Estate Planning Strategies for People Who Own Real Estate

Estate planning is critical for everyone, but if you own real estate, proper estate planning is particularly important. Without adequate planning, your surviving loved ones can be left to face substantial estate taxes without the ability to pay these debts. Through the use of proper estate planning, however, it is possible to maintain assets for your loved ones.

Avoid Estate Planning Mistakes

Many real estate owners make the same errors. One of the best ways to avoid making similar mistakes is to understand the risk of making the following mistakes:

• Estate planning can be challenging, but it is also a critical process that must be performed. By planning with ample time, you can make the most out of tax opportunities.
• People are often surprised to find out that estate taxes must be paid within nine months of a person’s death. 
• Many people fail to adequately document estate planning transactions, which can later weaken their tax planning and end up creating additional costs.
• Estate plans are not a once and done strategy. Instead, estate plans should be revisited every few years or after any substantial life changes like births, divorce, or death.

Navigating Tax Regulations

The federal estate tax is a one time tax made by the federal government at the point when a person dies. The only way to reduce the amount of federal taxes that a person ends up paying is to reduce the value of a person’s assets. Under existing tax laws, an individual can either give away up to or die in the ownership of $11,580,000 without facing an estate or gift tax. Married couples can give away twice this amount or $23,160,000. This amount is poised to be lowered to around $5 million in 2026, but given government deficits created by the coronavirus pandemic, estate and gift taxes might be reduced long before then. As a result, it is a good idea for people to engage in estate planning and use these exemptions as soon as they can through gifting. 

Taking Advantage of Current Situations as a Real Estate Owners

The coronavirus pandemic has left many commercial real estate owners with depreciated property values. While hotels have lost money due to stay at home orders, many apartment building owners have faced tenants who do not pay rent and office space owners faced financial difficulties as more workers turned remote. Other types of property have also been negatively impacted by the pandemic. As a result, the current value of property is at a relatively “low end,” which means that a person who passes a property as a gift will likely face the least amount of taxes on the property possible. Note, however, that eventually the real estate market will rebound and the property of real estate will increase again. By making gifts now, you can realize the greatest opportunity to save on taxes. 

Making the Most of Grantor Trusts

If a real estate owner wants to transfer assets above existing exemption amounts, it is possible to transfer these assets to a grantor trust. Assets held by a grantor trust are viewed as a person selling assets to himself or herself. This means that there are no gains or losses on this property transfer. These transfers are often performed in exchange for promissory notes. The Internal Revenue Service places a minimum interest rate on grantor trusts which must be charged on promissory notes to avoid adverse gift tax consequences. Currently, as of August 2020, this interest rate is at an all-time low. As a result, property owners currently can give discounted real estate to trusts for loved ones as well as sell these discounted estates to grantor trusts in exchange for promissory notes with low-interest rates.

Other Issues Real Estate Owners Should Consider

While estate planning opportunities for real estate owners are currently helpful, property owners also must make sure to address various concerns while planning for the future, which includes:

• Cash flow issues. Some real estate owners rely on cash flow from real estate, which means that gifting a property while the individual is still alive would result in the property owner not having enough money to live. One option for solving this problem would be for the property owner to pass the asset to a trust for his or her spouse. Distributions from interest accumulated by the trust could later then be passed to the spouse and utilized by the couple. If the spouse passes away before the property owner, however, assets could not be distributed to the real estate owner.

• Lender issues. If a person still has loans on real estate, notification often must be provided to these lenders before certain transactions can be made. Other times, lenders might need to provide consent before a transaction.

• Loss of the basis step-up. Assets that a person owns when they pass away receive a step-up equal to their fair market value. Assets that are given away or sold to grantor trusts, however, do not receive this step-up. Property owners who want to make the most of the step-up often hesitate to engage in estate planning tactics for fear that these strategies would make the benefit unavailable. There is still a way, however, to receive the step-up. If a property owner reacquires the assets in a grantor trust either by purchasing these assets or exchanging the low basis real estate for higher basis assets that are owned outside of the grantor trust, the low basis will be part of the property owner’s taxable estate when they pass away. 

• Property taxes. When changes in property ownership occur in California due to the estate planning techniques, property taxes can be reassessed. Through sufficient planning, however, adverse tax consequences can be avoided.

Speak with a Knowledgeable Estate Planning Lawyer

Creating a proper estate plan as a real estate owner can be challenging. If you need the help of an experienced estate planning attorney, do not hesitate to contact attorney Melanie Tavare today.