Real Estate Investing: How Will it End?

Real estate investing needs a long term vision. As individual investors we save money, purchase real estate and try to increase our portfolio over time, hoping that by the time we retire, if not before, the cash flow from the investments might pay for college for our children and then pay for a comfortable retirement.

Curveballs: Around 40 we decide it is time for us to improve our money management strategies so that we have money available for our retirement. Typically this happens because we can see our parents aging. We choose good investments, great locations, super cash flow, we refinance and use the equity generated to buy other investments.

Our plans look good until:

Multiple marriages/partners: Maybe we have been married two or three times, but what about the adult children that came with your new spouse? What if your spouse passes away and the step children want their inheritance now? The investment income you may have been counting on, or the house you thought you would live in for the rest of your years, may be in jeopardy.

Health: You were in good health but all of a sudden cancer caught up with you and you need to be in a rehabilitation facility. It was a good thing you purchased long term care insurance, but the drugs are affecting your memory; you are having a hard time making decisions.

Investment partners: You invested with a partner for many years, but his wife is ill and he needs to liquidate to have enough money to take care of her. Maybe our partner has four children and wants his assets to be passed to them. How do these partnerships continue...or end, do we have an exit strategy that will work favorably for all of the partners?

Children:

* We realize that our children are not as driven as we are. We have taken such good care of them, they don't value money. Sure, they received an education and are smart, but they have no understanding for financial statements and think real estate is too much trouble to deal with;

* Or maybe we have a child that is handicapped. We need to make sure a trust is in place to take care of that child;

* Or we started having children late in life and they are too young to make financial decisions;

* Maybe we do not trust our children; they think they are wise investors and money managers, or are greedy and want you to turn all of your assets over to them before you pass; or

* Or worse, our children have gotten married we do not trust the in law to take care of us or our investments.

We have to figure out a system to help the next generation make the right decisions. How are our children going to interact with one another or with a new spouse's children? How can we avoid a conflict that may result in the sell off or destruction of our investments? Involve your family early If you have children get your kids on board now! If you are married involve your spouse. Get them involved and educate them in your business..your real estate business, so they are prepared. Have them help you collect rents, paint apartments, repair toilets and pull weeds. If your children are not interested maybe, look around the family. Perhaps your son is the spend thrift but his wife is cautious with money.

Or you may have a grandchild that shares your thoughts on investing? Communicate your wishes to your spouse and children. Explain your goals. Few parents really tell the story of how they got what they have and the hard work that it took.

Planning Clearly: you need to plan ahead. You should have a Will. It is good practices to update that Will every five years. If you have assets that are under $1,000,000, federal and state estate taxes will be minimal. In Oregon the federal and state inheritance taxes are not aligned. In other words Federal estate taxes don't kick in for 2010 until we hit $3,500,000 per person (or a combined $7,000,000 estate). But Oregon estate taxes kick in at over $1,000,000. Estate taxes can eat up a lot of cash and may force beneficiaries to liquidate real estate in order to pay the taxes.

If we want our hard work and investments to be passed on to the next generation and our estate is worth more than $1,000,000 (cash, stocks, real estate etc) we need to hire an estate attorney to help we plan. Have your real estate attorney refer you to at least three people. If you do not have an attorney, search the internet or contact the Oregon State Bar, Estate Section for a referral.

Interview prospective attorneys; ask tough questions so that you can identify a person we can trust. Remember this person will most likely be responsible for settling your estate once you pass. They may suggest purchasing insurance to pay for long term care and estate taxes. They may suggest you place your assets into trusts, or they may even suggest generation skipping trusts.

Pre-Nuptial Agreements: If you have significant real estate assets before you get married you might want to consider entering into a marriage with a pre-nuptial agreement to insure not only your retirement income but your children's inheritance is protected.

Philanthropy: If you have no children or other family members, you can always give money to a foundation. They typically liquidate the real estate assets and then invest the money from the proceeds to create a fund that is invested. The investment returns are then used as your donations to philanthropies that you specified in your will/trust. (Examples of such foundations include the Oregon Community Foundation, and the Oregon Jewish Community Foundation, Portland Women's Foundation and the Rotary foundation.) On the other hand you might also leave your assets to a college, university, or not for profit organization such as a hospital, or Oregon Humane Society for example. Your attorney and CPA can give you some ideas on how a charitable remainder trust can be used to donate your real estate investments without generating capital gains taxes while you are alive.

You have worked hard to build an estate. To keep it intact you must take the time to hire the right people to advise you and help with tax planning both while you are alive. You can leave your mark on future generations, either by leaving the assets to your family or to philanthropic causes.

On the other hand you could just sell the assets while you are alive, pay taxes and go to Las Vegas and have a great time gambling it away. In any case it is up to you to decide.

This is merely an outline of some key issues. Please consult an estate attorney or CPA to get information on the most current laws.

Written by Clifford A. Hockley for www.RealtyTimes.com Copyright © 2010 Realty Times All Rights Reserved.