Selling massive Senior complexes at 94. Millions in tax savings?

Question

Ran across this in my little newspaper today.

A local guy is selling 3 massive Senior Living Centers in WA and 1 in ID.  He used to have them across 21 states. He is 94 years old. He owns them in an entity, of course.

Tax assessed value alone on the one in my town of Wenatchee is well over $6M.  The other 3 I will assume are close to that.  He's owned them for decades.  He's selling (estimated) $22M worth of RE.

Here's a link to the article is anyone's interested:  http://www.wenatcheeworld.com/news/2016/sep/10/ret...

If he owned in his personal name and they passed to his estate, his heirs would face no taxable gain if they sold soon after his death as far as I know.

Can you imagine?  He would save his family $4M+ in federal income tax alone.

CPAs - is this true? Is this the little talked about disadvantage of owning RE in an entity vs your personal name? Can't pass your entity interest it to your heirs and allow them to assume the stepped-up basis to current value?

I hold commercial assets in entities as well. If I wait to sell until I'm 94, I may wish I'd done it differently.   If Mr Campbell (the 94-yo seller) dies soon, his heirs just paid a massive federal tax bill for no reason.    They would have inherited at current market value.

Thoughts and comments are appreciated.  Thanks!

Brandon Hall · Answer

@Steve Vaughan

So he sells today for $22MM with a $16MM built in gain. The long-term gain tax rate on this sale will be 23.8% for total tax liability of $3.808MM.

His estate is now worth $18.192MM assuming that his entire net worth is wrapped up in these assets. When he passes away, his estate will incur taxes at the 40% rate less a credit of $2,125,800 (this is how estate taxes are calculated; it's tricky and weird). So his estate taxes are $7.276MM less $2.126MM equaling $5.151MM.

Estate taxes of $5.151MM plus capital gain taxes of $3.808MM equal total taxes of $8.959MM. This means he is passing on a post-tax estate of $13.041MM.

Now let's assume he doesn't sell but passes on assets worth $22MM to his heirs. His estate taxes will be $8.8MM less the credit of $2.126MM equaling $6.674MM. This means his post-tax estate will be worth $15.326MM.

So by selling prior to death, he costs his estate an additional $2.3MM in taxes. Maybe he's decided that paying an additional $2.3MM is worth lessening the burden of leaving his hearis with assets they have to liquidate.

They'd have to figure out how to foot a $6.674MM tax bill. Do they have experience with real estate dealings? These are commercial assets, not your every day single family home. How do we ensure passing down the asset's doesn't make the family relationships implode?

@Roy N.

Jerry W. · Answer

@Steve Vaughan if you are going to go over the $5 mil mark you really need to talk to an estate planner.  I am not an expert in this area but there are many things you can do to reduce the tax bill for your heirs.  QTIP trusts, you can buy life insurance under Crummey trusts to provide your heirs with the money to pay the inheritance taxes without having to liquidate the assets.  You can transfer some minority shares at discounted rates, etc.  You can also fund some education trusts.  it is great to have assets that need to be protected.

Steve Vaughan · Answer

Thank you @Jerry W.  Appreciate your advice especially!

The estate plan is not something I plan on DIYing for a change.  I am finally loosening my death grip on all projects and processes.  I will seek professional estate and tax planning guidance for sure.

I will look into the QTIP Trusts.  Don't know about the Crummey (what a name!) Trusts, but will research those as well.

Thankfully, RE gives us the need to do such planning and the time to research it when done right.  Thanks again for chiming in!

Steve Vaughan · Answer

@Brandon Hall- thank you!  I knew you would/could come through!

From a tax cost perspective alone, it would have been better to allow to pass down as real property to the estimated tune of $2.3M in my example.

To address the liquidation and operation burden you mention (which of course is a HUGE factor for the heirs) I believe Mr Campbell could have been 'under contract of sale' with this buyer until his passing.  A life estate on the whole business if you will.  He maybe could have had the best of both.

For my own personal estate planning, we are probably going to hold up to the limit ($5m ish today) in personally-owned residential RE and keep the commercial assets in LLCs.

We may explore trusts and other options to hold the houses for anonymity and will explore the best asset protection possible while still allowing heirs to inherit at stepped-up basis.

Thank you again, Brandon! You rock!

Roy N. · Answer

@Steve Vaughan

I understand the questions and am always interested in the answers to these scenarios.   Are there any federal or state taxation allowances for the passing of control of a {small} family business (if his still qualifies) to heirs?

Steve Vaughan · Answer

Thanks for chiming in @Roy N.  I appreciate your comments.

His company owns the personal property in name of the building, Colonial Vista LLC.

The real estate is owned by Campbell Healthcare Investments, LP.

An outside outfit is buying it all from him, leaving empty shell co's (most likely) and a massive tax bill.

If he owned in his personal name or trust or something else (?), I think he could have let the real estate pass to his heirs tax-free, up to $5M or whatever the estate tax exemption limit is these days.

That's my question or what I am getting at.  Is that true?  No doubt Mr Campbell had a team of the best estate planners and tax pro's at his disposal and the details aren't known to me, of course.

For us lowly average investors- If we plan to hold until we die (like Mr Campbell almost did), is the lauded LLC/entity the best way to go?  Are we costing our estate and our heirs unnecessary tax burdens at death by doing so?

Just from a tax perspective, is an entity the best way to hold valuable commercial assets forever after all?

Roy N. · Answer

@Steve Vaughan

Would not the proceeds of the sale of the properties by the company be taxed in the hands of the company?

After Mr. Campbell's death, his holdings in the company would fall to his estate and be distributed accordingly ... his death itself should not prevent the company from continuing as a going concern.

If he sells the company itself or winds the company down after selling off all its active business components the proceeds will be taxed in his hands.

Selling massive Senior complexes at 94. Millions in tax savings?

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