Estate planning for apartment owners (or the owners of any income property) involves both opportunities and hazards for the owners.  Too often, however, no one takes the time to explain the opportunities and hazards to owners, and they wind up with plans that do not fully meet their goals. 

Further, in many cases, owners still have plans that were written when tax laws, their family situation, and their finances were far different than they are today. 

THE BOTTOM LINE RESULT: Many owners now have an estate plan (usually based around a living trust) that exposes heirs to unnecessary taxes and no longer meets the owners’ desires. 

These out of date plans not only fail to take advantage of planning opportunities these owners never knew existed, but they also frequently saddle their families with the “hazards” of unnecessary tax burdens.  Many estate plans we review for apartment owners who no longer face estate tax exposure (after recent increases in exemptions) still expose their families to seven figures (more than $1 million) in unnecessary income and property taxes. 

Why Apartment Owners Need Better Than Average Planning

Good estate planning focuses on taking care of everyone you love and care for, while maximizing the benefit of wealth that you build over a lifetime of hard work, prudent risk taking, and avoiding extravagance. 

It also focuses on how you can leave a legacy for your heirs that maximizes both the financial benefits of your wealth for those heirs, and helps protect such heirs from claims by future creditors and predators (such as ex-spouses). 

As a group, we find apartment owners achieve significantly more financial success than most people, due to a combination of good investments and a healthy dose of frugality.  In many cases, the wealth our clients have accumulated has grown to many multiples, even in current dollars, above the wealth of their parents.

This level of financial success makes it even more important that apartment owners do careful, thoughtful planning.  Such owners become stewards of some real wealth, with both a desire and responsibility to pass it properly to maximize the benefits such wealth provides for their heirs.  And, maximizing these benefits means the owners need to understand the opportunities available with good planning, as well as the hazards along the way which would blunt the effect of good planning.

Much of the effort in good planning revolves around minimizing taxes, since none of our clients (to date) have wanted the government to be a major beneficiary of their hard earned wealth.  In fact, many of the strategies we use not only save taxes after clients die, but save taxes while our clients are still living.  Either way, integrated tax planning, that considers the impact of estate, gift, generation skipping, property and income taxes should form an essential part of the planning process. 

Common “Hazards” in Old Estate Plans

I have written a  lot about the ways in which changes in California and Federal tax laws have made many old estate plans “HAZARDOUS” to the wealth of apartment owners. Let me summarize the largest of those HAZARDS: 

Hazard # 1 – Older Trusts for Married Owners

Frequently Cost Your Heirs Unnecessary Income Taxes

One of the great benefits of holding appreciated property until you die is that it gets a new income tax basis after death.  That new “stepped-up” basis saves capital gains taxes when your heirs sell the property, and save ordinary income taxes by allowing much greater depreciation deductions until they sell.

Most old trusts mandate that a large portion of the deceased spouse’s property be allocated to a trust (sometimes called a “B” or “Credit Shelter” or “Bypass” trust) that will not get another “step-up” in basis when the second spouse dies.  This can cost your heirs hundreds of thousands, or even millions, in unnecessary income taxes, while saving no (or little) in estate taxes. 

Hazard # 2 – Old Plans Often Fail to Make Sure Property is “Community Property”

One of the few tax advantages of living in California is the treatment of Community Property. When one spouse dies, both the deceased spouse’s half of Community Property, and also the survivor’s half, gets a step-up.

But, if property is, or before being put in your trust was, held in joint tenancy, the IRS need not recognize it as Community Property.

Good planning today normally eliminates this HAZARD by “transmuting” property to Community Property, to save substantial taxes for the surviving spouse. 

HAZARD # 3 – Property Tax Reassessment

Many old plans contain provisions that would lead to premature, or unnecessary, property tax reassessment.  For those who have owed their property for years, that can wipe out up to 20% or more of your positive cash flow! 

HAZARD # 4 – LLCs

Many owners use LLCs to hold and operate their properties, usually to provide liability protection.

Unfortunately, the liability protection is often of little value, while LLCs add operating costs (taxes and fees), often eliminate the ability to pass property to children without property tax reassessment, and may reduce the step-up in basis when you die.

Property owners need independent, unbiased advice to determine whether their LLCs are a “HAZARD” or an “OPPORTUNITY” in the context of each owner’s situation. 

Hazard # 6 – Death Taxes

While death tax exclusions have grown to $5.45 million per person in 2016, many property owners have had enough success that their estates still face substantial exposure to death taxes at a rate of 40%.  For them, good planning involves strategies to maximize inheritance for family heirs, and minimize the tax “inheritance” for the government. 

ESTATE PLANNING OPPORTUNITIES

Good Estate planning means more than just protecting against hazards.  It also means taking advantage of opportunities to achieve your goals for your wealth and your family.

Some of the opportunities involve tax savings while you are alive; others are ways to protect your inheritance from outside attack, to pass a legacy of non-financial values to your heirs, or to help them live more meaningful lives.  Frankly, the list of opportunities in Estate Planning is almost infinite.  But, here are just a few that many property owners find attractive. 

Opportunity #1 – Preserve Your Legacy For Your Family

Good planning can prevent creditors and “predators” (ex-spouses of your heirs) from taking the inheritance away from your heirs.  The vast majority of our clients amend their plans to protect their heirs from creditors and divorce risks. 

Opportunity #2 – Decide How Much Flexibility Your Heirs Will Have to Spend the Inheritance

In today’s material world, owners often worry that their inheritance will be dissipated by heirs who may not be as prudent as their parents.  Your trust can balance reasonable restrictions on spending with enough flexibility that your heirs will still be well cared for. 

Opportunity # 3 – Pass Values Regarding Stewardship

Good planning can (if you want) encourage stewardship and philanthropy, often at little net reduction in what you want to leave for your descendants to spend. 

Opportunity # 4 – Fulfill Your Charitable Goals

If you have charitable goals of your own, good planning can help assure their achievement. 

Opportunity #5 – Save Income Taxes During Your Life

Estate Planning is not just about what happens after you die.  It can also involve strategies to save income taxes while you are alive.  Many strategies exist that can allow you to sell buildings and reduce ownership headaches without paying capital gains taxes, and some will even shelter other income. 

IF YOU FAIL TO PLAN WELL (TO AVOID “HAZARDS” AND TAKE ADVANTAGE OF “OPPORTUNITIES,”), PLAN TO FAIL!

Estate Planning involves a process.  In it, your estate planning lawyer helps you understand the HAZARDS your estate faces, ways to avoid such HAZARDS, and OPPORTUNITIES to enhance the legacy you leave for your heirs. 

A good estate planning lawyer helps YOU decide on the optimal balance for your family between avoiding hazards and choosing opportunities. 

Finally, good estate planning involves careful drafting to documents customized to meet your goals for avoiding hazards and using opportunities.

But, it all starts with PLANNING — planning about everyone you love and everything you own.  Property owners invest thousands of hours of effort and hundreds of thousands, or millions, of dollars to build their inheritance. To make that investment worthwhile, they should take the time to work with an estate planning lawyer experienced in representing apartment owners.  And, they should select an estate planning lawyer who will help them identify, refine and craft an estate plan that meets the property owner’s goals, and maximizes the benefits of their inheritance. 

Upcoming AOA Estate Planning Seminars 

AOA will present Attorney Ziskin’s 2016 edition of “Estate Planning for Apartment Owners – Tips On How to Save Millions in Income and Property Taxes” in Northern California this May and in Southern California this June.  The seminars are scheduled as follows:

  • ·         May 24 – Oakland
  • ·         May 25 – San Jose
  • ·         June 16 – Van Nuys
  • ·         June 21 – Buena Park
  • ·         June 28 – San Diego
  • ·         June 30 – Torrance

Seminars are free for AOA members. To register visit http://www.discoversuccess.com/index2.php

Attorney Ziskin will also host a booth at the AOA Million Dollar Trade Show on May 19, 2016 at the Long Beach Convention Center.  He would love to meet you there. 

Kenneth Ziskin is an estate planning attorney who focuses on integrated estate and tax planning for apartment owners.  He holds the coveted AV Preeminent peer reviewed rating for Ethical Standards and Legal Ability from Martindale-Hubbell, and a perfect 10 out of 10 rating from legal website AVVO.COM 

Ken lectures frequently to professional and apartment industry groups and has written numerous articles on tax, planning and other legal topics.  He recently rewrote AOA’s Special Report “Holding Title to Your Property –A Matter of Life, Death and Taxes…”

Ken’s website at www.Family-Wealth-Strategies.com includes information about his estate planning process and reviews of his work by his clients.  Ken offers free consultations for AOA members and can be reached at (818) 988-0949.  This article is general in nature and not intended as advice on which owners can rely.   Please get advice from counsel you retain for your own planning.