Preserve Generational Wealth by Incorporating Real Estate Into Your Legacy Plans

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Estate planning can be a challenging and emotional process as you assess how you want to shape your legacy. Overlooking some of the more technical aspects—like taxes, for instance—could prevent your plans from having their full intended impact.

Creating a framework to successfully transition your wealth to the next generation of your family requires a clear asset management strategy, especially when your plans involve real estate.

Incorporating real estate tax implications into the estate planning process and evaluating all succession options is key to preserving your wealth for your beneficiaries and providing peace of mind.

Consider these estate tax planning strategies that may help to ensure a smooth transfer of real estate assets from one generation to the next.

Benefits of Estate Tax Planning

Effective estate planning strategies could help you make the most of your capital gains and could also:

  • Manage estate taxes
  • Create a clear plan for beneficiaries
  • Simplify the inheritance process
  • Preserve assets

How to Pass Your Assets to the Next Generation

When including real estate and property assets in your estate plan, you’ll have to consider the tax consequences behind each method.

Gifting, selling, or allowing your beneficiaries to simply inherit the property holds a variety of different tax implications that can affect how your real estate wealth is passed from generation to generation.

Explore your options of where to start and key steps in the process below.

Identify Your Beneficiaries

Knowing who will inherit your assets can help guide your legacy-planning choices.

Choose Your Method

Gift Real Estate to Your Beneficiaries

In the gifting method, your beneficiary will assume the cost basis of the property and be responsible for taxes when and if they sell the property. You’ll have to fill out a gift tax form. Be aware that this will add to your lifetime gifting and reduce your available lifetime gifting exemption. for future gifting.

Sell Real Estate as a Gift of Equity

The process of selling your real estate to your beneficiary is often called a gift of equity and entails selling real estate well below the appraised market value.

This is a popular method as it would typically benefit a beneficiary who couldn’t otherwise afford a down payment or large monthly payment, which could result in a taxable gift, reducing your available lifetime gifting exemption.

Pass Real Estate as an Inheritance

As a result of stepped-up basis, the beneficiary will need to know what the fair market value of the home is when received. When and if the beneficiary sells the property, they’ll pay capital gains tax on any amount over the fair market value received.

Key Tax Planning Considerations

Regardless of your chosen method of passing on your assets, there will be additional planning considerations that could work to make that method advantageous in terms of federal and state tax laws.

There are several tax areas you should consider early in your plan to avoid your beneficiaries facing unintended consequences, including:

Step-up in Basis

A step-up in basis is when the basis of an appreciated asset is readjusted for tax purposes when the asset is inherited. It’s what happens when the fair market value of an inherited asset on the date of the decedent’s death is above the original purchase price.

Section 1031 Exchange Rules

Section 1031 exchange gets its name from Internal Revenue Code Section 1031. This section allows for a deferral of taxes when selling an investment property if proceeds are reinvested in like-kind property. If you meet the specific requirements of Section 1031, including reinvesting said proceeds within a certain time frame into another like-kind property of either greater or equal value, you may be able to defer the capital gains tax.

Specifically, Section 1031 allows a property owner to defer federal taxes to reinvest the proceeds of one property into another or multiple properties of like-kind, but they can’t be used for your personal home investment properties.

Section 1031 exchanges can be a key part of the tax implications of your estate planning strategy. They’re useful when selling things like investment property if you want to defer paying taxes to the future.

Delaware Statutory Trust

A Delaware statutory trust is a separate legal entity created under the laws of the state of Delaware to hold title to one or more income producing commercial properties. Multiple investors can hold fractional interest in the holdings of the trust.

Benefits of a Delaware Statutory Trust Section 1031 Exchange
  • Defer capital gains
  • Recapture depreciated value
  • Net investment income tax
  • Divide investments for beneficiaries
  • Discounted during total estate calculation

Lifetime Gift Exclusion

Tax Exempt Gifts
  • Spouse who is a US citizen
  • Covering a person’s medical expenses, if given to the medical facility
  • Education tuition, if paid to the educational institution
  • IRS-approved charity
  • Political organization

Preparing Your Family

Given the potential impact on the family members who inherit your assets, you should include them in the planning process to help them be prepared for the tax implications, financial planning issues and family dynamics at play.

We’re Here to Help

Creating a clear path to generational wealth and well-being starts now. Your Moss Adams professional can help you develop a legacy plan and navigate planning challenges. Additionally, you can learn more about how to start protecting your family estate, refine your personal financial plan, and begin your estate planning tax blueprint.

Moss Adams Private Client Practice may include investment advisory services provided by Moss Adams Wealth Advisors LLC, an SEC-registered investment advisor, and/or accounting, tax, and related services provided by Moss Adams LLP. The information referenced herein is provided for informational purposes only and should not be considered legal, accounting, tax, or investment advice, nor an offer to buy or sell any securities or financial instruments. The services, or investment information, mentioned herein may not be available to, or suitable, for you. This information is not a substitute for professional services. Consult a financial advisor before acting on any investment information mentioned herein. Consult a tax professional before acting on any tax information herein. Past performance does not guarantee future performance. All investments may lose money.

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