living trust in conjunction with a “pour-over will” can easily transfer ownership of a business.
  • Leave behind a profitable real estate portfolio. As an added bonus, when assets are transferred to heirs over the age of 18, they get the benefits of asset protection and creditor protection.
  • Give to charity. Use your assets and wealth for charitable or philanthropic acts.
  • Retain control. Prevent Uncle Sam from getting his greedy paws on your life’s earnings and dividing them up as he sees fit.

As a real estate investor, you know the importance of planning ahead. If supporting your family and the others you care about is one of your investing goals, the kindest thing you can do for those heirs is to get familiar with estate planning.

Gavel wooden and house for home buying or selling of bidding or lawyer of home real estate and building concept.

Estate Planning and Asset Protection

Emergencies can happen to anyone. Estate planning isn’t about just anticipating your inevitable death. We asset protection and estate planning attorneys have many tools to ensure your wishes are carried out if you’re ever in any kind of emergency where you’re unable to make decisions. It’s a way to protect your business and assets during life and beyond.

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

Related: Tips & Tricks From an Attorney: Here’s How I’d Protect My Real Estate Assets

Setting Up An Estate Plan

But the estate plan can only work if you bother to make one! So let’s look at some of the tools and structures you may want 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

Living trusts accomplish a few things:

  • You can transfer your assets privately, allowing you to avoid probate and protect your anonymity.
  • You can dictate what happens to your property if you’re incapable of managing it yourself.
  • Living trusts are easier to change than a will.
  • Living trusts are more difficult to contest than a will.

Pour-Over Will

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

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

Estate Plan, Living Will, and Healthcare Power of Attorney documents

Why You Shouldn’t Put It Off

Estate planning isn’t only about what happens after you die. The reality is none of us are immune from unexpected illnesses or freak accidents. That’s why other documents that make up a proper estate plan include:

Medical power of attorney. If you’re in a coma, or when you’re in surgery, granting someone medical power of attorney gives them permission to make medical decisions for you if you become incapable of doing so. Typically, this would be your spouse but may be another designee.

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

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

HIPAA. This document allows the person(s) named within to access your medical records. A copy of the signed HIPAA is not valid, but if you want to provide a HIPAA to more than one doctor, just print out another blank one and sign it (in front of a notary in California). If you want to make changes to a HIPAA form, you will need to provide a new HIPAA form to each doctor.

Choosing a Trustee

Appointing a trustee is an important part of estate planning. Your trustee will have an immense responsibility. So how do you know who to name?

If your trust is worth $2 million or less, listing a family member as the trustee is probably your best option. However, if your estate is worth over $4 million you may want to consider listing a lawyer.

If you have an estate worth over $10 million, you may want to consider listing a trust company or bank as the trustee of your estate. This option will cost tens of thousands of dollars, so it’s really only viable for large estates.

Asian aged couple meeting with real estate agent

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. Your trust owns your properties, cars, family heirlooms, or any other assets that you decided to place within it.

Related: Estate Planning: What Is the Role of the Executor of a Trust?

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

Dying is expensive. Your 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 your son or daughter doesn’t do well with grief, you may want to consider someone else.

Estate Planning Errors

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

DIY estate plans fail to provide the kinds of benefits and protections that you 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 your state’s signature and witness requirements invalidates the entire will.

Failure to Fund the Trust

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

Let’s say you want your home to be subject to the terms in your trust. To do this, you would need to deed the home out of your personal name and into the name of the trust. Otherwise, the property falls outside the trust terms and your 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 you have at least one situation unique to your estate that is not covered by standardized documents found online. Say you have a child who is financially responsible while the rest of your children are not. Or say you have more debt than assets, in which case you would need to structure your estate plan to leave as little money as possible to the creditors.

More “unique situations” include you 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 you’re doing your estate plan on your own.

Update Your Estate Plan

Once you have an estate plan in place, you will 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 your estate plan and make adjustments. These include:

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

Your estate plan must be updated each time you buy and sell anything with substantial financial value, such as a bank account, real estate, as well as items with great emotional value like family heirlooms.

You’ll need to update wills and beneficiaries when appropriate. Also, update your medical power of attorney (the person who makes medical decisions for you if you are incapacitated). And make sure the responsible party knows your wishes in case you are ever incapacitated.

This is just a brief overview; as I said, there will be circumstances unique to your situation that will probably need to be addressed. I can help you answer any questions you may have, or you can find a qualified estate planning attorney in your area. Again, make sure you get someone with real estate investing and asset protection experience!

Questions? Concerns?

Let’s talk below in the comment section.