How to maximize these complex opportunities
As compared to residential real estate, the complexities of commercial real estate (CRE) investments give rise to more complicated estate planning. On the plus side, this allows some unique ways to meet your goals and provide for your beneficiaries.
CRE includes apartments, office buildings, restaurants, shopping centers, hotels/motels, grocery stores, parking garages, and theaters. In contrast, industrial properties typically include factories, warehouses, and other properties used for large-scale business purposes.
While there are similarities with residential real estate issues (e.g., cash flow and value), certain challenges in CRE are more prevalent and consequential. Let's look specifically at those areas:
Real Estate as a Gift Asset
CRE can be a tremendous estate planning opportunity, especially if you have lifetime-support goals for your many beneficiaries. It is a uniquely advantageous asset for gift and estate tax planning purposes because it can be divided and given away. When CRE is fractionalized, the value of it can possibly be discounted for gift tax purposes. Effectively, a property can be shared among family members at a lower cost than the combined property value; further, different types of trusts can be created to hold fractional interests.
Working with Partners
Since CRE can require significant financial investments and may involve complicated tax structures, it is common for investments to be held through multiple entities, frequently involving unrelated partners. Joint venture, limited partnership, and operating agreements should be reviewed for various provisions (i.e., control, selection of a successor general partner or manager, right to terminate, etc.).
Keeping the Properties Running
A key aspect of estate planning for CRE is anticipating and mitigating the impact of the trustor's death upon business continuity. You'll want your tenants and all operational issues to be minimally impacted.
With your attorney, it is important to plan for the ramifications of a death event, so that not only can these business interests continue without a hitch but also so that beneficiaries can be actively involved as much as they would like (and has been planned prior to the trustor's passing), with all of the rights and responsibilities accredited to the trustor. Keep in mind that there may be several management companies for the various properties. It is healthy to have introductions made in advance if possible; some trustors bring alongside their designated beneficiary years in advance for a specific property in a co-management capacity, in order to prepare for the eventual transition of ownership.
Your Advisory Team
An important CRE issue is preparation of beneficiaries for the challenges of handling a complex CRE portfolio. For example, it is not unusual for a wife to be out-of-the-loop of her husband's CRE business and its daily management, then is "thrown into the fire" as a widow without proper preparation. In this or similar situations, it is ideal to proactively identify and prepare professionals (attorney, accountant, real estate property management, etc.) who can easily transition into necessary roles after a death event. If that hasn't occurred and you're in the midst of handling CRE after the passing of your loved one, keep in mind that many commercial real estate properties are overseen by professional property management companies with advanced business education and years of experience, so don't feel overwhelmed, just call upon your advisory team to help.
Liquidity is needed for continuing support of survivors and, in many cases, death taxes. However, CRE investors should not assume that properties can be quickly sold or refinanced to satisfy an estate's liquidity needs, due to changing market conditions (and to avoid a "fire sale" selling price). Talk with your attorney about other options to manage liquidity needs.
Dealing with Lenders
Existing mortgages should be reviewed to determine the impact of a trustor's death on loan agreements. In some cases, the death of a key principal or a guarantor is an "event of default" which could allow a lender to apply pressure on the trustor's estate.
Experts in Estate Planning for Real Estate
At Mortensen & Reinheimer, PC we've crafted estate plans that have involved literally thousands of real estate properties! Let us put that experience to work for you in simplifying what can be a very complex process. We look forward to helping you! Please contact us at (714) 384-6053 to make an appointment, or use our online contact form. Our website is http://www.ocestateplanning.net.
About the author:
Tamsen R. Reinheimer, Attorney, is a Certified Specialist in Estate Planning, Trust & Probate Law (The State Bar of California Board of Legal Specialization). She has significant experience in all aspects of estate planning, trust administration, and probate. Contact Tamsen at firstname.lastname@example.org.