Legacy Course Review: Article #7
Insurance & Investments
Source: Apartment News Magazine
By Timothy Gorman
Real Estate Broker/CPA/Entrepreneur
We’re now past the midpoint of our ten-week Estate and Legacy Planning class. This series aims to be both engaging and practical, offering comprehensive insights while equipping participants with a solid framework for their estate plans and actionable steps for themselves and their advisors.
In this article, we’ll focus on Week 6: Investments & Insurance—topics that extend far beyond simple asset protection. We’ll explore how these tools can shape your legacy and strengthen your estate plan. Our discussion covered: Key considerations for estate planning, Financing, Real estate investment fundamentals, Tax advantages and strategies, risk management and insurance strategies.
Joining us for this session were guest speakers Kelly Clyde, Certified Financial Planner, and Nick Lieberman, Mortgage Loan Broker. With my own background as a CPA at one of the world’s largest accounting firms, this week’s focus on investments and insurance was especially meaningful to me.
A mortgage broker might not be the first professional that comes to mind for estate planning, but if your estate includes significant investment real estate, their expertise is invaluable. While you may understand the intricacies of managing debt, your successor trustee must also navigate this landscape skillfully.
They’ll need to grasp loan assumption, new guarantors, prepayment penalties, balloon payments, and options for paying off multiple debts. Often, the successor trustee is also a beneficiary, which means they may need to step in as a guarantor, taking on the responsibility of the entire loan. This can be crucial when joint and several liability is involved.
To effectively evaluate their options, real estate owners must be familiar with common investment metrics.
- Capitalization Rates (Cap Rates): These are often used to estimate the potential return on an investment property by dividing the property’s annual net operating income by its purchase price. However, Cap Rates can be unreliable for smaller properties (under 100 units) as they don’t always account for deferred maintenance and other advanced accounting factors.
- Gross Rent Multipliers (GRM): GRM offers a simpler method to estimate value by comparing gross rents. It is easier to verify and often falls within a set range for specific areas and unit types.
- Internal Rate of Return (IRR): More sophisticated investors may use IRR, which accounts for the time value of money and measures performance over multiple years, as opposed to the one-year snapshot offered by Cap Rates or GRM.
The key in estate planning is to define the role of each property in your portfolio—whether it’s cash flow, appreciation, or legacy-building. Understanding these roles and how to evaluate them is crucial for both you and your successor trustee, ensuring that decisions align with your long-term goals.
Real estate offers several tax advantages, notably depreciation, which allows investors to deduct the costs of purchasing and improving a property over its useful life. In some cases, accelerated depreciation can provide additional benefits, though it’s important to consider potential recapture risks.
Investors can also deduct a wide range of expenses, such as mortgage interest, property taxes, insurance, maintenance, property management fees, and utilities. Additionally, a 1031 exchange allows investors to defer capital gains taxes by reinvesting proceeds from the sale of one property into another, growing their portfolio while delaying tax payments until a final sale.
REITs and DSTs play unique roles in estate planning. While REITs don’t qualify for 1031 exchanges, they offer liquidity and the ability to earn income from real estate investments without directly managing properties. DSTs, on the other hand, allow investors to own fractional interests in large real estate assets, providing an option for 1031 exchanges. This can be an effective strategy to defer capital gains taxes while maintaining real estate holdings. DSTs can also be a way to keep heirs invested in real estate, benefiting from returns without the challenges of property management.
Life insurance is a cornerstone of estate planning, blending protection with growth and providing critical support for wealth preservation and legacy building. It offers a safety net for beneficiaries and enables strategic opportunities like liquidity provision, tax advantages, and business succession planning. In this session, we explored how life insurance can integrate into estate planning through tools like Irrevocable Life Insurance Trusts (ILITs), 7702 plans, and Indexed Universal Life (IUL) insurance. This topic was an eye-opener, offering fresh insights that have prompted me to take a closer look at my own legacy plan.
In the next article, we’ll dive into Week 7: Taxes. We’ll cover income, estate, and other forms of taxation, as well as upcoming tax legislation updates, proactive year-end tax planning for 2024, and strategies for minimizing estate taxes. We’ll explore creative, legal ways to “disinherit the government” while maximizing the legacy you leave behind. Stay tuned!