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Thursday, 7/19/07
I just finished with a client who has some concerns that seem to be growing amongst the ‘Mom and Pop’ demographic. This couple who are in their mid-sixties has done a fantastic job in saving and investing, and have built up a respectable real estate portfolio mainly in CA. Their main source of income is being derived from a few apartment buildings but now they are reaching a point in their lives were they are looking for something different. Looking to enjoy their retirement more, they have found that their apartments which are supposed to provide them with passive income are becoming more of a burden than a blessing. They find that it is difficult to take any sort of significant vacation while still actively managing their properties. The uncertainty of the real estate market and the possibility of earthquakes make them worry about not being diversified enough by being overly concentrated in real estate. They also have concerns about the best way to leave their legacy to their kids and grand kids as they recognize that there may be some differences in opinions in how to manage the properties and whether to keep or sell some or all of them.

For this couple, I recommended that they keep their highly appreciating properties, but sell the income producing ones using a Real Estate Legacy Trust to both replace their rental income with truly passive income, avoid capital gains tax, and leave the assets to their heirs. To mitigate the risk of earthquakes and being overly concentrated in real estate, I recommended a re-optimization of the equity assets in their properties. What a lot of people don’t realize is that in addition to not being liquid, equity in real estate earns a 0% rate of return. I also recommended that they set up entities to hold their investment real estate to protect them from losing everything to frivolous law suits, and to modify their Living Trust (’A’ Trust) with provisions to the ‘B’ Trust to capitalize on the $2M of estate tax exclusion amount on the death of the first spouse. Finally, with the AB Trust and the Real Estate Legacy Trust to minimize the estate taxes, this couple was now over-insured in life insurance with term policies that were due to expire in a few years. I recommended that they sell any excess life insurance they didn’t need for about 15% of the face value to offset any new mortgage payments and increase cash flow for medical and potential long term care expenses. The couple didn’t foresee the need for additional cash flow after all that we had done, so they opted to roll those proceeds to another insurance policy held in an Wealth Replacement Trust for their heirs. Since the insurance companies all started using the new mortality tables in 2005, this couple was able to get a higher death benefit than what they had originally.

Posted By
Stan Sung, CFP®

Risk Management Advisors, Inc.
“Redefining the Way You Protect Your Wealth.”

110 Pine Ave, Suite 310
Long Beach, CA 90802
(562) 489-7028
(562) 435-7886 FAX
www.riskmgmtadvisors.com

CA Lic#: 0D71892

IRS CIRCULAR 230 DISCLOSURE: To insure compliance with requirements imposed by the IRS, we inform you that, to the extent this communication (or any attachment) addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment).

This entry was posted on Thursday, August 30th, 2007 at 9:32 am and is filed under Commercial Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.