ARE YOU CREATING A LEGACY OR A HEADACHE?
SIMPLE SOLUTIONS TO KEEP THE CASH FLOWING
There is a problem many of us do not want to face. My wife and I put it off for many years.
During our building years we built up a nest egg. It included stocks, mutual funds, and our favorite, real estate.
Your investment portfolio may also consist of a variety of assets including stocks, bonds, IRAs, 401(k)s, and real estate. It might even include ownership in a business.
If you are unable to tend to your investments for a couple of months, what do you think would happen?
Would they continue to grow? Would cash flow keep coming in? Is rental income dependent upon you depositing checks? What would happen if tenants stopped paying rent? Who would send late letters and file for eviction?
How we take ownership in an investment makes a difference.
If we have an investment portfolio large enough to create a cash flow stream, then it is likely that there will be something left for a surviving spouse or other heirs.
Do you trust the courts or government to decide in a timely manner how your assets are handled? Or do you want your loved ones and heirs to be able to move forward with your intentions and continue to operate the assets?
How will your assets or estate be handled when you are not there to do it?
WHY DOES IT MATTER?
Several years ago my wife and I invested in a house purchase with several other partners. It was a hand-off investment for us and a learning experience as far as partnerships go.
After a couple of years the partners decided to merge with other partners in the neighborhood to diversify our investment over several houses instead of just one. When you have one house and it is vacant, the cash flow plummets. So the decision was made to merge the partnerships.
Later, one of the partners passed away and his widow wanted her cash out of the partnership.
As you probably know, real estate is not as liquid as some other investments.
The widow wanted her money for her husband’s share in the partnership. She wanted to sell those shares.
However, the widow’s share would first have to go through probate before it could be assigned to her. Only then could she begin to receive any distributions or sell the inherited shares.
Unfortunately, many people don’t understand the benefits of real estate. Many times people who inherit real estate turn around and sell it instead of taking advantage of its benefits.
As a syndicator I do not want to have to deal with probate with an investor’s interest. It can be time consuming.
For the heirs it can be frustrating. Some just want their money, but that is not usually immediately possible.
Recently I talked with a lady who’s father passed away and he intended to leave his house to her. Unfortunately the will was not to be found. So she might or might not be able to inherit an interest in the house through probate.
This brings up another issue. We need to make our intentions known and let someone know where the paperwork is.
There are several items that could have made these scenarios easier for the families involved. As an investor I would suggest investors do several things.
FIRST, create a file or notebook or file containing a list of all assets, their location, and any related contact information. Identify and list key people involved including your trusted advisors.
SECOND, make sure your will and estate documents are up to date. Typically a will should be written and signed in the state where you reside. Make sure someone knows where the documents are and who the attorney is that prepared the will.
THIRD, check with your attorney regarding how to hold your interest in certain assets. It might be as an individual for some assets such as retirement accounts. It could be joint with right of survivorship. Or as a multi-member LLC. Or it might be as a beneficial interest of a trust.
How you hold title to an investment makes a difference. It is much better for the investor, heirs, and syndicator if the investor considers in advance who his heirs should be. It can be handled any one of several ways.
The issues typically occur when the partnership interest is held by an individual without naming a beneficiary.
For a syndication the operating agreement should specify what happens if a member passes. The operating agreement may provide a place to name a beneficiary.
If the partnership interest is held within a retirement account it is usually defined in the plan paperwork. Most custodians require you to name a beneficiary.
A multi-member LLC can be used to hold interest. The LLC operating agreement should specify what happens if a partner passes.
If the interest is held by a trust, then the trust documents should specify a contingent beneficiary.
It is suggested that investors consult with an attorney to determine the best way to hold an interest in assets.
My wife and I delayed for years setting up our wills. I can say that after taking the three steps above my wife and kids felt better knowing that our wills and other estate planning documents had been prepared. If something happens to either of us the cash flow will keep flowing as we intended. There is an inner peace that we all have.
None of us want to create problems for our intended heirs. But that can happen unexpectedly if we do not provide them with the knowledge of what is there and how to access it.
Listing a beneficiary in operating agreements or plan documents can help provide a smoother transition of assets to intended heirs. This is one of the ways we can prepare to leave a legacy instead of headaches for those that matter the most to us.
LET’S GET TO KNOW EACH OTHER BETTER.
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Mike is a retired aerospace engineer with a passion for real estate investing and teaching financial literacy. He lives with his wife in Daytona Beach, Florida.