Embarking on the journey of estate planning as a Canadian real estate investor is akin to navigating a complex terrain, fraught with potential pitfalls that can jeopardize your hard-earned legacy. Just as in the realm of property investment, where strategic timing can be the difference between substantial gains and missed opportunities, estate planning demands careful consideration and proactive action. Drawing wisdom from the experiences of countless investors, let’s delve into the realm of common estate planning mistakes that can inadvertently undermine your aspirations. By arming yourself with insights from these missteps, you’ll empower yourself to forge a more secure and sustainable future.
In this video, we’ll dive into a series of common estate planning mistakes that range from underestimating the importance of getting started, to inadvertently excluding beneficiaries and grappling with the nuances of fairness and taxation. So, whether you’re a seasoned investor or just stepping into the world of real estate, join us as we unravel the intricacies of estate planning and equip you to make informed decisions to secure your legacy.
Video Transcript: 13 common estate planning mistakes for real estate investors
Let’s talk about the biggest mistakes I see when real estate investors are estate planning.
I’m George Dube, saving the world from tax one bow tie at a time.™
Mistake 1: Not doing any estate planning
Well, one of the first that jumps off the page is not doing the planning in the first place. It reminds me of probably a common example we hear in the real estate industry. The answer to the question, when’s the best time to buy real estate? Well, that was at least 10 years ago, 20 years ago, but the next best time is today.
Mistake 2 Not giving your estate plan enough time
Most estate planning work needs time to percolate. It’s not something that’s going to be magically done the next day, where the value of it is obtained over time. As the business or real estate or investment activity grows, now all the ideas that are part of the estate planning process are allowed to work.
Mistake 3: Being intimidated
Some people get intimidated by the topic, and they run screaming for the hills.
Mistake 4: Fear of complexity
Others, I think, really recoil from the complexity involved in their eyes. I have a particular family I’ve been working with for years. Literally, they’re losing approximately $700,000 a year, because they don’t want a little bit of extra complexity in their structure. A extra couple companies, a family trust. That’s really, really, really going to an extreme in my mind, but I have a lot of examples, perhaps not to those dollar figures, where people, again, are trying to understandably simplify, because they may have been involved in a process before with their parents or alternatively, other family members, and it was too complex. Sometimes, that complexity is justified though.
Mistake 5: Planning to live forever
I think other people plan to live forever. That’s the magic solution.
Mistake 6: Avoiding family issues
Some will see or know of a family issue that they just don’t want to get into. They don’t want the fight. I’m sure there’s a host of other reasons for people not to get involved in the estate planning process. What I think people will find is that if they can get into it, get it started, particularly where they’re working with an experienced advisor, you may be surprised at some of those solutions that pop up.
Mistake 7: Not having a will
Some people that are putting off completing their wills may not like to hear it, but I do think it is an abdication of responsibility, particularly where minor children are involved.
Mistake 8: Waiting too long
Don’t wait until it’s too late. There are more than enough examples where someone, for example, a family will call a mom and dad are now ready to shift to the next generation the particular business. At that point in time, the child and their family, they may not want that so-called opportunity. They may be too old for it. They may not want the stress associated with it. They may not know how to do it, because they haven’t received the mentoring, and now all of a sudden, their fear or thought process can be, I’ve gotten by 60 years without this. Why deal with the extra stress?
A little bit of dialogue with the family, a mentoring process can go a long way in helping go back to missing that particular opportunity to do the estate planning in the first place.
Mistake 9: Assuming you have to sell the real estate portfolio
One of my pet peeves for real estate investors, as they’re completing their estate planning process, whether we’re talking shareholder agreements, partnership agreements, wills, et cetera, is the assumption that if somebody passes away, we must sell that real estate portfolio.
One of the nice things I’ve noticed about real estate over the last 25, 30 years is that real estate doesn’t care who owns it. It really just wants to know who it should send a check to. And if that real estate was good for you, why wouldn’t it be good for your family? Why wouldn’t it be good for the next generation?
It may be that the next generation or the widow may not want to run that real estate the way you did. Professional management can be found. If nothing else, give yourself some time. Give your family some time. What happens if you passed away at what I’ll call an economically poor time? Interest rates may have skyrocketed. Challenges in finding financing. Now, you could have a row of dominoes and a very low price or much lower than otherwise obtainable for that real estate compared to if there was at least a plan to maintain that portfolio for a few years, if not indefinitely.
Mistake 10: Lack of flexibility
Another problem that I’ll frequently see with estate planning is creating something that’s so rigid. There’s absolutely no flexibility that is available.
So a good advisor, I would suggest, is going to be checking for some what if scenarios and some opportunities or problems. As well, in looking through this, one of the descriptions I’d like to give to clients is that advisor’s role in many cases is to reign on every parade that we see. And it’s not that we’re trying to be negative. Far from it, but if we can address the bad things that are gonna be potentially able to happen, we can certainly handle the good things. And if we can do both, I think most people find they’re much more comfortable in the plan that’s being created for them.
Let’s take an example where mom and dad have a million dollars of assets. Mom and dad decide, of the four kids, each of them will receive $200,000, and then the remainder will go to a charity or group of charities. Starts off fine. Now, let’s fast forward though. What’s the scenario 15 years from now when that $1 million of assets or a business or real estate or whatever it may be, has grown to $15 million? Uh-oh, you have four kids that have just received $200,000, and you’ve got a group of charities that have just received $14.2 million. Whoops, probably not the original intention.
Mistake 11: Unintentional biases
Let’s take and watch for biases that you may be unintentionally creating in your estate plan. Two of the common ones that I see, one may be a preference for male heirs as compared to female heirs. Secondly, the eldest child. It may not be that the ultimate plan diverges from whatever that bias may be. But be cognizant of what that may do to family harmony, the thoughts of the other children.
Mistake 12: Too much focus on technical details of saving taxes vs fairly dividing an estate
In creating the estate plan, be careful about getting swept up in what I’ll call the “technical aspects” of saving taxes. While that’s important, creating a plan for saving taxes, in many cases, will not be nearly as important as fairly dividing an estate. And in fairly dividing the state, fair does not mean equal. Fair is a four-letter word that already starts with an F. It can go sideways very quickly, but give thought to what you’re wanting to accomplish, then worry about the technical details. Allow the advisors to recommend how to get there.
Mistake 13: In remarriages, some children accidentally excluded
With a lack of planning, it’s possible where there’s a series of marriages, deaths, et cetera, that some of the children are excluded from ultimately receiving assets, which may not likely be the intended solution. Far worse, I’ve certainly seen original plans where one side of the family or children pay for the taxes of the other side. A little coordination is critical.
Conclusion
I’ve gone through a lot of tips. What not to do, what to do is part of the estate planning process. You’re not going to get it perfect. I don’t think anybody will, but we can significantly reduce the problems with some forethought.
Don’t be cheap about it.
Don’t leave it to the last minute.
Consider what’s going to happen when you’re gone for your children or extended family. You are helping solidify your legacy.
Have more questions? Please subscribe, follow, and even share. I want all of us to have the tax information we need to do wonderful things.
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Resources to avoid common estate planning mistakes
For additional resources related to estate planning for real estate investors and how to avoid common mistakes, go to:
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
