Need Financial Advisor (Retired) - Real Estate, stocks, annuities, advice

[Mackal Smith]

I have been retired for 7 years. My current financial advisor deals well with my stocks, 401K, Roth IRA, and Annuity but I also need help figuring out the most tax efficient way to get out of the small multi-families I own across 2 companies and a partnership with small multi-families. I don't want to leave a burden for my wife when I pass so I need to work with someone who can look at all my assets and provide me my most tax efficient way to structure an exit plan.

I own some properties outright and am open to selling some to loosen up equity with a strategy of owner financing others to provide a steady stream of income over the next 15 to 30 years but this needs to fit into an overall plan including all my existing income streams ( social security, a fairly large annuity, substantial 401K, substantial non-401K investments, and a real estate portfolio worth a couple million).

I can find financial advisors that deal with investments other than real-estate, but I have not been successful finding someone that is willing to deal with the complicated overall financial picture I have including real estate.

Any help would be very much appreciated

[Dillon Kenniston]

Hey there @Mackal Smith! It sounds like you have two main goals: to 1) generate an income stream while keeping taxes manageable, and 2) develop an estate plan that equips your wife with lasting income while simplifying the picture. Fair summary? If so:

How best to accomplish #1 will depend on several factors, and it's always risky to recommend anything without knowing the full picture. (If we were discussing face-to-face, I'd want to understand the "why" behind divesting a bit better, since there may be ways of generating income more passively without divesting.) So, high-level, it sounds like it'd be worth doing a side-by-side analysis on whether a Deferred Sales Trust or a 1031 to Delaware Statutory Trust makes most sense. Both have the potential of deferring capital gains "indefinitely" and both will likely provide commensurate income. A Delaware Statutory Trust will be more restrictive in terms of new investment vehicles, but also has the benefit of deferring depreciation recapture. (I believe a Deferred Sales Trust will still recognize depreciation recapture in year of sale, but someone can absolutely correct me if needed.) Likewise, with a Deferred Sales Trust, capital gains are deferred, but still paid if/when principal payments are distributed from the trust. (And since a sale has occurred, there's no step-up in basis to be had. This is one of the benefits of holding real property: at death, your wife could sell with a stepped up basis and get a lump sum while avoiding capital gains and depreciation recapture. A Delaware Statutory Trust preserves this benefit.) Not sure which would make most sense for you; just options & factors to consider.

#2 would require more strategic discussions with your financial advisor and (ideally) an estate planning attorney about how you'd want income for your wife structured. This can get complicated quickly because of how many moving pieces there are (such as property titling: if to your businesses, then what business ownership looks like; what you'd like to happen after your wife passes; whether you think you might breach the federal estate tax exemption amount [$13.61m per individual for 2024] and more broadly, whether or not you should use the marital deduction; whether you're in a second marriage; whether there are kids from a previous marriage; etc.). Much of the financial side of estate planning done by a CFP or other fiduciary advisor has to do with estate tax planning, which generally becomes relevant if you expect your gross estate to exceed exemption amounts. (That's usually when we go from discussing revocable living trusts more broadly to discussing things like QTIPs, General Power of Appointment trusts, and Bypass trusts - all, of course, alongside your estate planning attorney. We look at these and don't assume spousal exemption portability because portability may be forfeited in cases of remarriage.) 

But here are a few high-level factors to consider:

1) Are the properties held in multiple states? If so, watch out for ancillary (multi-state) probate. (Having a will is necessary but usually not sufficient since a will won't, by itself, avoid probate.) It's common to put properties into a revocable living trust for this reason (avoids probate while preserving step-up in basis). Even if you use a different trust structure - there's several to choose from - 99.9/100 times, if you own property in multiple states, you don't want to own them in your own name, and usually want them in some sort of trust. 

2) LLC ownership interests can be put into trusts as well, but as you hinted, things can get a bit more complicated, especially when there are loans on LLC assets held in trust. (It sounds like your idea about getting the properties owned by your businesses to "free-and-clear" might help simplify things here. But an estate planning attorney can help steer you in the right direction.)

3) Are you and your wife charitably-inclined? There are certain kinds of charitable trusts that lend themselves to income streams for your wife once you've passed, give you tax benefits today, all while leaving remainder interests to charity-of-choice.

There are other strategies (Family Limited Partnerships, Spousal Lifetime Access Trusts, etc.) that come available if you were open to holding properties for longer (ie, offload to a trusted  property manager). But assuming divestment, the above might be some options.

One last note: @Daniel Johnson hit the nail on the head above. I'm also an XYPN member who specializes in working with Real Estate Investors and he's 100% right: there's not a ton of us out there. To your point, fee-only advisors who earn a living strictly on an AUM model may not work with RE investors because RE investors have a significant portion of net worth tied up in assets the advisor can't manage (plus, it's a financial planning niche, and the rabbit hole goes deep). So, too often, the first advice given to real estate investors is: "Stop investing in real estate; instead, liquidate your properties and invest the proceeds with me; here's a lovely bond ladder!" And the kicker if they're not fee-only: "And by the way, you look like you might need another annuity." But, independent, fee-only, fiduciary advisors who work with RE investors do exist, as Daniel and I can testify! And both XYPN and NAPFA are great places to find fee-only, fiduciary advice more broadly.

Apologies for the novel. Cheers, and best wishes! Don't hesitate to reach out if I can be of service. 

And, disclosure: All of the above is for educational purposes only, does not constitute investment advice, no decisions should be made solely on the above, and you should consult with other professionals to validate which of the above strategies is best for you :)