Guest Post from our REAPS!

Succession Planning – Nothing Is Certain Except Death and Taxes

Photo by David Castillo Dominici. From
Photo by David Castillo Dominici. From FreeDigitalPhoto.netDou

By Doug Owens

We are all aware that nothing is certain in life except death and taxes. We as investors generally have a grip on our tax situation. We usually have on our team bookkeepers and or a CPA who can help us with our filings and we set aside funds from our revenue to meet our tax obligations. But what about the impact of death on our business? Death is something we do not like to talk about but as operators of small businesses, investors occasionally face the consequences of death, expected or unexpected.

In what ways can death affect a small business such as a real estate investment operation? There are several categories of people and resources that can be affected by the passing of the principal operator of the business. If the investor is a buy, rehabilitate and resell investor, there are many moving parts that generally require the investor’s attention. The details of the purchase agreement and closing, financing, arrangements with contractors and then the listing and selling process all involve decisions and actions by the person who is in charge.

If the investor is a buy and hold investor, then some of the same activities are involved, except that instead of the listing and selling of the property there is the dealing with tenants, deposit trust accounts and maintenance of an ongoing business property relationship. In either case there are usually people who put up money, either private lenders or institutional lenders who expect to receive back over time their money plus the promised return.

Why bring all this up? It can sometimes help to visualize what one’s investing business would look like if suddenly the principal action taker or decision maker were permanently out of the picture. Who would be affected? Would there be someone to follow through on a purchase and sale agreement and make sure the sale closes in order not to forfeit the earnest money? Would there be someone to ensure that contractors did what they were supposed to do and on time, and then that the property is listed and re-sold, or would the arrangements fall apart? Would there be someone to deal with tenants, collect rent, pay operating expenses and mortgage payments, or would the property go into foreclosure because no one had the authority to act?

Would the investor’s employees continue to have employment? How is the investor’s estate protected when there are ongoing obligations to other parties?

All of these and similar questions could be anticipated and dealt with in succession planning. Such planning involves analyzing the investor’s business and identifying areas in which having one or more replacement persons or entities ready and available to act in case of the principal investor’s death or incapacitation is necessary. Then the planning proceeds by setting up arrangements to make sure that these replacement persons are willing and ready to act and also that the documents are in place to authorize them to act.

In some situations, at least part of this authority can be contained in a will. Sometimes if the investing operation is a partnership the terms of the partnership agreement can address these points. Life insurance can address the financial needs of employees during a transition and other financial needs of the business. Other methods are available but regardless of the method, the necessary authority should be provided for before it is actually necessary.

The consequences of not planning for succession can be adverse to many people who have relied on the investor. Lenders, if they believe themselves at risk due to the passage of the principal investor, can petition the court to appoint a receiver to take over the business operation and wind it down. Receivers and the associated legal proceedings can be very costly and payment of these costs can come from the investor’s estate. Tenants are entitled to access to their security deposits when leases end and again the financial penalties if no one is available to provide that access can be significant. As small business owners, and professionals, we should plan for the certainties in life, namely death and taxes. The preceding is intended to be educational and should not be considered legal advice.

About the Author… 

Doug Owens practices real estate law and general business law from his office in Seattle.  He offers a 20% discount for REAPS members and he can be reached at 206-985-6679 or [email protected]

REAPS is the oldest – and largest – Professional Association for the real estate investor this side of the Mississippi. We provide education and networking resources for real estate investors, those who want to be investors and anyone who provides value to our members. Our goals are to motivate and support our members and guests through education, discussion, legislative action and networking. We host over 40 live events a year around Puget Sound and they are all open to the public. If you’ve never attended one of our meetings, just email our office at [email protected] and be our guest for free!”