The 3 Phases of the Wealth Cycle [Part 6 – Wealth Distribution Cont.]

Want to distribute your wealth to the next generation? Here’s how to conquer the paperwork, rules and regulations, and piles of red tape in your way.

This post is the last in a series related to the three phases of the Wealth Cycle – Wealth Creation, Wealth Preservation and Wealth Distribution.

Now we continue our look at Wealth Distribution, which is the process of making sure we are able to pass along our accumulated wealth in the most seamless fashion possible when our time in the saddle is up.

The importance of a having a cohesive plan cannot be overstated. In a perfect world, each of our assets will flow to the intended parties and the appropriate professionals will be already be engaged to lend assistance in their respective specialties. Those receiving portions of our estate will know what they are getting, when they will get it and have a clear understanding of their role and responsibility as it relates to each asset they receive.

Making sure that your heirs know what to do with what they get is critical, especially when it comes to commercial real estate.

If you hand off real estate assets to heirs that lack the experience and depth of real estate knowledge that you have, the results could be disastrous. Industrial business parks, retail shopping centers and office buildings are complicated investments, all requiring a high level of expertise in multiple disciplines.

You may be quite comfortable negotiating a tenant improvement package with a prospective lessee, but the person inheriting that asset may not know where to start. Real estate decisions are complex and markets are in a constant state of change. So, if you will be passing along real estate investment properties to your heirs, either make sure they can fill your shoes or engage the appropriate professionals to act in their interests.

As we mentioned in our last post, keeping things simple may be the best strategy.

If you have assets that are management intensive, maybe you should consider exchanging into simpler properties that require less hands-on experience to manage. Also, you may own assets that have elements of functional obsolescence or have deferred maintenance issues that need attention. If so, trading into more modern facilities might become part of your wealth distribution strategy. Planning ahead means that you get to make the important decisions. Without a good plan, your heirs may find themselves overwhelmed, and you won’t be there to help. Please excuse the morbid reference but, let’s face it, there is no escaping reality.

We recommend that you evaluate all your assets and visualize the simplest transition of each one to your heirs.

If your current distribution plan comes up short, now is the time to come up with one that will get the job done. We can help you with evaluating your real estate in terms of its value and relative position in the market, but you’ll need advice from attorneys, accountants, financial planners, insurance professionals and others depending on the size and complexity of your estate.

If all your assets will flow through to just a few who understand your assets as well as you do, that’s one thing. But, if there are children, grandchildren, brothers, sisters and charities all receiving shares of your estate, the need for simplicity becomes more important.

Let’s also not forget Uncle Sam. The tax implications alone can be enormous, as federal estate tax rates run as high as 55% on the net value of individual estates exceeding approximately $5.4 million. If your estate is worth more than that, then some of your assets may need to be disposed of to generate cash to meet tax obligations. That’s where life insurance can come in handy, as cash proceeds from life insurance can be used to pay taxes, so that other assets don’t have to be liquidated for that purpose.

We could go on, but we want to be careful not get too far afield in terms of our area of expertise. However, we do want to pass along one more idea before we close, and that’s the act of distributing your estate while you are still alive. The truth of it is, you can pass your estate along to your heirs while you are alive, giving you the opportunity to see them enjoy their inheritance.

Of course, there is the usual mountain of paperwork and menagerie of rules and regulations to follow, but it can be done. Maybe one of your heirs needs capital to start a business or another needs to pay for law or medical school. Perhaps you’d like to make the down payment on your son or daughter’s first house as a wedding gift or start college trust funds for your grandchildren.

In simplest terms, you can use up to the limit of your estate tax exemption to distribute your estate without incurring tax liability.

You can also gift up to $14,000 per year to each of your heirs without even having to file a gift tax return. By doing so, the taxable value of your estate will be reduced and your future heirs receive their gifts tax free.

For example, if you gifted the maximum to ten heirs for ten years, that could reduce the federal tax on your estate by as much as $770,000 (55% of $1,400,000). You can even establish trusts that restrict and protect the distribution of those gifts to heirs too young or otherwise unable to handle their own financial affairs.

Whatever you decide to do with your assets, the sooner you focus on the issue the better. Planning ahead cannot work against you. It’s your plan and you can change it any time you want to. You can be totally transparent with your heirs or hold all your cards close to the vest. You earned your wealth and only you should decide what happens to it and who benefits from it.

This series is meant to get you thinking seriously about this important final phase of the wealth cycle.

We are real estate market experts, and know just enough about estate planning to know that only trained professionals in the field of estate planning should be relied upon for specific advice. But, if we have you wondering if your wealth distribution plan truly serves your interests and those of your heirs, then we consider that to be another “mission accomplished”.