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Passing a real estate portfolio to the next generation is not always straightforward, and if not planned well, it can be a painful point of contention for a family. In this episode, we discus come clever ideas on how to equip your children with the skillsets needed to responsibly manage what you leave them.

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Transcript:

Emil:

 

Hey everyone. Welcome back for another weekend wisdom episode of the remote real estate investor. My name is Emil Shour and I got my co host with me today who are

 

Tom:

Tom Schneider,

 

Michael:

and Michael Albaum.

 

Emil:

And today we're going to be talking about generational wealth. We're gonna be talking specifically about our thoughts on it, what our plans for the future what we want our legacies to look like and even how that's changed over time. So let's hop into this week's episode.

 

Tom sounds like he's at the motor speedway right now he's…

 

Tom:

…got a little construction going. Like the dentist over this

 

Emil:

Oh, let's just drilling

 

Michael:

Are they still jacking up your house?

 

Tom:

They finish jacking up now they're adding in plywood to strengthen the sides of the walls usually houses have plywood on the side but mine did not so it's kind of scary living in the bay area where it's like a little bit earthquake prone not being as structurally sound but…

 

Michael:

like around just the perimeter above the ground not like the shear walls that are on the foundation.

 

Tom:

So you have the two by fours like the framing and then yeah normally outside the framing there it's common to have plywood and mine My House did not so they're adding in like some plywood and stuff so a lot of stuff going on at the old Casa so that's the dentist noise in the background is plywood going in deck being rebuilt all this all this jazz. So kitchen being redone. Fun Fun, fun,

 

Michael:

Rehab that work.

 

Tom:

Rehab and live in rehab. I yeah, grind through it. Yeah, it's a first world problem. But it's uh it'd be nice to have a kitchen with running water.

 

Michael:

So needy Tom, needing running water, electricity. Gosh, Come off it already, man.

 

Tom:

Yeah, this toughened me up. Sounds good.

 

Emil:

Alright, guys, so back on track. We're talking generational wealth today. This is personally for me, some I have just gone back and forth on like, what do I want to do? There's like, kind of two schools, right? There's some people, there's a lot of different variations. But I think the two main ones are, I want to leave a lot of the assets that I'm buying and owning to my family. And then there's some people who are like, No, I want my, my kids, my family, well, mainly your kids to build for themselves. And you either I don't know, donate to charity, or do something with it where you know.

 

So I'm curious, like, have you guys thought about the future? What does it look like, for you in terms of passing, will stick to real estate specifically by passing on your portfolio to your kids?

 

Tom:

To be honest, I mean, I haven't really thought too much about the mechanics in a way that I want to do it. But what I what I do know is there's a good amount of lead time, hope that I that I live long, that I can, you know, I don't necessarily have to make that decision today, with real estate and I think is relevant to you know, passing on to kids, there's, there's two things you can never change with real estate, that is the location of the property and the price that you pay for it down the line, if they you know, one thing that I like so much about single family rentals that you have multiple kids, it's it's much easier to kind of break up that kind of disbursement of, versus your you know, your family owns a big apartment complex, you know, it's a little bit trickier have a thinking about passing it on to the next generation.

 

So that's one thing I'm thinking about with single family is it's a lot easier to slice and dice that type of wealth, you know, some questions that I've been having is, you know, how much money should I be putting in this, you could do pre tax money towards like a college fund. And part of me is like, No, just dump it into real estate, like, you know, maybe I'm losing some of that pre tax efficiency, but like, I really love this as an asset class. So I cut in front of the line to give an answer. I didn't really like the answers, just a couple of musings that I have is I don't have a very specific plan. But I do know that I want to get the assets in place and really focus on that side, you know, down the line, I can get more formal about that way of, of transitioning. So not positive. I answered your question that you had asked me, but I had a good time answering it.

 

Michael:

Well, I've got a follow up. That's more that's more point blank. Do you plan on passing your assets to your kids when you and your wife are no longer around? Or do you have a separate plan?

 

Tom:

Yeah, I hope so. Um, yeah, that would be the plan to do that. I mean, I think it's a buffer if, for whatever reason, like, you know, we need the money, like, I hope to set myself up in a situation where you know, you have Principle of investments be it in like properties, whatnot, and you never necessarily have to dip into it, you know, you're making money off of the yield, you're making money off of cash flow, perhaps even, you know, dipping into the some of the equity through, you know, another cash out refinance, whatever.

 

But at the end of the day, the end of my day, I chose source assets are able to be passed on to the next generation, I would like to do that and maybe even step it up a little bit, maybe throw a house or a couple houses in there, too. So, alright, I digress again, Michael or Emil somebody quick!

 

Michael:

Before the potato hits the floor,

 

Tom:

I am holding, my hands are burning. Yeah, hot potato.

 

Michael:

Good. Similar to you, Tom. I've thought about it. In theory, only my wife and I don't have kids yet. So but they're definitely in the foreseeable future. That's part of our plan. So we'd love to be able to leave the whole portfolio to the kids, assuming they're not a couple of knuckleheads. It was something that that I was left when they had future generations passed. And it was a hugely, hugely impactful thing. Now, if my kids have no interest in real estate, no, I'm not just going to give them a portfolio of performing assets and say, well, you're not your setup. I mean, they need to express an interest in wanting to actively manage and be a part of that, from a young age. It's not just a golden ticket, here you go figure it out. So I want them to be active participants.

 

And if they don't want to be well, there are ways to, you know, liquidate the asset or get equity out of the assets so that they can use that cash for a better purpose or for something that they see more fit or that they are going to get more out of, because so often you hear about these, someone in the future generation passing away, the kids have the asset, whatever it is, and they squander it or squabble over it, or screw it up, and then it just gets really ugly pretty quickly.

 

So there's a way to avoid that, which I think if I had to play it out, and as best way I could, I'd say that they would be involved in the business during their lifetime, so that they're well equipped and well versed to take over should they choose.

 

Tom:

I think that's responsible also, Michael, that you're talking about kind of thinking about, like concerns of potential like squabbles, I don't know if this stuff can get ugly.

 

Michael:

It gets really ugly really fast. And I've seen it happen. I've heard about it happen with family members, that's typically who's being left this stuff. So kids or siblings, cousins, whatever, and then the relationship gets soured, because they are in a better position. Now financially, because they have this thing, which is so silly to do. It's the exact opposite of what should be happening. So if you can plan for that in advance, and there are tons of ways to do that, via trusts and making sure that kids get things at certain ages, and their estate planning is this whole sector unto itself.

 

But the fact that real estate is such an amazing vehicle to keep until you pass is kind of comforting.

 

Tom:

If you got a pet, pet turtle, you know, you can you can get really creative with wills and trusts. And if it's gonna outlive you, if you have a pet, there you go.

 

Emil:

Is that an analogy? Are you serious about pets? I have heard of it. I have heard of it. Yeah. My thoughts on this kind of flip flopped? I think, when you have kids, it puts it a little bit more in perspective, like you just think about it more. I think there's so much value in learning how to build from nothing, right? Like, okay, let my kids kind of work, earn money, help them learn how to do the things I've learned over time, but not just give it to them or give them money or whatever it is.

 

But I think that has changed a lot over the years. I think now I would rather I would love to help my kid not just like hand my kids over properties, but help them get their first properties, help them do their first deals, even if I'm the person giving them the cash to do the deal. Like I'm their bank, that would be the most amazing thing, because then I think they're learning and they get to kind of make those mistakes. But I'm also you know, it's it's like, you want to help your kids as much as you can give them a leg up in this world. Like, why not do that? Why not help them but still teach them those important lessons.

 

So like you said, my goal, they don't squander it, hopefully, their kids, you know, when they leave it to them, don't squander it, but like, trying to teach them the value of $1 and like, give them a leg up, but not just hand everything over to them. It's kind of like, how I think about it now.

 

Tom:

I think in the the process of, you know, grooming them to take it over or whatnot. Man, there's some really practical learning spots in there in like looking at, you know, a pro forma, like breaking it down like looking at lease looking at like math and English and action. So I think in getting to that transition plan, like I can just see a lot of kind of fun ways and getting them excited about these really important concepts. stops with financial literacy, of understanding that so it's kind of a gift that you get like multiple, multiple gifts to give from one that, you know, understanding on the inside of it, and then to it at whatever point you, you know, transitions assets to them, boom, number two.

 

Michael:

The gift that keeps on giving, it's the golden goose, the golden goose, I think it's interesting that I see. And you hear about these kids squandering it and the squabbling over it. And it's like, they never got any training. And when a kid turns 16, they can go get their driver's license, but we don't just don't give them a keys to the car, because it's their birthright or because it's their right to go get their car, they have to go through training, and they have to learn it and have to earn it and have to pass a test, same thought process should be applied to business or assets, there needs to be training involved. We can't just give the kids the proverbial mineral keys and assume that it's going to all work out. Okay.

 

Emil:

You, you brought up a good question, Michael, that I wrote down, I want to ask us all, what do you do if your kids are just not interested in real estate? Like you try to bring them in the business, you try to keep them involved? But like, you know, there's only so much like kids, a lot of times they don't have the same interest as you no matter how hard you try. So it's very, very real scenarios. What do you do if your kids are just not interested in real estate?

 

Michael:

Can you just go get new kids?

 

Emil:

Trade em in!

 

Michael:

Trade with someone who doesn't have any, swap till you drop? Isn't that what we were saying before the show for real estate?

 

Well, that's like Michael Zuber talked about that.

 

Emil:

Exactly.

 

Michael:

That his daughter was not interested. I think that you can, again, me personally, without having kids, it's, it's all theoretical. But I would plan to support them in the same ways that I would if they were involved in the business, and whatever their passion was. And that me, I love what you said, that's just not to go give them money and say, or do whatever you want, but to be as supportive and helpful and give gifts in the way that is going to benefit their lives. And further there being a good person in the world, doing things to that effect, and then deciding and having that conversation, hey, you're clearly not into real estate. You know, what's something that you're passionate about?

 

Maybe we can donate this to when we pass? Or maybe there's something we can do in that department? Yeah, without having a super clear answer, because I don't know yet. That's, that's what I'm thinking in my brain.

 

Tom:

I think based on if they're not interested in continuing to build upon the portfolio and actively manage, put it in a position where you just be passive. And, you know, if they want to, like have a career that is, I guess, I don't know, net positive. And it's, it's funny, like, Who am I to, like judge that, but if they want to have a career where maybe like, the money that you make is not a lot, and this could help them out, you know, build the portfolio in a in a passive way. And it's a weird thing to say that it's like, you know, who's who's judging? Like, what's a, you know, career worth worth having. But yeah, at the end of the day, just making it like a passive position where it can help them, you know, live their life a little more comfortably. I think that's would definitely be something that I would want to do, even though they're not going to be actively involved in it. Build set up to be passive.

 

Emil:

Yeah, that's a good one.

 

Michael;

What about, you know, what if? What if the little one is like, yeah, Dad don't care.

 

Emil:

I've thought about this a lot. I would, I'd hope that they'd be interested in either business or something like, let's say they have some skill, and they like, they wanted to start their own business,

 

Michael:

Like bow staff skills?

 

Emil:

Wxactly. Bow staff skills, nunchuck skills, you know, something where they want to start their own business, maybe we can put some money in there and help them grow their business, right? Maybe they're not interested in real estate, we can use the wealth we've created to help them start a business that they can. That's another type of asset, right?

 

If they have no interest in that, I don't know man, it would be tough to just be like, Alright, let's just put money in, like Tom mentioned, that was my first thought as well put in something passive, maybe some dividend stock portfolio that just helps supplement some income, I would just be kind of scared if they just have no interest in financial education, personal finance, like they're gonna squander it. So it's, I don't know, at that point, though, I'm going to find out what time is something you can do as a parent that just ensures that they're interested in this stuff that we're all interested in, I don't know.

 

Tom:

I've got a better take. Now I've got a more established take thinking about and hearing you talk about it. It's so I'm gonna have put it it'll be in a trust, right? And they, if they're not into it, I'm going to make the decision that it's a really great wealth builder. And the trust is not going to let them touch it. It's just going to like, dribble out, you know, money for them to help them. Yeah. And it'll be just this little dribbling out. Money Money machine, that that's what I want to know.

 

Michael:

A little ATM.

 

Tom:

A little ATM. Yeah.

 

Michael:

I feel like if my kid or kids are not into it, and they, they still want access to the benefits. In the fruits of my labor, I'll just like give them treasure maps that they have to go solve. And the trust dictates like, no, sorry.

 

Tom:

Dude, the trust you can make it like you can make it do whatever you want.

 

Michael:

Yeah, yeah, you must go to this location, you must solve this riddle.

 

Tom:

You need your agents license in Hawaii go! Then, you become a notary in the state of Vermont.

 

Michael:

Your mission should you choose to accept it.

 

Tom;

Could you imagine like the, like kids faces like this, this 50 point project of like, I have to do what?

 

Michael:

Are you serious?!

 

Emil:

Wait, what if? What if you do that same logic, but you make them a achieve? Like they have to buy a rental property and achieve a minimum of 5% cash on cash return, so they basically have to learn real estate investing to unlock the big treasure chest.

 

Michael:

Yeah, that's good.

 

Emil;

So I don't know.

 

Michael:

I mean, you might be on to something Emil.

 

Emil:

They have to do all these things to get the millions or whatever and in doing so they've learned their financial literacy.

 

Tom:

You got to go go to a soup kitchen. You got to go build a house!

 

Michael:

You got to go be a good person. Yeah, totally.

 

Emil:

With the trust you can do that. Yeah, you can do all that stuff.

 

Michael:

So all right, I have to go Kelly after this. I gotta go update my trust.

 

Emil:

Alright, guys, anything else to add here?

 

Michael:

Yeah just…

 

Tom:

No we got it!

 

Michael:

Oh so clearly what I have to add is not essential.

 

Tom:

Probably not. Go ahead.

 

Michael:

There's there's something that a lot of people might not know about. And it's called this step up in basis. And that has to do basically with Tom, what you were mentioning earlier, in that the two things you can't change the location of the property and the price you paid. And so the way real estate is tax is it when you make a profit on the sale of a property when you sell from when you bought it for it's called capital gains, and you pay tax on that gain.

 

So let's say you bought it for 100,000, a couple years goes by it's worth 200,000. If you sold it, you would pay tax on that $100,000 you gain plus depreciation recapture. But let's not even get into that. So what a step up in basis basically says is that the day that you pass, and you give that property to someone else, or to In addition, wherever it's going their basis in the property basically becomes the fair market value at that point in time. So what that all goes to say is, let's say you same example, you bought that property for 100 grand, and you go talk to your tax professional before doing any of this, but this is just high level, how my understanding of it is, is if you bought that same property for 100 grand couple years goes by, it's now worth 200. And then you kick the bucket and you pass it on to your kid, well, your kids basis in that property is now 200 grand, because that's the fair market value.

 

So if they sold that property, the day after you passed, they could sell it for 200 grand, their capital gains tax would be zero, because the step the basis gets stepped up to the value at your passing. So if you sold the day before you died, you get taxed on 100 grand in capital gains, if the air sells the day after you pass after it's been stepped up, they sell for that same 200 grand their tax basis is zero.

 

So it's a really, really, really amazing asset to pass on to the next generation. Because what Tom mentioned is true, you can't change what you paid for it in your lifetime. The basis does change in someone else's lifetime. So it's again a really amazing asset to die with. As morbid as that is.

 

Emil:

A good tip. Michael, I’m glad you mentioned step up and basis very important. As you're thinking about…

 

Michael:

What do you think, Tom? Is that essential or not?

 

Tom:

Uh Yeah.

 

Emil:

I would say that's fair to include in the essential.

 

Tom:

Oh, yeah. Oh, yeah. Yeah, that's definitely fair.

 

Michael:

Yes. Awesome.

 

Tom:

Yes, definitely. The dentist office downstairs agrees, with the pounding.

 

Emil:

Alright guys wrapping this one up. Thank you, everybody for joining us on another weekend wisdom. We will check you guys out in the next one. Happy investing.

 

Michael:

Happy investing.

 

Tom:

Happy investing.