Consider Estate Planning as Your Successful Real Estate Empire Grows in 2023

No want wants to think about death—especially if you’ve still got decades of life left to enjoy! But the more complex your financial situation becomes, the more you need to consider what happens if you pass on. Who assumes ownership of your properties? What happens to your leveraged debt? How does this impact your spouse or family?

Estate planning is something every real estate investor needs to consider as their portfolio grows. You might be focused on building an empire or setting up consistent cash flow, but you also need to figure out how that all plays out when you’re not there to oversee it.

But first, if you would like to learn how different types of mortgages are treated as part of your estate planning, click the link below to book a free strategy call today.

A quick primer on estate planning

Simply put, estate planning is the act of getting your financial affairs in order, so they can be easily managed after you die. It’s not just about how your debts are handled, either. It’s also about planning for things like the Deemed Disposition Tax and making sure your assets don’t go through probate. Through estate planning, you’re able to dictate exactly what happens to your real estate investments after you pass.

Understanding Deemed Disposition Tax

If you found out you owed a 33% tax on all the properties you’ve invested in, you’d probably be pretty upset! Well, that’s what the Deemed Disposition Tax is. Any investments sold upon your death trigger a tax on capital gains—often as high as 33% based on Canada’s federal income tax rates. It’s hard to get upset about it (because you’re dead), but your heirs and family probably won’t be too thrilled about it.

Estate planning helps in combating the Deemed Disposition Tax. By arranging for your assets to be passed on or handled responsibly, it prevents them from being liquidated, which would otherwise trigger capital gains. Capital gains are deferred when assets are transferred to a living spouse or heir. This means lowering the burden of your owed Deemed Disposition Tax.

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Protecting your investment through a trust

One of the focal points of estate planning for a real estate investor involves setting up a trust. A trust is a type of three-party relationship that’s used to protect assets and wealth. It usually involves a trustor (you, the investor), an executor (third-party) and a beneficiary (spouse/heir). Your assets and wealth go into the trust, which is managed by the third-party o behalf of the beneficiary.

There are several types of trusts, but they all have a common purpose: To protect your wealth from taxation and ensure it’s handled according to your last will and testament. To ensure your real estate holdings are passed on appropriately, you might arrange for any of the following types of trusts:

Revocable living trust

This type of trust is aptly named because it can be rescinded at any time by the person who set it up. For example, if you set up a trust for your spouse, then get divorced, you can nullify the trust. Be aware that once you pass on, whoever is the beneficiary becomes the trustor.

Testamentary trust

This type of trust becomes active only after your passing. It’s outlined as part of your last will and testament, and names someone as a trustor on your behalf. That person then handled setting up the trust, including choosing the beneficiary if you didn’t name on in your will.

Trusts are the first line of defence against protecting your wealth from taxation after you pass on. If you’re planning on leaving your real estate empire to a spouse or want to lighten the taxation burden on your family, a trust is a top priority.

Power of attorney

As a real estate investor, you sign your name on a lot of important legal documents—everything from mortgages to rent checks. Appointing someone as your power of attorney is crucial in keeping things running after your death.

Imagine you’re terminally ill, confined to a hospital bed. How is a business supposed to continue? You can’t go out and sign documents or process paperwork, and you can’t send someone to do it for you because they don’t have your authority. The power of attorney changes that. It gives an appointee the power to manage your affairs if you become unable to do so yourself. Suddenly, that person can sign on the dotted line for you or cash checks in your name.

The power of attorney is simple to set up and incredibly important if it ever becomes necessary. The person you designate can handle your finances, open your mail, file your taxes, talk with lawyers and accountants, represent you in court, and more.

Don’t forget to draft a will

The last—and potentially most important—thing you should do when planning for your estate is to draft a will with an attorney. You can’t control when you’re going to pass away, but you can control what happens after you do. Your will can dictate exactly what you want to be done with your assets.

Without a valid will, your death is considered intestate, which means the province you live in will dictate how your assets are distributed. That’s means going through probate. The process can also take months, with your assets up in the air the whole time. That’s unacceptable if you own properties where people pay rent or have mortgages with payments due.

A valid will overrides the probate process and ensures your assets are handled exactly as you need them to be. Delegate ownership to a spouse or heir, or have your wealth distributed any way you see fit. Used in conjunction with a trust, it’s your first line of defence against losing everything you’ve worked so hard to accumulate.

Make estate planning a priority

You may be in your 20s or 30s, or even your 50s and 60s when you start investing. Either way, death is hopefully a long way off and something you shouldn’t have to worry about. Nonetheless, taking the time to prepare for it now will ensure peace of mind for the rest of your investing days. Your real estate empire will be well-protected and your family or heirs will be taken care of appropriately. It’s yet another smart way to be a responsible investor.

Now, if you would like to learn how different types of mortgages are treated as part of your estate planning, click the link below to book a free strategy call today.

Consider Estate Planning As Your Real Estate Empire Grows, With Scott Dillingham