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Wednesday, May 8, 2024
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Case Studies |
Marketing Ideas During Soft Markets and Dropping Interest Rates, Part 10 - Commercial Real Estate, Investment Land and Homes
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Case:
Jack Henry, 80, is a very concerned American. Having grown up during the Great Depression, Jack developed certain attitudes towards the stock market and savings. As a result, he saved consistently and conservatively during his entire life. In addition, Jack would only put his money into real estate and savings accounts. As a result of his steadfast belief in savings and real estate investing, Jack and his late wife Samantha accumulated a $5 million estate.
While stock investors have recently lost ground, commercial real estate values generally have held steady and even increased in some areas. Accordingly, Jack's holdings have remained quite solid. In fact, many of Jack's properties have continued to grow and have accumulated a huge amount of appreciation. Although Jack believes strongly in his investment strategy, he now fears that the real estate market may drop sharply in the near future similar to the way the stock market fell.
Despite his past success in the real estate market, Jack feels his holdings are not diverse and subject to great loss potential. As a result, he is interested in selling some of his real estate holdings now, locking in the appreciation and reinvesting in a safe, income-producing investments.
Question:
What could Jack do with his appreciated real estate holdings? What vehicle(s) should he consider to meet his goals? Is this a safe investment?
Solution:
Jack could consider using a Charitable Remainder Unitrust ("CRUT"). Since an unmarketable asset is being transferred into the trust, a FLIP unitrust or NIMCRUT should be utilized. Either way, Jack would be exchanging a potentially volatile real estate holding for a fixed trust payout percentage. The trust would sell the real estate (without the payment of capital gains) as soon as possible, thereby locking in the appreciated property value. Afterwards, the trust could invest in a bonds and equities mix which is intended to minimize loss potential.
Jack could elect to receive a payout ranging from 5% to 8%. While Jack could elect a higher payout, it may cause the trust to decrease over time as payments are made from the trust corpus. Considering the current state of interest rates, Jack is thrilled with the CRUT payout options and consequently elects a 6% FLIP unitrust. He and his advisor think that the trust will earn more than 6% and the tax-free growth of trust principal will also benefit Jack with increased income during his lifetime.
In addition to receiving income and diversifying his real estate investments, Jack would also receive a charitable income tax deduction. At his age of 80 and with a 6% payout, his deduction is over 60% of the fair market value of the real estate transferred. Again, Jack is amazed with the size of his tax benefit. Finally, Jack would be making a substantial gift to charity at his death.
Not surprisingly, Jack is completely happy with his plan. He turned uncertain economic times into a golden opportunity to diversify his holdings, lock in investment gains and move into safer, income-producing investments.
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