How to prepare for the wealth distribution phase of the wealth cycle, assessing and organizing your assets, and how to handle business partnerships.
In this installment, we begin our discussion on wealth distribution, which is our plan for passing along what we have accumulated in our lifetime.
Deciding what will happen to accumulated wealth after we are gone is perhaps the most difficult, frustrating and complex business challenge you will face.
Rules, regulations and taxes are only part of the problem.
There’s also the personal side of the equation, which brings in family dynamics and the relationships with business partners, lenders, shareholders and others, all of whom have their own plans for the assets that flow from our estates.
Then, there is the mountain of paperwork associated with each and every agreement we’ve ever made, much of which we haven’t even looked at for years. Just the idea of having to sort that all out will bring out the procrastinator in just about anybody.
Before getting into a serious discussion about distributing wealth, we need to make clear that we are not the go-to experts when it comes to establishing a comprehensive wealth distribution strategy. You will need legal and financial professionals who specialize in this complicated area of the law to help you work up a plan that is best for you.
However, we know a thing or two about commercial real estate and we interact with clients every day who are making real estate decisions driven by their own wealth distribution strategies.
So, we decided to share some of that experience with you in the hope that it will get you thinking about your own plans for the future. It could be that you decide to make some moves now that will streamline the process of distributing your assets in the future, as the more simple things are structured, the better the chances are for the outcome you desire.
Understanding Your Assets
A good place to start the process is to take a look at all of your assets, including your real estate.
Like most other successful business people, you have probably invested in a variety of asset classes that include real estate, blue-chip stocks, bonds, mutual funds, whole life insurance policies, partnership interests in other companies and your share of the business you own. Each of these investments has its own risk profile and level of liquidity and complexity.
The stocks are easy. You own them yourself and they can be traded in a fraction of a second.
Partnership interests in real estate or your business is a whole other story, and we can tell you from experience that it’s a story that doesn’t always have a happy ending.
Hypothetically speaking, let’s take a partnership interest in a building that you and your business partners purchased as individuals to serve as a facility for your company. This is a very common practice in Southern California, as merchant developers have been focused on building freestanding industrial buildings for sale to users since the 1970’s.
Let’s also say that you bought the building in the name of an LLC with you and your partners as the managing members. That agreement describes your interest in and responsibilities for the property.
But, it may or may not define your exit options should you decide that selling your interest in the property is in your best interests.
You and your partners may have all been on the same page when you bought the property many years ago, but life is full of surprises and things change. If something happened to you or one of your partners, having your heirs or their heirs become a partner in the property may not be best for all concerned.
In such a case, it may be more prudent to sell the property before the fact and have each partner exchange his or her proceeds into an investment of their own, which has the effect of simplifying several estates at the same time. We see this strategy being executed with considerable frequency.
The takeaway in this scenario is that you and the other original players make the decisions and the heirs get what they were intended to have in the first place. It also allows for the investors to go in different directions. One may wish to exchange to defer capital gains and depreciation recapture taxes, while another may choose to cash out, pay Uncle Sam and buy a big boat or second home to enjoy with the grandkids.
Without a cohesive plan and clear path to achieve that plan’s primary objectives, things can go sideways in a hurry.
We recommend that you look at each property you own from every angle possible and decide if continuing your ownership serves the interests of a sound wealth distribution strategy. Dedicating a little time to the topic may just be the best investment you’ll ever make.
More on wealth distribution in our next post.