Estate planning for real estate
Real estate remains a cornerstone of many UHNWI investment portfolios, accounting on average for 27% of the investable wealth, according to the Knight Frank Wealth Report 2022.
UHNWI real estate investors have tended to invest directly into bricks and mortar, but this is changing due to an increased financial product offering, with 20% planning to make indirect investments via the likes of funds and real estate investment trusts in 2022.
Indirect investments provide greater liquidity and similar returns over long-term periods to direct investments.
Real estate may trigger the so-called scission of an estate.
While usually, the country of your last residence is responsible for your entire estate, a foreign country may also claim jurisdiction over your estate due to real estate that you own in that country.
Such a foreign country may also apply its succession laws to real estate, and if you don't consider this in your estate planning, it may lead to a surprising and undesired outcome.
Next to legal issues, this could also trigger higher costs for foreign procedures.
Structuring real estate with a corporate vehicle may be necessary to avoid such scenarios.
With a corporate structure, the company's shares would be part of your entire estate and usually subject to your last residence's jurisdiction.
Avoiding property disputes
Leaving a property to several heirs may lead to disputes. We recommend that estate planning considers how properties will be divided among heirs and gets clarity on future ownership.
Depending on the individual situation, you could consider compensation payments during or after your lifetime to avoid co-ownership and correlated potential conflicts.
It would help if you asked whether the family should keep the property in all cases. If not, there is no need to transfer it, and your heirs may appreciate receiving liquidity after your lifetime.
Again, an open conversation within the family should enable clarity on the destiny of specific properties and avoid potential conflicts.
Structuring of real estate
Transferring real estate can be subject to lengthy and costly procedures, including additional exposure to eventual taxation. Owning your real estate portfolio via corporate vehicles may enable a smooth transfer at a lower tax cost.
You may also leverage low interest rates and consider transfers to benefit from specific tax exemptions during your lifetime.
If your estate plan is implemented with a trust, holding the shares in a company rather than directly owning real estate will facilitate future generations' straightforward administration.
Establishing trusts is an essential step in creating an effective estate plan. It allows you to preserve wealth for future generations while protecting your assets from creditors.
They usually further avoid probate procedures and transfer your wealth directly to beneficiaries.
Another efficient estate planning technique for real estate is to transfer bare ownership while keeping the usufruct during your lifetime. With that, you can avoid probate procedures and still maintain control over properties.
You keep the right to live in the properties and may rent them to third parties to generate income. In such a scenario, you still have to cover costs and taxes but may deduct them for tax purposes.