What's up guys.
Hey, it's Clint Coons here.
And in this video, I'm going to talk about the eight mistakes
real estate investors make when it comes to their estate plan.
Okay, let's get started.
All right.
So when it comes to estate planning, it's the last thing people
tend to focus on, especially real estate investors.
I mean, we understand the importance of limited liability companies.
We want to reduce our risk exposure.
So we go out there, we create the LLC, we create this plan to insure
that we don't lose our assets and the result in the event of a lawsuit.
But then what happens?
You unexpectedly pass away and everything's in your own name
and it all starts to crumble.
You're everything you've been building up today can fall apart within one
generation if you're not thinking about your estate plan, your succession.
So I want to cover this is a crucial mistakes that I see time and time again
for real estate investors when it comes to putting together their estate plan.
And it's because they have a lack of knowledge.
They haven't thought these things through.
So what is the mistake?
Number one, in my opinion, when it comes to being a real estate
investor, first mistake is not having
a living trust.
Okay?
This is the first mistake people make.
They keep their assets in their own name.
So let's say you created a bunch of limited liability companies over here.
You have these LLC that you set up and you're the member of them.
Well, what occurs if you pass away?
These things have to go through probate in order to transfer
on the ownership of the LLC so somebody can step in and start controlling
it, collecting the rents, dealing with the property manager and the like.
So when you own assets in your own name and you don't have a living trust,
you have to go through the probate process
which can drag on and take untold amount of time.
When my grandmother passed away, my uncle stepped in and she had two pieces
of property and five bank accounts, and it took them four and a half years
and he bled the estate to the tune of 70 grand.
So as you can see, when you go through probate, it leaves a lot open,
gives people opportunities to do things they shouldn't otherwise be doing.
So the first thing you need is a living trust.
Now the second mistake people make
if they get the first
one right, is they fail
to fund
their living trust.
I'll just put L.T. there.
So you have your LLC and you're the member of them.
You create the living trust, but then you don't assign your interest,
transfer your interest into that living trust to make sure that the living trust
now controls your LLC so you can avoid probate.
Now, the third thing mistake and again,
after number one, these aren't in any particular order.
They're just areas that I know are concerned that I see time and time again.
So the third mistake is that you've set up a living trust, right?
So you're in control of your assets that are held inside of this living trust.
But when you pass on, then you have a successor trustee
that steps in and is going to control these assets.
So the mistake that I find real estate investors
make is not selecting
the right
trustee after they're gone.
Okay. So what do I mean?
So you have real estate assets.
You need to appoint someone who understands real estate
or at a bare minimum understands entities.
And what they need to do with those LLC is to transfer control to someone else.
And I'll explain that here. This is going to be my next point.
So the successor trustee provision in your living trust, think of that person
and their knowledge base and their skill set
when you're choosing them to make sure that they're going to be comfortable
with the types of assets you hold.
You should be talking to them,
checking out their experience, seeing if they're doing the same things you are,
because that successor trustee is going to be in a very portant position
to handle the the distribution of your estate.
Or better yet, as I'm about to share with you,
hold on to it to build generational wealth.
And if they're not up to the task, then all this work is going to fall apart.
So your successor trustee, you need to vet them.
The fourth thing that you need to look at, successor
manager
of Real Estate LLC.
Okay, so you've got real estate in limited liability companies.
Who's going to actually run the day to day deal
with the property managers, know what to look for, know if you get a
a repair order that comes in, whether or not it's bogus
or it's for real, that person needs to have real estate experience
so you can have a successor trustee that can handle the distributions and has
some sense of the business entities and what to look for.
But you should also name in your trust who that successor manager will be
for those limited liability companies, and that the successor trustee is going
to ensure that the manager takes over when you're no longer here to control it.
Because, again,
people that try to
run rental or real estate in, they're not familiar with it
can find themselves in a situation where they're way over their heads
and then the properties
you lose the properties or they're not producing
the type of income that you intended. They get sold.
And then all the in your efforts that you've put forth have gone to waste.
So make sure you've chosen the right successor, successor manager.
All right. Now, the fifth thing.
Okay, holding
these assets
in trust.
All right.
You're going to leave it to your beneficiaries, your real estate.
How do you plan to leave this to your beneficiaries?
Maybe have two children.
Maybe have three children. Okay.
Are you going to split it up, one property per child, or
are you going to divide up the LLC among all three?
So each of them become a one third owner?
This is critical when it comes to planning for your estate
if you bring all three kids in.
Okay, so let's say I have a an LLC set up here, all right?
And it's part of my estate.
And let's assume that you had nine of these and you passed away.
You say, right, I want to have each child only one third interest in these LLC.
And so you split all of them up, one third, one third, one third.
I assume you can see the complexity and the problems
that could arise in this scenario, because now what you have
is you have three individuals that have to agree on things
in order to get something done.
Well, maybe you want that, but what happens when one of them passes away?
Now they leave it to their two kids.
Now, all of a sudden you have four individuals that we're talking to
on how those LLC is going to be run.
So if you plan to leave
your assets outright to a beneficiary and you had three kids and you had nine
LLC try to figure out the approximate values
and try to have the trustee give instructions to the trustee
to make sure they're all equal and then give one LLC per person.
Or maybe you talk to the kids
ahead of time, determine which properties they would want, and then you allocate
those properties again, making sure it's equal to two your beneficiaries.
Another option you could consider is holding the assets in trust.
All right.
And so what this means is that you spend a lot of time building this up.
Why allow that next generation or the generation that comes behind it
to go in and sell them and take the money won't buy fancy cars
because it kind of defeats the purpose.
Real estate can create generational wealth.
It can create income for multiple generations.
But in order to do that, you have to hold it in trust
so that beneficiaries do not have the ability to sell off those assets.
So you may consider holding it in your living trust for multiple generations.
So it's held there and it'll make distributions of the income,
but the assets themselves that produce the income will not be sold.
So that brings me to my sixth point, which is guidance
on distributions.
Okay.
So you need to think this through on how the assets are going to be
distributed to the beneficiaries.
So what can happen here is that when you have
those those assets, their do you want them to receive the money outright
or do you want to hold money back?
See, people tend to think, well,
you know, it generates 1200 dollars a month in rental income.
I'm going to take the 1200 dollars right out
when in reality you should be leaving extra money
in there to cover those unforeseen expenses, like a roof repair.
Or when someone moves out,
you have to do the rehab on the property because the tenant trashed it.
Because if you don't have enough reserves left inside of that
limited liability company, then what would happen
is you have to go to the beneficiaries
and ask them to re contribute the funds or if they don't unwilling to do it,
then you can create some real problems here.
So guidance on how distributions are going to be made is crucial
when you're running your limited or when you're setting up your estate plan.
Now, the seventh one kind of goes hand in hand and here is
leave cash
for CapEx and expenses.
So I've seen the states where they do this,
we're going to hold all the LLC in trust, okay, for the beneficiaries.
And so they're going to do
they're going to check off number five and they got gains on the distributions.
But then they distribute out all the cash to the kids, the beneficiaries.
What does that do?
It leaves the trust essentially dry.
And so if you have a major expense come up with one of these leases
that are held in the trust, then you don't have the cash to cover the expense.
So I would argue that what you should do is, you know, value up your properties,
figure out what a reasonable amount is for reserves and have the trust.
So you have all these LLC like this held in this trust, have the trust,
keep some cash, always on reserve to cover something that's unforeseen.
So that has to be held inside of there.
And so you seed fund that from your cash reserves initially
and then from there it'll just grow in and on its own.
And then the last thing, number eight, which I think is really important
and probably equally as important is number one,
leave info
for successor trustee.
Okay.
On if you have PM, you know, property managers,
utilities, tenants, all that create a list,
keep that list up to date because when you're no longer here,
they need to know, hey, where the bank where's the bank account for that LLC?
Who's the property manager
that handles the property in that limited liability company
where the utilities, if your property if you're the one being serving
as your own property manager, what are the tenants names?
How do I get in contact with them?
Because these are all the things
the people you leave behind are going to have to handle
and you'll want to make them
to have to go searching and calling people up and just asking questions.
Hey, did you know my my parents?
I think they they own this property in a limited liability company.
You may have dealt with them.
That's not where they should be.
This should all be spelled out for them.
So here's eight things they think are really important.
If you are a real estate investor that you should incorporate
into your estate planning.
If you'd like to set up a strategy session to discuss
creating an estate planning living trust, we we'd like to do that with you all.
If you go into the show notes, click on that linked schedule a strategy session
and we can talk to you about how it would be to set up
your own estate plan using these eight things here
that I think are crucial for every real estate investor.
Take care.