One of the hardest things our clients deal with when it comes to managing their estates is preserving non-liquid assets. Whether they’re trying to keep the family home in the family or maintain land rights, it’s very possible that taxes can undermine all their efforts. After all, estate taxes are due in cash and if this property isn’t properly managed, those estate taxes could require your heirs to sell off assets. There’s a lot of advice out there on how to protect real estate assets. The most common strategies for managing these assets, though, involve putting real estate in a Roth IRA or using ILITs to fund property taxes.
Protecting Real Estate Assets
When discussing protecting real estate assets, most strategies utilize Roth IRAs or ILITs. Roth IRAs can be advantageous as they allow for tax-free growth and withdrawals in retirement, potentially shielding your real estate investments from heavy tax implications. On the other hand, ILITs, or Irrevocable Life Insurance Trusts, can also be utilized to safeguard real estate assets by removing them from your taxable estate, ensuring they are passed on to your chosen beneficiaries without being heavily taxed. By exploring these strategies, you can take proactive steps to protect your valuable real estate holdings for the future.
Using Roth IRAs to Manage Property Taxes
One avenue frequently considered by real estate owners is leveraging a Roth IRA to minimize property tax burdens. Roth IRAs are post-tax retirement accounts where distributions are tax-free. Unlike traditional retirement funds, Roth IRAs aren’t subject to the required minimum distributions, making them viable for holding assets like real estate.
However, transferring property into a Roth IRA isn’t straightforward. You can’t directly transfer property into the account; instead, you must use funds within the Roth IRA to purchase the property. Any appreciation in the property’s value within the account remains tax-free, making it an attractive option for holding appreciating assets.
The Cons of Using Roth IRAs
The catch arises if you lack sufficient funds in your Roth IRA to purchase the property outright. While financing is possible, it comes with associated costs, potentially offsetting the tax benefits. Moreover, the value of the Roth IRA is included in your estate upon your passing, offering limited protection against estate taxes for your heirs.
Typically, utilizing a Roth IRA for property holding suits individuals within the $11.7 million estate tax deduction bracket seeking tax-free asset appreciation. For those with larger estates, trusts often present a more effective option.
Managing Property Holdings through Trusts
Often, the most efficient way to hold a property is within a trust. The most common is a living trust, which owns the property on your behalf and allows you to sell and buy more. When you die, all of the properties bypass probate. Living trusts, though, have their limitations, so some instead choose to manage these properties through ILITs.
Using ILITs to Fund Property Taxes
By utilizing ILITs to fund property taxes, individuals can effectively shield tax funds, thus avoiding the need to sell off property assets. Life insurance within ILITs can be structured to cover the estimated tax amount, ensuring that the beneficiary not only receives the property but also a financial safety net.
Using UL and ILITs Provides Flexibility for Changing Property Values
As the fair market value of the property is likely to exceed your initial estimate upon your passing, this tactic is best suited for use with Universal Life (UL) insurance. UL policies allow you to adjust premiums and increase the death benefit as needed. Therefore, by employing Universal Life and ILITs to fund property taxes, you maintain pace with the appreciation of real assets.
Another option some choose is to sell their property to a trust based on its current fair market value. Then, a separate ILIT can be set up with life insurance policies that provide enough in death benefits for the beneficiary to purchase the property from the trust. While this method is a bit more complex, it’s also the best way to reduce your eventual estate taxes.
Additional Benefits of ILITs
Beyond tax implications, these trusts streamline asset transfers, bypass probate and potential disputes, and ensure a seamless transition to heirs.
If your property’s value is likely to exceed the IRS exemption, an ILIT offers a robust solution to safeguard assets and bypass an often lengthy and potentially expensive probate process. Moreover, since the trust is managed by contractual obligations, it passes on directly to your heirs without dispute and can avoid instances in which assets might be placed into conservatorship.
Choosing The Right Strategy
By employing ILITs strategically, individuals can protect their property, secure assets for beneficiaries, and manage tax obligations effectively. It’s essential to consult with an advisor you trust to tailor an ILIT to your specific needs and circumstances, ensuring a solid financial plan for the future.
For comprehensive guidance on utilizing trusts to manage property holdings, reach out to a Howard Kaye advisor to contact a Howard Kaye advisor today at 800-DIE-RICH.
