The other day I read about a real life real estate investor who’d been pretty successful, and had decided to step away from the life, and begin their retirement. Sounds good to me. Betcha there’re a lotta folks readin’ this askin’ themselves under their breath, “Where do I sign up?” The article in question was about a guy who’d followed what he’d thought was the tried ‘n true strategy one of his mentors had taught him. Buy property — never EVER get rid of it — refi for more investment cash when prudent and possible — rinse, lather, repeat. It’s not relevant if the agenda was cash flow or capital growth. The ending will be roughly the same.
Though it’s not absolutely necessary, that strategy almost always results in the following relocation for the investor. Between a rock, a hard place, the IRS, and post job existence more analogous to a life sentence than a dream retirement. This presents a thorny problem for those who wish robust second careers requiring much capital, or those for whom after tax cash flow from real estate is paramount to the success of their retirement. Here are some of the details to which you may look forward after following such a rigidly defined investment strategy.
1. If you wish a second career, and require much capital to make it happen, the cost of selling your portfolio will be daunting. Not only capital gains taxes, but depreciation recapture taxes will devastate your equity. All those decades of proudly taking depreciation against your cash flows and your job’s salary (if under $100,000/yr.) now come home to roost. Did you really think their wasn’t another government boot to drop on ya?
2. If your Plan called for you to live on real estate cash flow, gird your loins BigGuy, cuz Uncle is lickin’ his chops for that time to come. How’d you like it to dawn on you one day that your $150,000 a year retirement income will be quickly run through the IRS/State sausage grinder, resulting in that princely sum turnin’ into a whole buncha $90,000. Ah, now yer payin’ attention.
3. Keepin’ all those properties forever, cuz Grandpa told you to? Here’s a real unwelcome result — you’re now the proud, retired owner of a collection of already old, high expense, retirement killers. Each year there’s gonna be somethin’ else to suck up more and more of your ‘woulda been’ cash flow.
The really sad part? It was designed to end up this way — whether you realized it or not. It’s kinda like gravity — it doesn’t care if you know about it, or believe in it — it just is. And it works every single time. Smart people use it to gain positive results. Gravity will just as easily be your friend, as kill you.
This is where the article brought in the Knight in Shiny White Armor – Charitable Remainder Trusts — CRTs. In a nutshell, and hugely simplified for this post, the investor donates his real estate portfolio to his favorite charity, which gives him a giant tax deduction. The charity then sells the property and generates income to the investor for their retirement. The income is then tax sheltered by the tax deduction received from the original donation. This begs a few questions though, doesn’t it? Think about it a minute.
What about the investor’s three kids, um, I mean heirs? Guess they’re relegated to the, “Hey, I took care of myself, now you do the same” scrapheap. And yeah, I know kids can be included in CRTs, but this guy needs the income for his retirement — he’s not Warren Buffet. Remember the premise here — he’s screwed the pooch both in the potential sale and/or cash flow of the portfolio tax wise. There’s no equity or cash flow left for any heirs.
It’s at this point panic sets in for some. Their decades of hard work and planning have turned into a morass of unintended taxes, resulting in settling for a far less gratifying retirement than envisioned.
Many will tell you that the heirs can be made beneficiaries of a life insurance policy. Sounds nice, doesn’t it? One problem though — what’d'ya think the premiums are gonna be for a $2-3 million dollar policy on a man or woman in their mid to late 60′s? In many cases, six figures or close — annually. Where’s that money coming from, the Retirement Fairy? (Failure buzzer in background.)
Let’s assume the CRT’s appraisal showed an equity of $3 Million at the time of the donation. Also assume the investor, 65, needs $125,000 to enjoy the retirement lifestyle desired. He’s exceptionally healthy. Let’s also assume he lives to be 90. Here are some questions for you, the answers to be provided in my next post.
Again, the answers and Purposeful Planning solutions to these questions/problems in my next post on Monday. I say Purposeful Planning, but when brought into situations like this, it’s really more of a rescue mission than anything else. In fact, if there’d truly been a solid Plan executed on Purpose in the first place….
Meanwhile, today’s no different than any other, and I need a fix. So call me at 619 889-7100. Did today’s post hit you on the forehead like a two by four? Have a good one.
Related posts:
- Transitioning From Growth To Retirement As A Real Estate Investor — End Game
- Subprime Resets AND The Real Estate Investor’s Dream Of A Perfect Storm Is Reality
- The Learning Curve of a Recovering Attorney Turned Real Estate Investor — Escaping From Dodge
- Transitioning From Growth To Retirement As A Real Estate Investor — Part III
- Transitioning From Growth To Retirement As A Real Estate Investor — Part II
About BawldGuy
[...] I would talk a little about Charitable Remainder Trusts in response to BawldGuy’s post, “Retirement Dream a Nightmare….” First, some background in my involvement with CRTs. I will give you the full explanation in a later [...]