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Succession planning: make decisions now, alleviate headaches.

Real estate investors who want control of their future should plan now for their succession. You planned your portfolio to achieve particular goals and objectives. You should do the same for your succession.

Too often, succession planning is overlooked or is only addressed as it relates to the owner's death. Departures, though, are not necessarily as definitive as that. What about when you retire? What if you are in an accident that renders you unable to oversee your investment? What if you want to leave your investment partnership because of disagreements with your fellow partners?

The events that trigger the implementation of a succession plan are numerous. Being prepared for all potential triggering events ensures a better chance for success. The process begins by asking yourself questions: Do I want my investment to continue operating after my death or my retirement? Should I consider requiring my entire portfolio to be sold, keep some properties or retain them all? What do my partners want to happen if I am unable to continue in my current role? Can they buy me out? What about my heirs? Can they become the new partners? Who will run the business when I cannot or do not want to?

The answers to these questions, which vary from person to person, establish the unique guidelines to create the framework for your succession plan. The next step is to make sure your expectations are put into writing so they're legally binding. Experienced financial or legal advisers can guide you through the process. That way you know that your succession goals will be understood and executed properly.

Continuity is the first determination that needs to be made. Do you want the company to continue in its present form, an altered state or be liquidated? If you are the only owner and opt for liquidation, ownership and control issues are moot. For most, however, ownership and control matters are at the very core of their succession plans.

Even if you opt for family members to inherit your portfolio, many factors are involved to ensure that ownership issues are settled fairly and with the most advantageous tax structure. Deciding that you want equitable distribution among your children, for example, only opens the door to more questions.

Take a parent with two adult children who decides to split his or her real estate investment company down the middle--50/50 for each offspring--upon the parent's death. Yet, only one child is competent in the business and interested in remaining with the company. Should each child receive the same interest?

In this example, perhaps the child interested in running the business could receive an investment ownership incentive. The portfolio's value could be assessed upon the parent's death. Then, if the portfolio's value increased during the time that the managing sibling assumed responsibility, that child would receive a proportionally greater share based on the difference between the property's sale amount and the value at the time of the parent's death. Or perhaps both children are interested in running the business but do not work well together. In that case, the parent might consider splitting the portfolio in half, giving equitable properties to each child individually so he or she can decide what to do.

No single answer is correct. Make sure to evaluate your objectives and their repercussions, then detail your decisions in your succession plan, as well as in your overall estate plan.

Retirement triggers ownership succession issues. Perhaps you're counting on your real estate investment to fund your retirement. If you own the properties by yourself and want to sell outright, the succession plan can be straight forward. What if you have partners in your investment? Plan together now so everyone knows what ownership steps kick in when a triggering event happens. Buy-sell agreements spell out the details of your understanding so everyone plays on a level field.

Buy-sell agreements detail terms, such as whether the property or partnership interest value will be based on the fair market or some other assessment. Can the partners buy out another's interests upon his or her death, disability or retirement? If the deceased or disabled person gives his or her share to a family member, can that individual become a new partner? Does the buyer benefit from the value in appreciation after taking control or from the partnership's inception? What if insurance is going to be used to buy the stake, does the agreement allow for that?

Buy-sell agreements also can include steps for control and management matters. Control issues, including voting power distribution, are separate from ownership issues--though ownership may be a part of a new leader's compensation--and must be a part of the succession plan.

Perhaps a partner wants to sell most of the shares in his or her portfolio, but wants to keep a hand in the management of the company. Is that possible? How will this person be compensated? Advanced planning makes any option more feasible. Without such advance work, the potential for conflict, and potentially litigation, is much greater.

Control issues lead to management concerns. Who will assume leadership roles? Will other partners or heirs step up? Perhaps key employees will take on new positions? Planning now means you can prepare those future leaders. Instead of discovering one day that they are leading your company, they can begin now to learn more about the company, to develop their leadership skills, to familiarize themselves with vendors, and to learn the processes. That way they are better prepared when the time comes to take over. If they are unprepared, the investment's value could drop significantly.

Making succession decisions and putting them down in a detailed, written plan is not the end of your work. Also critical to the success of the plan's implementation is making sure all parties who are affected know the who, what, where, when, why and how.

The conversations may be difficult, but communicating your intentions and reasoning is a lot easier now than hoping the people involved will understand later.

MARC WIEDER, CPA

ANCHIN, BLOCK & ANCHIN, LLP
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Title Annotation:Investors to have succession planning before investing
Author:Wieder, Marc
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Jun 15, 2005
Words:1008
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