Succession planning can be one of the most difficult, yet most important, actions you take as an independent rental owner (IRO). Simply put, succession planning is the act of determining what will happen to your business and wealth after you retire or unexpectedly pass away. It’s not something you want to put off until the last minute — but most people do.
In fact, according to the Business Enterprise Institute, 81% of business owners plan to leave their business in less than 10 years, but only 20% have an exit plan in writing. We should mention: a succession plan doesn’t count unless you get it down in writing.
Here’s the thing: Independent rental owners don’t want big decisions argued by lawyers and decided in court (and neither do their families). If you’re like most people, you want to honor the commitments to your family, employees and tenants with a good succession plan.
Yardi Breeze supports IROs in their quest to easily run their businesses and support their communities. This article offers basics strategies to help you:
- Identify the role of trusts in succession planning
- Set up a family constitution
- Prepare your successor(s) to take over
There’s an important difference between your will and your trust, and both are important. Your will dictates to whom your cash, equity and property will go.
Your trust serves a different purpose. It:
- Defines your wishes, both general and specific
- Passes on your knowledge and experiences
- Reduces taxes and avoids probate
Pro tip: A CPA and real estate tax attorney are necessary to help you correctly set up and manage your trust.
Revocable living trust
There are many kinds of trusts, but a revocable living trust (RLT) can be reviewed and updated (something you should do every other year). Because you’re succession planning, you’re thinking ahead. You’ll probably want to update the trust with your thoughts, priorities and insights over time.
For the sake of comparison, an irrevocable living trust has tax advantages and other benefits, but it isn’t as flexible as an RLT.
Don’t forget the family constitution
Similar to the family trust, the family constitution goes beyond the simple allocation of funds and property to your descendants and relatives. Your family constitution is sort of like the Constitution of the United States — it provides a blueprint to keep your family unit cohesive and financially successful for generations.
What’s in it?
A family constitution contains a preamble (summary) as well as a list of priorities to:
- Educate successors on your goals, ideas, knowledge and direction for the business
- Help the next generation to replicate wealth, not just consume it
- Organize family meetings and family retreats
- Prevent family divisions, excess capital gains taxes and unnecessary business risks
Your succession plan needs a willing & able successor
Inherited wealth can destroy the next generation, but an inherited legacy can enhance every generation thereafter. A family member (e.g., son, daughter) may be the ideal successor to your business, but they might not be. In fact, even if they are capable and qualified to be an IRO, they might not be interested. Or, they might be partially interested but unwilling to make a full-time commitment. The only way to know for sure is to talk to them about being your successor. This is often the first step to take when succession planning.
Train a successor
It may take several years to fully realize a succession plan. During this time, your living trust will change as your succession goals take shape, and your family constitution will serve as the guiding “North Star” for your decisions. But it’s your chosen successor(s) who will ultimately play the biggest role of all. That’s why you need to delegate roles and responsibilities, not just tasks.
- Enroll them in property management classes such as those offered by the National Apartment Association Education Institute (NAAEI)
- Attend apartment association meetings together
- Network with other business owners and suppliers
- Consider a temporary veteran CFO to help bring your successor up to speed on financial matters
- Take care of your immediate income needs first, then pass many of the financial responsibilities to your successor
IROs can also sell the business
Selling is not necessarily a bad option. If you don’t have an interested or capable successor, or you’d rather collect cash now (while you can still enjoy it), go ahead and sell!
You’ll need your business running like a well-oiled machine if you’re going to sell it at the best possible price. This means:
- Maintain and update the property
- Document the age and condition of roofing and appliances
- Check on the tax consequences ahead of time
Your CPA and real estate tax attorney should be able to help determine what your property is worth. If selling isn’t the best option, they can help independent rental owners find upside in a down economy.
Use technology for a smooth transition
Whether it’s a successor or new owner taking over your business, make sure your financial, marketing and operational data is organized in a single system of record. This can have a huge impact on the value and future success of the portfolio you leave behind.
It’s not easy for independent rental owners to create a good succession plan, but it’s worth the effort. A good plan protects your wealth and assets, prevents family in-fighting and preserves your legacy for generations.
This article is not a blueprint for succession planning your business and neither constitutes nor replaces professional counsel. It is meant to be educational, and we encourage you to do more research. Late-career IROs should consult a CPA and real estate attorney to help you plan the future of your business.
Special thanks to Steve Lightner, NAA Regional Vice President for Region 5, and Dawn Ford, National Speaker for Smart Apartment Solutions, for hosting the APTvirtual webinar from which the material in this article was taken.