Broker Check

Estate Planning Tips for Real Estate Depvelopers and Investors

| August 29, 2017
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Real Estate Developers are often in a favorable income tax position due to depreciation and other income tax deductions that shelter a great deal of their income. This is particularly true during the early years of a project. Because of this, estate planning strategies that focus on income shifting to lower income tax bracket family members are not usually the first line of planning for a Developer. Instead we look to reduce death- related taxes and estate administration costs as a primary focus. This approach includes several challenges when designing a plan, including lack of liquidity for estate expenses and tax payments, succession/continuity of the business, creditor/lender Issues, and asset protection.

Liquidity/Tax Payments

Liquidity will be needed to pay any applicable estate taxes, income taxes, ongoing business expenses, and family support needs. Federal Estate tax is generally due 9 months after the date of death and it is very important to understand that the taxes will be levied upon the market value of the business including underlying assets on the date of death. Many people mistakenly use the property appraiser assessment or some other measure of value the Developer may be using on their books and this can typically result in a large discrepancy in the amount of estate tax the Developer expects to be levied and the actual amount the IRS demands in payment.

Developers typically expect the estate to pay these taxes through the sale or refinancing of some portfolio properties. That action plan ignores two major risks, the first being the assumption that the estate will be able to refinance once the Developer has passed away. Without a valid and working succession plan in place and continuity of management a lender may be unwilling to lend on the portfolio, no matter the equity in it. Additionally, if property values are in decline it may be difficult to find a lender offering to lend on reasonable terms - even with management continuity. The second risk is that of the market prices being depressed on the portfolio properties at the time of a required sale by the estate. With only a 9-month window to raise the funds, the estate runs the risk of having to sell at an inopportune time to cover the tax bill. A good plan should account for these risks and include a source of liquidity for estate needs.

Some small businesses can take advantage of Section 6166 of the Internal Revenue Code which permits deferral of the estate tax attributable to business interests over a period of up to 15 years at a low interest rate. For Real Estate Interests to qualify for 6166, advanced planning is imperative to assure you structure your holdings properly to qualify for the deferral.

In addition to IRC 6166, there are several other tools a planner can use to help improve liquidity. These include planning to reduce estate taxes and probate administration costs, building up additional liquid investments, arranging private financing, or purchasing life insurance. Most plans include a combination of several tools.


Careful consideration should be given to the treatment of General Partnership holdings and Management Entity Control. A named successor who has the same management rights and obligations as the deceased partner should be provided for to assure voting rights and control are not lost and the ability to retain the management company is secure. Executors or trustees named in your documents may not want to (or may not be qualified) run the business, you should leave written instructions as to how you want the business operated (or liquidated) at your death. For any holdings, even those you do not hold controlling interest in, it is recommended that a Buy/Sell agreement be in place with each of your partners. This will specify what is to happen in the event of the death or disability of a partner. These agreements typically provide for the sale of the deceased partners shares to the remaining partners, thereby providing needed liquidity to the estate of the deceased and keeping the business by and between the partners and not involving their heirs.</p

Creditor/Lender Issues

Many Developers have existing loans, mortgages, and other credit related documents that must be must analyzed to see how guarantees and other lender restrictions might be affected by the death of the Developer/Guarantor. Changes may need to be made to provide other separate guarantees upon death, or to have reasonable time after a death to replace the guarantor. There are several options for structuring guarantees to avoid this issue, proper advice as to the best method for your situation is vital. When not done properly cross-collateralization can endanger asset protection and guarantees can put the estate tax planning at risk of failing. With proper planning, you can reduce or eliminate creditor/lender issues that may affect the business after the death of the Developer while maintaining the protections of the structures in your plan.

Asset Protection

Proper Liability and Loss Protection Insurance is vital to the success of a plan. They are usually the first line of defense when a potential liability arises. The structuring of business entities also provides a layer of protection for the assets both currently and in the future. In addition, properly designed plans to afford maximum long term asset protection can include various trusts and business entities to shield assets from creditors for you and, after your passing, for your heirs. These can include using long-term trusts to protect inheritances rather than outright distributions which unnecessarily put the assets at risk when heirs inherit.

In Conclusion

With the uncertainties of tax payments, timing, lender appetite, and market prices, making sure you have your plan to reduce your tax bill and probate costs, provide liquidity for the estate, as well as protect assets for your heirs is more important than ever.

⃰ Not practicing on behalf of MassMutual or its affiliates.
This article was prepared by Renee' Caputi and is not intended as legal, tax, accounting or financial advice. Renee' Caputi is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. OSJ: 2400 E Commercial Blvd., 11 th Floor, Fort Lauderdale, FL 33308 (800)320-4180. The opinions provided above are not necessarily those of MML Investors Services, LLC. The opinions provided are for general information purposes only. CRN201712-216651

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