Selling your real estate portfolio, especially investment properties you and your family have held for years or decades, can be a complex process. For many families, their investment property portfolio acts as a key source of income, tax optimization, and asset base for borrowing. When the time comes for real estate liquidity, there can be significant estate planning implications, as well as the need to find a way to replicate the income streams from these properties.
More importantly, it’s a transitional moment for most, both mentally and financially. You’ve transitioned from managing tenants, maintenance, taxes and wealth tied to your properties, to suddenly having substantial liquidity. With this liquidity comes both challenges and opportunities, especially as it relates to generating sustainable income and leaving a lasting legacy.
When we work with families transitioning out of investment and rental properties we focus on three critical components for a successful real estate portfolio exit:
- Developing a holistic estate plan
- Developing an income plan with the new liquidity
- Implementing the plan and building an investment portfolio of stocks, bonds, and private investments (e.g. alternatives)
Below we discuss each component in more detail.
1. Developing the Holistic Estate Plan
A liquidity event from a real estate sale offers unique opportunities and challenges for your estate planning. Your new liquidity may be sitting in your personal bank or brokerage accounts, may not have beneficiaries specified, and is likely less protected from creditors. In addition, when you die your wealth is now more visible and potentially exposed to estate taxes or probate complications.
The first step in the estate plan is to decide what your long-term intentions are for your wealth? Is it to leave to family? Charities? Use to sustain your own personal spending habits?
To implement the strategy we will use tools such as revocable trusts, beneficiary designations, and strategic asset titling can simplify asset transfer, minimize probate challenges, and ensure your wealth is efficiently and privately passed to your heirs.
Charitable Giving and Family Gifting
Real estate liquidity events are ideal moments to review philanthropic and family gifting strategies. Options such as donor-advised funds and charitable remainder trusts can provide immediate tax benefits while supporting meaningful causes. Structured family gifting can help minimize estate taxes and benefit your heirs directly.
Managing Estate Tax Exposure
Substantial sales of investment properties can unexpectedly trigger significant estate tax liabilities. Strategic gifting, trust structures, and life insurance planning can proactively mitigate these risks and safeguard your wealth.
Incorporate your Family into Discussions
Estate planning is not only about preserving wealth but also about clearly communicating your values and intentions. By engaging your family in these discussions you can help to ensure your legacy is more than just financial value and captures your personal vision and legacy aspirations.
2. Developing an Income Plan
Replacing the reliable income once generated by your investment properties is vital to maintaining your lifestyle without management headaches.
Investment options like dividend-paying stocks, bonds, private credit, or other private market investments can generate steady income streams without the direct oversight real estate required. In addition, many of these investments can also offer tax optimalization benefits similar to what you may previously have had with your real estate portfolio – depreciation pass thru, expense offsets, and favorable tax treatment of gains and income.
Importantly the structuring of your liquidity producing investments should be tied into your broader estate plan, both for tax and investment purposes. Investment duration, risk, and liquidity should all align with your estate and your potential needs for money in the future.
A durable, purpose-built strategy will help ensure you remain aligned with your current and future financial needs. Consider income solutions that manage longevity risk, ensuring your resources last as long as you need them to, and inflation risk, helping your purchasing power remain strong over time.
3. Implementing the Plan with an Investment Portfolio
Once you have an estate strategy and understand your liquidity needs the next step is implementing the plan inside of a holistic investment portfolio. Building an investment portfolio that aligns with your financial goals and risk tolerance is essential to sustaining and growing your wealth.
When we build for portfolios for families we work to incorporate drivers of return and risk across public and private markets. This type of strategic allocation allows for steady income generation while also helping to balance growth potential with stability for ongoing financial peace of mind.
Diversification for Security and Growth
By allocating your assets across multiple classes and geographic regions, you reduce vulnerability to market fluctuations. A diversified portfolio that includes stocks, bonds, private equity, and alternative investments can balance growth potential with risk management.
Aligning Investments with Lifestyle
Your investment strategy should reflect your personal life stage, financial objectives, and risk appetite. This alignment helps ensure the long-term viability of your investment portfolio, supporting both your immediate and future lifestyle goals.
You’ve Done the Hard Work – Now Let’s Make It Last
Transitioning from investment properties to a liquid investment portfolio (that replaces the income needed to sustain your lifestyle) requires strategic guidance to ensure your investments are appropriate, financial goals and legacy are effectively aligned, and your estate is optimized for tax and liability purposes. By taking intentional steps now, you can safeguard your wealth and establish lasting peace of mind.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
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