Build Estate Plans with Commercial Real Estate Interests

February 2, 2015 Published Work
Estate Planning, Vol. 42, No. 2

Commercial real estate presents unique opportunities and challenges to the estate planner. Several planning strategies are available to place the appreciation of, or the income generated by, real estate outside the transfer tax system. In addition, because commercial real estate transactions often occur on a fractional basis, valuation discounts may well apply to transfer tax valuation of the interests. Some issues, a portion of which are exclusive to planning with real estate, can derail even a carefully considered plan.

Certainly, the form of ownership through which the real estate operations will be conducted needs to be carefully considered because entity choice can have a significant impact on the planning results. Beyond that, the estate planner is not often first on the scene, and must understand how to deal effectively with existing entities that are less than ideal. This article briefly outlines common estate planning techniques applied to real estate owners and describes the spectrum of entities through which most real estate enterprises are operated. It then ranks how each type of entity stacks up in terms of key tax and nontax concerns, such as liability protection, tax treatment of distributions from the entity, and tax effects of transfers of interests in the entity.

Overview of common techniques
As complex as lifetime wealth transfer planning can seem, boiled down to its essence the planning is quite simple. If an individual attempts to transfer assets during life in order to avoid an estate tax, the transfer will generally be subject to a gift tax instead. Since the gift tax and the estate tax apply at the same rates and generally have the same exemptions, there should be no incentive for an individual to transfer wealth during life as opposed to waiting to transfer it at death. In effect, by enacting the gift tax as a companion to the estate tax, Congress created an "airtight" transfer tax system. There are, how-ever, leaks in that system.