Real Estate Wealth Preservation: Protecting the People You Love as Your Assets Grow
We’re back with part 2 of our 3-part series on Real Estate Wealth Preservation. In this episode, we’re focusing on how an intermediate investor can protect the ones they love as their real estate portfolio grows. Our panel of experts answer questions about various tax, legal, insurance, and estate planning strategies investors can use to preserve their assets and ensure they’re passed onto their heirs.

In our first episode, we focused on a beginner investor who’s just starting to grow their portfolio.  Today, we’re going to look at what an intermediate investor should understand as their portfolio grows and their life changes. 

To walk us through these concepts, we have our panel of experts:

  • Pam Maass Garrett of Law Mother
  • Bill McIntosh of Complete Protection Insurance
  • Byron Elliott of 3 Pillars Law

Remember: our panelists have great information, but it’s important to speak your own advisors or reach out to our panel directly to get guidance specific to your situation.

Three Learning Options!
  1. Listen to the podcast “#395: Protecting the People You Love as Your Assets Grow” Denver Real Estate Investing Podcast
  2. Watch the YouTube video (at the bottom).
  3. Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.

What Structures Should I Put in Place to Protect My Assets?

Having a more complex strategy to protect holdings isn’t as vital for beginner investors.  However, as your portfolio grows and you acquire more assets, it’s important to figure out the best way to structure them. 

Byron says that it’s common to set up a holding company that has an ownership interest in each separate LLC that owns a property.  Essentially, this is a master LLC under which everything else operates.  Any joint ventures and all passive and active investing should go through the holding company.  Picture it like a pyramid: the holding company is at the top and every LLC under it forms the structure. 

How Do I Protect These Structures through Estate Planning?

Most people want to protect their assets for their spouses and kids but aren’t sure how to go about it.  According to Pam, assigning the holding company in a living trust will ensure the assets don’t go through probate.  If both you and your spouse own the company, make sure it’s assigned into the trust to ensure fuller protection. 

The LLCs under the master one will also go with it into the trust, ensuring everything is in one safe place.  Byron points out that it’s important to have an attorney who will add in language about death and disability. 

What Kind of Insurance Do I Need for My LLCs?

The master LLC doesn’t own any real estate itself; it just has a checking account with about $50K in it and owns 5 other LLCs.  What type of insurance is best in this scenario?

Bill says that when your portfolio grows to this size, it’s important to talk to a commercial agent.  Because the LLCs are outside of the realm of personal insurance, there are a lot of details specific to commercial policies that a specialist will understand. 

He reminds us that there are a lot of types of insurance, and many agents think they can provide policies for all of them.  However, it’s crucial to find agents who specialize in the type of insurance you need.  That way, you can be sure that they pay attention to and understand all of the nuances to protect you fully.

How Can I Capitalize on My Real Estate Investments?

As you invest in more property, you start to build up equity.  A great place to find equity is in your primary residence. 

If you lived in your primary residence for two of the last five years and then sell that property, there is no taxable event.  The government wants to encourage home ownership, so they don’t punish homeowners for selling their residences.  Within a five year period, you can buy and live in two homes for two years at a time and sell both for no penalty. 

This strategy allows you to kickstart your investments: you can make $250K if single and $500K if married off of these sales tax free and with no 1031 considerations necessary.

Can I Do a 1031 Exchange through an LLC?

1031 Exchanges are a great way to take advantage of equity and avoid capital gains tax.  This is a strategy wealthy people use to defer tax payments time and time again.  While this doesn’t eliminate taxes altogether, it’s a deferral that can kick the can down the road. 

The IRS determines the gains by looking at the purchase price of the property and factoring in depreciation to calculate the basis.  When the property is sold, the capital gains are the difference between the basis and the sales price. 

Investors can utilize a 1031 exchange regardless of the property being in their personal name or an LLC.  The IRS tracks the property based on the Tax ID number: either a social security number for an individual or an EIN for a company.

If the investor originally bought the property in their name and then transferred it to an LLC, they can still use a 1031 exchange.  At the time of the transfer, there was likely a taxable event that affects the basis of the property.  The basis won’t be dramatically different, but it’s important to make sure any taxes are paid from the previous transfer before trying to transfer it again.

Should I Create an LLC for Each Flip, or Rotate Them through One LLC?

If the flipping business is just you, or you and your spouse, then you can rotate them through one LLC. 

However, if you’re doing a joint venture with a partner, then you want a separate LLC per partnership.  These limited liability entities need their own operating agreement, and it’s important to make sure the business is operating in the way the agreement specifies. 

If I’m Doing S Corp Elections for My LLCs, How Does that Impact Estate Planning?

Businesses often file their taxes as S Corps to help alleviate their tax burden.  To protect your heirs, it’s important that there’s a succession plan in place that specifies who gets access to and who will run the company.  There needs to be an operating agreement on the estate planning side, or your family won’t get access to those assets right away.

This is particularly important for business owners whose spouses are not involved in their business.  My wife isn’t involved in my real estate investing, just as Pam’s husband isn’t qualified to take over her legal business.  In that case, it’s crucial to make sure you have someone in your life who can transition and step in if needed. 

What Type of Insurance Do I Need for My Businesses?

Bill says that as a real estate agent, you need errors and omissions insurance.  Brokerages require this insurance, but the more business you do, the higher the coverage needs to be on an annual basis.

For flipping businesses, it’s important to get the right kind of coverage, either a landlord policy or something else, depending on how much work is being done on a property. 

As your investments become bigger and your businesses grow, talk to a commercial agent to see what coverage you need.

Connect with Our Experts

To reach out to our experts directly, contact them here:

Pam is offering a free copy of her book Legally After Ever that shows parents how to create an estate plan that will protect their children.  Use the promo code RICO to download your copy today:

Remember, this is an ongoing series, so reach out with your questions and comments on LinkedIn and Instagram.  We look forward to putting together an episode based on the information you want to know!

YouTube Video

Protecting the People You Love as Your Assets Grow

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