We have dedicated our last 6 posts to a revised version of what we call the Wealth Cycle, a series we first published back in 2016. We continue here with further discussion of wealth distribution, the final stage of our lives as investors when we make sure we leave to our heirs what we don’t get around to spending when we are vertically oriented.
Read the Previous Posts in This Series:
- Phase 1: Wealth Creation
- A Wealth Creation Story
- Phase 2: Wealth Preservation
- On Preserving Wealth and Managing Risk
- Phase 3: Wealth Distribution
- Building a Cohesive Wealth Distribution Plan
Developing that plan can be quite complex, especially for those who have accumulated considerable wealth in multiple asset classes. Our focus here is on the real estate, which may just be the most difficult and complex asset class of them all to give away in an orderly fashion. Commercial real estate can be risky, management intensive, expensive to operate and it requires specific skills and up-to-date market knowledge to make informed decisions in its regard. It’s not just a stock or a bond that can be easily traded at the speed of light at an easy-to-determine value.
So, every real estate asset should be carefully evaluated up front to make sure it is ready to be acquired by heirs in accordance with their abilities to make sound decisions in your absence. Unfortunately, it is also not uncommon for heirs to disagree with one another when money is involved. Your plan can go a long way in avoiding those intra-family and partnership squabbles. Here is a case in point:
Two clients of ours, longtime friends and business partners, own a property together in Buena Park with title held in their respective family trusts. They bought the property in late 1980’s for $600,000 and paid off a small loan many years ago. The property is now worth $4,200,000, which means the tax consequences of a sale would be enough to knock the wind out of most folks. But, in this case they are both getting older and one of them is in very poor health and is willing to suffer the tax hit to help out his oldest daughter and her family who have fallen on difficult times. The other partner, a savvy investor, is quite well-to-do and has just one son who is wealthy in his own right. In other words, he doesn’t want or need the money from the sale.
However, he is considering going ahead with the disposition and exchanging his 50% interest into a residential rental property so that he will not have to deal with his partner’s daughter (who he knows will be difficult) if his partner passes away or becomes incapacitated. A bit morbid, yes, but a very real potential problem that the sale would eliminate. Both partners could advocate for their own interests and put themselves at arm’s length from what could be a challenging situation in the future.
This is just one of a many different scenarios that could make wealth distribution decisions such a challenge. We all have families, many of us have partners we own property with and most of us at least have a friend or two whose heirs went to war over their money or were left to figure out a complex estate with no plan to work from.
A good distribution plan can go a long way to keep that from happening, and there has never been a better time to reposition commercial real estate assets. Valuations are still near their all-time high despite the significant rise in the cost of mortgage capital. As we have mentioned many times in these pages, we thought the market correction would have come a while ago. It hasn’t, and that means that owners of highly appreciated assets are still in good position to reposition their real estate equity in a way that serves themselves and their future heirs.
Next week we will get to the step-up rule as we promised in our last post. Stay tuned.
Leave a Reply
You must be logged in to post a comment.