Building and managing a substantial real estate portfolio requires careful planning around financing, ownership, operations, and risk. Estate planning should receive the same level of attention.
Without a coordinated estate plan, the death or incapacity of a real estate owner can disrupt management, financing, partnerships, and the transfer of ownership interests. For real estate professionals with significant holdings, an effective estate plan should address not only who inherits the assets, but also how the portfolio will continue to operate.
Coordinate Entity and Estate Planning
Most real estate professionals hold properties in LLCs for liability protection, financing flexibility, and operational control. But forming an LLC is only one piece of a larger estate planning strategy.
Operating agreements often address day-to-day operations but may not address a manager’s or sponsor’s incapacity or death in a way that allows for continuity of control over decisions affecting the asset. When the operating agreement and estate plan are misaligned, assets may be subject to probate, lenders may assert due-on-sale provisions, and disputes may arise with heirs never intended as partners or with third-party members who try to assert control.
A well-coordinated plan should ensure membership interests transfer seamlessly, management authority is clearly designated, and intentions are documented consistently in both the operating agreement and the estate plan.
Use a Revocable Living Trust for Real Estate Holdings
For professionals with properties in multiple states, probate can be particularly burdensome. Each state may require a separate proceeding, known as ancillary probate, resulting in additional legal fees, extended timelines, and potential disruption to rental income and development activity.
A properly funded revocable living trust allows real estate interests to pass outside probate, providing management continuity, preserving privacy, and ensuring uninterrupted cash flow. For the family, this can mean the difference between a smooth transition and prolonged uncertainty.
Simply executing a trust document is not enough. The trust must be funded. For professionals who hold real property in their individual names, this means deeding property into the trust, which may implicate title insurance, transfer taxes, and documentary stamp requirements.
More commonly, when properties are held through LLCs or other entities, funding the trust requires assigning membership interests to the trust and confirming that operating agreements permit and align with trust ownership. In either case, lender consent may be required, and coordination between estate planning counsel and real estate counsel is essential to avoid triggering due-on-sale clauses or inadvertently affecting existing title insurance coverage.
Addressing Co-Ownership, Partnerships, and Joint Ventures
Many real estate professionals hold interests alongside partners, family members, or co-investors. These arrangements work well when all parties are active and aligned but become problematic when one party dies or becomes incapacitated and a spouse, child, or executor steps into the role without understanding the business or obligations involved.
A comprehensive estate plan must account for these structures. Operating agreements, partnership agreements, and joint venture agreements should include buy-sell provisions, valuation methodologies, successor management protocols, and transfer restrictions, drafted not only for routine contingencies but also for death, disability, divorce, and family disputes.
The goal is to ensure the family is neither trapped in an unwanted partnership nor forced to liquidate at an inopportune time.
Consider Estate Tax and Asset Protection Strategies
For real estate professionals whose estates may exceed state or federal estate tax exemptions, advanced estate planning and asset protection strategies can significantly reduce the tax burden on the next generation. Real estate, particularly appreciating or income-producing property, is often ideal for these techniques because of its growth potential.
Irrevocable Trust Structures
Spousal lifetime access trusts (SLATs), dynasty trusts, and grantor retained annuity trusts (GRATs) can transfer appreciating real estate out of the taxable estate, removing future appreciation from estate tax calculations while allowing the grantor to retain certain economic benefits. With federal estate tax rates reaching 40 percent, the potential savings are substantial.
Asset Protection Planning
Real estate professionals face litigation risk from construction disputes, environmental claims, tenant actions, and other commercial matters. Asset protection trusts and carefully structured entities can help insulate personal wealth from these exposures and protect inherited assets from a beneficiary’s creditors or divorce.
1031 Exchange Considerations
Real estate professionals who have used Section 1031 exchanges to defer capital gains should ensure their estate plan accounts for the embedded deferred tax liability in exchanged properties. A key planning opportunity is to hold properties with the largest deferred gains in a revocable trust until death, at which point the heirs receive a stepped-up basis under IRC § 1014, eliminating the deferred gain entirely. Properties transferred to an irrevocable trust do not benefit from a basis step-up, so deliberate planning is critical to avoid heirs inheriting an unexpected capital gains tax obligation triggered by a subsequent sale or disposition.
Qualified Personal Residence Trusts (QPRTs)
For real estate professionals with high-value residences or second homes expected to appreciate significantly, a QPRT can transfer the property to the next generation at a substantially reduced gift and estate tax cost.
The technique is most effective when the residence is likely to increase in value between the date of the gift and the expiration of the retained term, because the gift tax value is “frozen” at the time of transfer. For residences that are not expected to appreciate meaningfully, the trade-offs, including the loss of a stepped-up basis at death and the requirement that the grantor survive the trust term, may outweigh the tax benefit.
Each QPRT should be evaluated in light of the professional’s overall tax profile, current property values, and projected appreciation.
Protect What You’ve Built
A real estate portfolio represents more than financial value. It reflects years of strategic decision-making, relationship-building, and risk management. Protecting that legacy requires an estate plan that addresses not only asset transfer but also the operational, financing, and succession challenges unique to real estate holdings.
If you have not recently reviewed your estate plan, or if your plan was not designed with real estate holdings in mind, consider whether it adequately addresses the ownership and management of your properties and related entities.
Contact Varnum’s Estate Planning and Real Estate Practice Teams to review your estate plan and address the unique considerations of your real estate holdings.
