You have worked your whole adult life to establish a real estate legacy. These real estate investments have paid for your kid’s college and your retirement. You put your blood, sweat and tears into them and now you have to make key decisions regarding passing the assets on to your spouse and kids. What do you want your estate to do with your real estate assets?
• You could give your assets to a charitable foundation who will promptly sell them. Typically, they want cash and do not want to manage your real estate assets.
• You could have a trust company or bank manage your real estate assets in trust for your kids and/or wife. They typically charge a percentage of the assets as a management fee which is a high price to pay. (For more thorough overview of how fiduciaries work go to this web site: http://wills.about.com/od/choosingfiduciaries/a/institutionlfid.htm).
• You could leave your assets to your children and/or nieces and nephews. They have to choose what to do with the assets, after estate taxes have been paid. They can keep or sell the assets. If you want your kids to keep the real estate, instead of selling them, you will want to leave instructions. My estate attorney calls that managing your estate from the grave.
Best Results
As you aged you decided that you needed help managing your real estate investments. The kids have moved far away and lack interest in managing the assets. You have turned to a property manager, who is handling the day to day operations of the properties.
As part of the transition process, you had a choice of gifting shares (portions) of your real estate assets to your kids before you and your spouse passed away, but you decided that the tax benefits were not worth the risk of losing control of your assets.
One question you have to ask yourself is: do you trust your kids? Do they care enough about not stealing your assets from you before your death? What about their spouses? How you raised your children will have a huge impact on your decisions. You also need to consider if they have the interest, time and skill set to take care of the assets the way you do.
• Remember it was your risk taking, your entrepreneurial energy that created this legacy. They may not have your drive and focus.
• Will they destroy your assets? This is a good question. Maybe a better question is how you can help them make these assets into a family legacy.
Family Legacy
Some families start early and have the kids clean and paint vacant apartment properties with their parents. Other families have regular family meetings (say once or twice a year) to inspect the properties, review financial statements and make major decisions. These meetings can be held face to face, over the phone or using tools such as Skype.
As the asset base gets larger, say over $2,000,000, you might consider involving a property manager. The property manager can then facilitate the family meetings and help with the decision making. This is a huge responsibility and will take a sophisticated well educated and experienced property manager.
Recently, one of our clients whose shareholders are spread out all over the west coast, agreed to fund the further education of the next generation by paying for basic real estate finance classes for the next generation.
Another issue you need to come to grips with is the age and maturity of those that are going to lead the investment decisions in the future. One of our attorney friends advised us to write a letter to the next generations that gives them a theme and context of past investment decisions, the establishment of financial cash reserves and why holding onto real estate and developing a large asset base is a good long term strategy.
This may work well for the second generation, but by the time you get to the third generation you may have 10 grand children vying for cash and an input into the decision making process.
Start Early
To create a real estate legacy you need to start with leadership and real estate training early. Not all have an aptitude for leadership and interest in real estate or financial analysis. You will need to develop fair and transparent procedures that can be adjusted to the personalities in the next and following generations. This will take an investment of time and money with real estate and estate attorneys, property managers and CPA’s. If you want to leave a legacy, the payoff will be large and in your heart of hearts you will have succeeded not only for yourself but for your children and grandchildren.
Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company. He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM). Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM).