Your business requires unique estate planning considerations. 

  • As a real estate developer, you may be in a favorable income tax position.
  • Strategies that reduce death-related taxes and estate administration costs are important to explore.
  • Planning for the ultimate continuation or sale of your business is equally important.

As a real estate developer, you may be in a favorable income tax position because of the nature of your business and the assets you employ in that business. Assets such as depreciable buildings, depreciable construction machinery and equipment, as well as other business assets may provide income tax deductions that effectively shelter much of your income. These income tax benefits may be realized by you as a sole proprietor of your development business or as owner of various “pass-through” entities, such as partnerships or limited liability companies, which hold your real estate development assets.

Because of this favorable income tax position, income reduction strategies or lifetime estate planning techniques that shift income to lower-bracket family members may not be as important to you as those strategies that effectively reduce death-related taxes and estate administration costs. 

Like most real estate developers, you will have special considerations when planning your estate, such as the following:

Growth of the value of the business

Large potential growth in the value of your real estate development business through successful operations, increases in real estate values, inflation, and other factors often indicates the need for “estate freezing” techniques. These strategies are designed to limit the value of your taxable estate to a value approximating the present value of your business interest, so that future increases in value can be shifted over to your beneficiaries free of gift and estate taxes. One estate freezing option is the use of a Grantor Retained Annuity Trust (GRAT). The GRAT allows business owners to transfer appreciating business interests or income produced by the business interests onto the next generation while incurring minimal gift tax implications. The benefits of the GRAT can be increased exponentially if the business is sold while the GRAT holds business interests. This technique is consistently in the limelight for more restrictive legislation, so you should consider GRAT planning sooner rather than later if this strategy makes sense for your situation. 

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