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Planning for property investment success…from beyond the grave

While death is not something any of us like to think about, it is one of the only certainties in life…of course the other certainty is about as palatable a topic.

But the fact is you need to think about your own mortality in relation to your financial plan and yes, that means taxes too!

Just as constructing a well thought-out investment and gearing (debt) strategy is important when venturing into property, estate planning is essential.

You want to be successful and reach your goals, and when you get there you want to make sure your high growth assets are distributed according to your wishes when you move on from this plane (yes, I’m being polite about it!), in order to minimise tax.

Without an estate plan you have no control over where your assets end up, who gets what and whether your wishes are followed. You may also end up bequeathing substantial tax liabilities to your loved ones, rather than passing on your wealth.

Most investors have two primary goals when they start:

  1. To fund retirement and,
  2. To take care of their family financially.

To meet the latter objective, estate planning is critical. There’s no point in making all the sacrifices, taking all the risks and doing all the hard work while building your wealth, only for it to be squandered through a lack of adequate protection when you pass.

Debt shy family

Estate planning is not just about leaving your family wealth and wealth-producing assets. You have to remember that any property strategy requires taking on a relatively large amount of debt.

Therefore as an investor, you need to consider that you could potentially be leaving your loved ones with a ‘hot potato’ in terms of debt. What will they do with that debt and how comfortable will they feel taking it on board?

Will I or won’t I?

An up-to-date will is the cornerstone of the estate planning process. Preparation of a property investor’s will, should really cover two main aspects

  1. Asset distribution and,
  2. Estate administrator; who directs where the assets go and carries out your wishes.

Your will should generally be prepared by a specialist estate planning lawyer, rather than a DIY document using a will kit or form downloaded from the Internet.

Make sure it’s customised and meets your objectives. As a property investor, your plan is to accumulate wealth, along with assets that generate a passive income and are valuable, so an estate planner is worthwhile.

Not a large investment

A standard will normally costs $500 to $1000 to have prepared which, when you consider the alternatives, is not excessive in terms of making sure that the property empire you’ve built will be passed on to the right people.

Advice and guidance from a financial planner can also be beneficial, as estate planning and the set-up of your will should be considered alongside the establishment of correct ownership structures and your initial property and financial plans.

Your will should be updated from time to time and ideally reviewed annually, or at a minimum, every three years. Don’t forget to amend your will as circumstances dictate, such as marriage, divorce, remarriage and children entering the picture.

And you must also account for any changes in ownership structures, assets held in your portfolio and so forth.

These significant life events are the usual catalysts that prompt a review of your will, which should be conducted with your estate planning lawyer and financial planner or adviser, such as an accountant.

Appointing an executor

An executor is the person who carries out your wishes and directs your assets according to your instructions.

It might be a good idea to consider a fellow property investor for this role, or at least someone with knowledge as to what’s involved, because if the core assets you hold are bricks and mortar based, they’ll better understand this commodity and how it should be managed.

The alternative might see you end up with an executor who has no real understanding of your assets’ value and simply decides to sell everything, which might not be best for your family’s long-term interests.

If you don’t have a family member or trusted friend who can act as an executor and has some property investment experience, don’t panic.

In this case, consider leaving specific instructions, which will normally be in addition to the will, such as a formal letter to your executor detailing what they should do (often called a letter of wishes).

For instance, you might want to direct them to not sell any assets because you bought the property to generate an income in 20 or 30 years, so you’d like them to preserve the assets and their continuing capital growth for the benefit of your family.

You might suggest that they use your life insurance to repay all debt associated with your portfolio, so your family are left with unencumbered assets.

Whatever you and your adviser believe to be best for your beneficiaries can be outlined in the instructions to your executor. Keep in mind that the clearer you are with regard to your wishes, the easier the job will be for them.

Power of attorney

A property investor should certainly consider appointing a power of attorney – someone who can legally act on your behalf. There are three types of power of attorneys:

  1. Specific – as the title suggests this is a PoA that has a specific purpose, such as a medical PoA.
  1. Limited – this is a PoA that might act for one specific transaction only. For instance you might give a limited power of attorney to someone to complete the purchase of a specific property on your behalf.
  1. General or unlimited – general PoA is given to someone so they can conduct any business on your behalf.

There is also an enduring power of attorney, which means that the power of attorney continues until death, regardless of the mental status of the principal.

All PoAs lapse should you not be of sound mind, with the exception of an enduring power of attorney, which protects someone or gives someone the ability to act on their behalf even if their mental state deteriorates.

It’s particularly beneficial for a property investor to have a PoA in place if they travel often.

That way if you’re absent, your PoA can sign a contract of sale, or attend an auction and buy a property, sign loan applications and legal documents such as a transfer of land and so forth, all on your behalf.

In other words, you have someone on the ground who can represent you in a property transaction. A power of attorney can be revoked at any time, but the process of doing so is subject to some state laws.

Remember, growing your asset base requires hard work and dedication. You never know what can happen on the journey, but you need to make sure it’s as smooth and successful as possible; not just for you, but the family you could one day leave behind.

If you would like more information on how you can profit from investing in Australia’s residential real estate sector by establishing clear investment strategies and structures, contact us or subscribe to receive regular post updates and industry insights.

Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: wealth@propertytycoonfinance.com.au