WealthTrack

View Original

Protect Your Property: Estate Planning for Realtors

(Eight-minute read time)

You're an expert in helping clients with one of their most significant investments: their home. However, how often do you apply that investment mindset to your own future, specifically your estate? Estate planning is a crucial component of comprehensive financial wellness, especially for realtors, whose personal and professional assets are often closely intertwined. This article dives into the importance of estate planning specifically tailored for realtors, highlighting the pivotal role of life insurance in safeguarding your financial legacy and reducing risks.

If you would like to learn more about incorporating life insurance as a strategic financial plan, consider reading our article, How Life Insurance Can Protect and Grow Realtors’ Financial Future.


To Learn More About Life Insurance, Check Out Our Other Articles:

What Type of Life Insurance is Best?

Term vs Whole Life Insurance in Ontario

Am I Too Young For Life Insurance?

Getting Approved for Life Insurance in Ontario - What You Need to Know

What Is Underwriting in Life Insurance

See this content in the original post

Estate Planning for Realtors

Due to your unique position within the volatile real estate market as a realtor, your financial health and legacy depend significantly on how well you plan today. Since your assets and income are linked to market trends, it is essential to consider estate planning now, not later. This ensures your hard-earned wealth is protected and your family's future is secure, no matter how the market shifts and personal circumstances change.

Steps in Estate Planning

  1. Drafting a will to outline the distribution of real estate investments and personal assets upon your demise.

  2. Selecting beneficiaries for your life insurance, investment accounts, and other assets critical to your real estate business.

  3. Forming trusts to control and protect your real estate holdings, providing benefits to your heirs while potentially offering tax advantages.

  4. Assigning a power of attorney to manage your real estate affairs and make crucial decisions if you are unable to do so.

  5. Strategizing for estate taxes and expenses to maintain the value of your real estate investments after your passing.

  6. Making arrangements for dependents, including setting up guardianships and securing their future with your real estate assets.

  7. Outlining your preferences for end-of-life care and funeral details to ensure your real estate legacy is respected.

  8. Regularly reviewing and updating your estate plan to reflect changes in your real estate portfolio or personal circumstances.


Why Estate Planning is Important for Realtors

Since your income and wealth are directly tied to the real estate market, your financial landscape is more complex than most. You likely have a considerable size of assets in real estate, which could complicate your estate and result in significant tax implications for your heirs.

For you, estate planning is more than just asset protection—it's about ensuring the stability of your business and safeguarding the financial future of your family. By utilizing life insurance for its liquidity and tax advantages, you can navigate these unique challenges effectively. This approach not only secures your personal assets but also maintains the continuity of your income for your heirs.

How Estate Planning Can Benefit Realtors

Estate planning helps deal with taxes and money owed from your properties. By planning ahead, you can help cover these taxes, so your family doesn't have to worry about them. This means protecting the properties you've worked hard for. By setting up your estate smartly, you can make sure your real estate keeps helping your family after you're gone, without losing a lot of it to taxes.

Adding life insurance to your estate plan will provide the ability to quickly covert assets into cash, useful for paying taxes and debts when you pass away.


Trust in Estate Planning

One of the components of estate planning is a trust. A trust is a legal arrangement allowing you, as a realtor, to securely transfer ownership of your assets to a trustee for the benefit of your selected beneficiaries, optimizing your estate and tax planning strategies.

What is a Trust Good For?

  • Control After Death: A trust allows you to control the distribution of your assets, ensuring your wishes are honored and your beneficiaries are taken care of according to your instructions.

  • Benefitting Multiple Beneficiaries: By utilizing a trust, you can effectively manage how your assets are split among several beneficiaries, such as children, which could potentially reduce the tax burden on the estate.

What is a Trust Not Good For?

  • Guaranteed Tax Savings: While trusts can offer tax advantages, they do not automatically guarantee tax savings. The effectiveness depends on the trust's structure, the assets involved, and current tax laws.

  • Liquidity: Trusts often lock assets away, making them less accessible to beneficiaries in the short term. This could be a drawback for those requiring immediate access to inherited assets.

  • Cost and Complexity: Establishing and maintaining a trust can be expensive and complex, particularly with the New Underused Housing Tax (UHT), which might affect certain types of property held within a trust.

Estate planning, including decisions around forming a trust, should be approached with careful consideration and with the advice of a qualified estate planner or attorney.


Income Tax: Pay Now or Pay Later

Understanding the nuances of income tax to real estate and estate planning is crucial for realtors. Here’s how this applies to your financial strategy:

  • Today’s Tax: Your current tax obligations arise from various sources, including your cash flow from real estate operations and the principal portion of mortgage repayments. These elements impact your immediate tax liabilities and shape your overall financial health.

  • Distant Future Tax: In the long run, you'll potentially face capital gains tax on the sale of properties or upon their deemed disposition at death. Planning for these eventual taxes is crucial to minimize the financial burden on you or your heirs.

  • Who Pays the Tax? Ultimately, the responsibility falls on the property owner or their estate. However, strategic planning with tools like life insurance can alleviate the future tax burden.

  • Preparing for Tax Liabilities: Anticipating and planning for future taxes can prevent overwhelming your estate or heirs. Consider leveraging strategies such as life insurance to cover future tax liabilities, ensuring your assets are passed on as intended without a significant tax hit.


Are You Prepared for Retirement?

Find out if your retirement strategy is on track by checking out our latest article: The Importance of Retirement Planning for Realtors


Leveraging Life Insurance for Estate Planning: Consider this Scenario

Tom is an established realtor who has invested in two properties in the past 15 years, originally valued at a total of $450,000. Today, these properties are worth approximately $1.2 million, with an expected annual growth rate of 5%, projecting their value at about $1.5 million by the time of Tom's passing. In the end, Tom plans to leave one property to each of his two children.

However, Tom faces a significant challenge: he currently has no life insurance policy in place. Upon his death, the rental properties he owns will be considered as sold at the fair market value of $1.5 million, leading to a calculated gain of $1.05 million. Given the capital gains inclusion rate of 50%, Tom's estate would be responsible for tax on $525,000 at his marginal tax rate. If that rate is 50%, the total tax bill would amount to $262,500. This tax bill would have to be settled regardless of whether the properties are actually sold, potentially placing a financial strain on his beneficiaries and risking the very legacy he aims to leave behind.

Now, consider the alternative scenario where Tom opts for life insurance. By choosing a Term 100 policy with a guaranteed life pay for a non-smoker male at 50 years old, he'd be looking at a premium of about $320 a month. This policy doesn't build cash value, but it provides a straightforward solution to cover the risk, guaranteeing protection for life. If Tom secures a policy with a face amount of $250,000, this could significantly lower the tax his children will have to pay on his estate, thereby safeguarding his properties and ensuring they can be passed on to his children as intended, without the burden of a hefty tax bill.

Here are five benefits for Tom choosing a Term 100 life insurance policy with a face amount of $250,000:

  1. Immediate Liquidity: Upon Tom's passing, the life insurance policy would pay out $250,000 directly to his beneficiaries. This payout is generally tax-free and can be available almost immediately, unlike estate assets, which may take time to liquidate.

  2. Tax Liabilities Coverage: While the life insurance payout doesn't cover the entire tax bill of $262,500, it significantly reduces the amount his estate would need to cover using other assets. Instead of liquidating properties or other investments, the insurance payout can be used directly to pay off a large portion of the tax bill.

  3. Preserving the Legacy: By using the life insurance payout to cover tax liabilities, Tom ensures that his intention of passing on the properties to his children can be fulfilled without the need to sell the assets to pay taxes. This maintains the integrity of his estate and ensures that his children receive the full benefit of their inheritance.

  4. Estate Planning Strategy: The strategic use of life insurance in estate planning allows Tom to manage the distribution of his wealth according to his wishes. It provides a safety net against unforeseen tax impacts and helps maintain family wealth across generations.

  5. Cost-Effectiveness: While the life insurance premium is an additional expense during Tom's lifetime, the cost is relatively low compared to the potential tax savings and financial benefits provided to his estate and beneficiaries after his death.

Buying life insurance will provide Tom’s children $250,000 to use towards the tax bill of $262,500 when he passes away.


For realtors whose assets are often in real estate, a life insurance policy ensures that your financial commitments are met without the need to liquidate assets under pressure.


Other Ways to Reduce Financial Risk

In addition to incorporating life insurance into your financial plan to reduce risk, diversification and proper planning are also important considerations.

  • Diversifying your investments beyond just property can provide a safety net against market fluctuations. Consider exploring other areas such as property management services, landscaping, regular maintenance, and renovation projects. These can not only enhance the value of your current properties but also open new revenue streams. Additionally, ensure your financial bases are covered by maximizing your TFSA and RRSP contributions. These vehicles provide tax benefits and serve as a secure foundation for your broader investment strategy.

  • Proper financial planning with a financial advisor is essential for mitigating risks in estate planning. A qualified financial advisor can guide you through the complexities of estate planning, ensuring that your assets are protected and your legacy preserved. They help identify potential risks and implement strategies to address them, such as setting up trusts, drafting a will, and considering life insurance policies. This collaborative approach ensures that your financial plan aligns with your long-term goals, safeguarding your estate against unforeseen circumstances and ensuring a smooth transfer of assets to your beneficiaries.


Conclusion

By understanding and applying the principles of estate planning, leveraging life insurance, and embracing proper planning and diversification, you can protect your hard-earned assets and ensure your family's well-being.

If you're ready to integrate life insurance into your estate strategy and safeguard your future, book a call with us at WealthTrack today for professional guidance tailored to your unique situation as a realtor.


Recognized By


Interested in Learning More About Life Insurance?

Check out our additional resources: 

See this gallery in the original post