Mary Owens: Choosing the right successor for your estate
February 11, 2018
Last month I outlined many of the critical issues to be considered when choosing successor trustees for your trust and related affairs. For estates that own substantial real estate holdings or own a business, the challenges of finding the "capable and willing" successor trustee can be daunting.
First and foremost, there is no "rule of thumb" to go by when considering successors for more complicated estates. Each family situation is different and must be carefully evaluated in order to list the skills needed to be successful in administrating your future affairs.
In order to provide some framework of evaluation, I will go through each type of skill needed to handle differing situations. Please note, rarely will you be able to find one person who possess all the knowledge and time needed to fill all needs.
The best person to select is one who is bright enough to understand what they can and cannot proficiently perform in the way of required services. When this level of understanding comes, a willingness to hire and engage those that do possess the skills sets needed to create a positive outcome of the estate affairs with the least amount of stress becomes critical.
But the one "rule of thumb" you can rely upon is in estate administration, "the cheapest solution is usually not the BEST solution." Hiring competent people in a more complex estate is crucial to success.
Handling real estate
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Let's start by discussing real estate holdings. If your estate owns a couple of residential rental houses, then the issue is not too difficult to handle. If your successor trustee is a family member, works full time or lives out of the area, do not expect them to be able to adequately service rental properties on their spare time.
Hire a competent rental property manager before you are unable to handle these affairs yourself. Don't leave this task to your child or professional trustee. You want a real estate manager that is already familiar with your tenant, knows the rental market in your area, and is aware of the condition of your property.
Many think managing real estate houses is fairly simple. It may not be difficult when you have a wonderful long term tenant who treats the place like their own, but that is usually not how most long term rental properties operate. There will be vacancies.
A family member working full time does not have the time to interview and screen tenants. They also do not have the time to inspect the properties with the new prospective tenant to document the condition of the property before they take occupancy. They also do not have the knowledge or time to credit check and be aware of "problem tenants."
Once you get a bad tenant into a property, the time and expense of getting them out is significant. These are not the issues your family members signed up for when they agreed to be a successor trustee.
As you age, your ability and willingness to handle these affairs diminish as well. Hire a property manager well in advance of asking your child to take over these responsibilities. They already have enough on their plate without the burden of "learning the ropes" on rental property management.
If you are lucky enough to have a family member already versed and experienced is these affairs, discuss with them their thoughts on their abilities and time constraints to take on this additional tasks. Even though they may have the skill sets needed, it does not mean they have the time needed to take on this task without rental property managers doing some of the work.
The more rental properties you have, the greater the need for professional assistance. Out of state properties in particular need a local set of professional eyes on your valuable assets to insure it is being well taken care of in your absence.
The complexities of commercial
The next area of real estate management concerns commercial real estate owners. Commercial real estate is far more complex to manage than residential.
Commercial real estate valuations are tied to the successful management and operations. If a commercial property is leased out in a long term lease that is under the market relative to other like properties, it can and usually does decrease in fair market value.
The terms of the commercial lease can also affect your ability to sell or refinance your property. Your ability to inspect and manage your property must be clearly stated in your lease document in order for your rights to be enforced. Do not expect a child to manage commercial real estate unless they have substantial experience or they have hired a professional to assist them.
The most challenging and difficult situations I encountered as a professional trustee involved managing commercial real estate that had been poorly managed in the past.
If you own this type of property it is extremely important that your child who is going to be the successor trustee is aware and has access to all accounting and leasing records of your commercial properties. This is true of all rental real estate, but even more crucial in commercial real estate.
The valuation of a residential property has little to do with the rent structure if the lease is short term or month to month. However, that is not the case for commercial properties.
If your successor trustee does not know the terms of your leases, the lease rates and other significant data, they are unable to effectively market your property without enormous amounts of work to reconstruct these records. Access to records and having knowledge of where they are stored is absolutely essential to their success. As with residential real estate, consider hiring a professional property manager before you pass these responsibilities to your successor trustee child.
Next month I will be discussing more thoughts on real estate management for your estate and will begin the series on the challenges of estates that own operating businesses.
Mary Owens, CPA, MS, Principal, President of Investments, OEWSG Branch Manager RJFS with Owens Estate and Wealth Strategies Group, located at 426 Sutton Way Suite 110 Grass Valley, CA 95945 | (530) 272-7500. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Owens Estate and Wealth Strategies Group is not a registered broker/dealer and is independent of Raymond James Financial Services. The information provided does not purport to be a complete description of the developments referred to in this material, it has been obtained from sources considered to be reliable but we do not guarantee that it is accurate or complete. Any opinions are those of Mary Owens and are not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.