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Estate Planning for Commercial Real Estate Owners

Estate planning for real estate investors and developers involves anticipating and mitigating the impact of the client’s death on the client’s business interests and the client’s family.

Post-mortem Goals of a Successful Investor or Developer

Generally speaking, the estate planning goals of successful real estate investors and developers include the following:

  • The orderly and efficient post-mortem administration of assets;
  • Business continuity;
  • Allowing the client’s family to maintain the same degree of control previously held by the client;
  • Deferring and minimizing death taxes;
  • Providing necessary liquidity to address post-mortem cash needs; and
  • Addressing existing creditor and lender relationships.

Often the client’s investments are held through multiple entities, frequently involving unrelated partners, varying financing arrangements, personal guaranties, and separate management companies. Administering the estates of such clients involves dealing with multiple constituencies, each with varying interests, including other partners, lenders, and various tax issues.


Liquidity is needed to provide continuing support for the client’s spouse and children and, in many cases, death taxes. Federal estate taxes are due nine months after a decedent’s death, leaving a short time to raise cash to pay what can be a sizeable tax liability. In some circumstances, an estate may qualify for a special tax relief provision that allows for estate taxes to be paid in installments over a period of up to 14 years. Such relief, however, is only available to real estate investors whose operations are structured in a specific manner.

Real estate investors should not assume that one or more properties can or will be sold or refinanced to satisfy an estate’s liquidity needs. It is impossible to predict what the state of the real estate market and economy will look like when a client dies. Even in a positive economic client, being forced to sell a property or a partnership interest within a nine-month window may result in realizing only a “fire sale” selling price.

It is prudent for many people to consider all of the following to provide liquidity:

  • Ensure that each business checking account has in place an additional authorized signatory. If the client is the only authorized signatory, it could take weeks before an executor is appointed by a probate court and in a position to assume control over such an account. Absent such an appointment, the financial institution may treat the account as having no authorized signer.
  • Review existing life insurance policies to determine whether they provide sufficient liquidity for the business and estate. Policies on the lives of the developer and on the developer’s spouse, or both, should be owned by an irrevocable life insurance trust (an “ILIT”) to shield the proceeds from estate taxes, while providing a source to pay estate taxes or meet business liquidity needs.
  • Review existing buy-sell agreements with other partners. If such agreements do not exist, consider implementing them.
  • If a property owned by an entity having other partners/owners/members needs to be sold or refinanced following death, determine whether there is a right in the organizational documents of the entity to compel a sale or refinancing upon the death of a partner/owner/member.
  • If an estate plan provides specific cash bequests, include language that permits the delayed funding of those bequests until it is determined that all of the estate’s cash needs will be met.
  • Make sure the estate retains control over a management company that will provide a steady supply of cash flow to the family following death. Lifetime gifts or specific bequests of the management company could divert this source of liquidity.

Section 6166 Estate Tax Deferral 

Section 6166 of the Internal Revenue Code (the “Code”) permits deferral of estate taxes attributable to business interests over 14 years at substantially reduced interest rates. There are many technical requirements for deferral, and advance planning to qualify for this tax relief is necessary. Deferral may provide the estate with sufficient time to dispose of illiquid assets or otherwise raise cash outside of a fire sale.

Dealing with Lenders

Existing loans and mortgages should be reviewed to determine what impact the developer’s death will have on these arrangements. In many cases, the death of a key principal or a guarantor is an “event of default” under a loan agreement, which could allow a lender to put greater financial pressure on the developer’s estate.

When necessary, the developer should determine if changes can be made to the existing agreements to allow for the substitution of a separate entity guarantor following the death of the individual guarantor. At a minimum, the agreements should allow adequate time to identify and install a successor guarantor. In negotiating loan terms of future developments, try to structure guaranties that provide maximum flexibility upon death. Alternatively, consider funding an entity with sufficient liquidity and other assets and then determine whether the lender would permit such an entity (rather than an individual) to serve as a guarantor to avoid the individual’s death from resulting in an event of default.

Control and Continuity

Joint venture, limited partnership, and operating agreements should be reviewed for control provisions. In joint ventures, partners may have the ability to block the estate’s choice of a successor general partner or manager. The developer’s death may create rights for another partner to take control of the property. Such a change in control may give other partners the right to terminate agreements with the developer’s management company, taking away a significant source of cash flow for the developer’s family. Accordingly, if the developer is the general partner or manager, provide for a named successor who will have the same management rights and control.

In situations where a partner does not take control when the developer dies, for purposes of continuity, it is also important for the developer to consider management succession. Fiduciaries who are named in estate planning documents may not be able or willing to run a real estate business. The developer should provide clear instructions on how the business should be operated or liquidated after the developer is no longer involved.

Tax Mitigation

Another planning strategy is to transfer assets when their values are low to allow future appreciation to inure outside of the estate and lower estate tax liability. For 2019, the federal estate tax exemption will be $11.4 million per decedent or $22.8 million for a married couple, and the Maryland estate tax exemption will be $5 million per decedent or $10 million for a married couple. Note that transferred assets no longer appear on developer’s financial statement, which could reduce the ability to obtain financing. However, the transferees of these assets (whether individuals or trusts) could use those transferred assets to provide guarantees.

Structures that ensure maximum basis step up at the second spouse’s death, or that could take advantage of the unused estate tax exemption of a parent or parents to achieve basis step up, should also be considered.

Estate planning techniques to mitigate tax consequences include doing any or all of the following:

  • Crafting partnership and other entity operating agreements to permit lifetime transfers of non-controlling interests (e.g., limited partner or non-voting membership interests) to family members. The value of minority or non-controlling interests should be substantially discounted for gift tax purposes if the entity is structured properly.
  • Removing value from the estate and gift tax system by utilizing the $15,000 per donee annual exclusion (or $30,000 per donee for married couples). Trusts can be structured to be receptacles for these annual exclusion gifts; trusts can consolidate the ownership of these transfers and also allow for equal treatment of the families of each of the donor’s children (if desired).
  • Relinquishing a controlling interest to reduce estate tax value of retained non-controlling interests. Of course, this involves many non-tax considerations.
  • Making transfers to trusts that allow the donor to retain some degree of control over the transferred interests.
  • Using grantor trusts as receptacles for transferred interests, which allow the donor to continue to pay the income tax liability associated with the transferred interest without such payment being treated as a gift. This allows the trust’s assets to essentially grow income tax-free. In addition, the donor is entitled to claim the tax losses associated with the transferred assets or use personal losses to offset taxable income generated by the trust’s assets. Further, the grantor can sell assets to a grantor trust in exchange for cash or a promissory note. Such a sale does not trigger any capital gains because for income tax purposes the donor is treated as having sold the asset to himself/herself.
  • Using Spousal Lifetime Access Trusts (“SLATs”), which allow a donor to remove assets from the donor’s estate while providing the donor’s spouse with continuing access to these assets if needed.
  • Taking steps to freeze the value of the estate, including through grantor-retained annuity trusts (“GRATs”), installment sales, and partnership freezes.
  • Considering use of the election under Code Section 754, in which a partnership may elect to adjust the basis of partnership property when property is distributed or when a partnership interest is transferred.

Before making transfers, it is important to consider the income tax characteristics of the assets. Transfers of negative basis property or property encumbered by debt in excess of basis should generally be avoided. Remember that the property held by a decedent at death receives an income tax basis step-up to fair market value at the date of death. Conversely, property that was transferred prior to death does not receive an income tax basis step up.

Consider different ownership structures for new ventures. Family members or trusts can be made the initial owners of any entity acquiring a new property. The developer can loan the entity the funds needed to acquire the property. Loans can be made to grantor trusts without income tax consequences. The increase in value after the loans are repaid inures to the family, free of gift or estate taxes. The developer can retain control of the property or project and as much of the equity as desired. Partnership or operating agreements can be drafted to allow depreciation and other tax benefits to inure to the developer while allowing the upside to inure to the family members.


Each person’s situation and goals are different, and not every point mentioned above will be relevant to everyone. But with proper planning, many people (including real estate developers and investors) can achieve a number of their personal goals that would not be achieved without complete knowledge of the opportunities that are available.

For questions, contact Ken Aneckstein, (410) 576-4053.


January 03, 2019




Aneckstein, Kenneth S.


Real Estate
Trusts & Estates