Summary: Real estate often represents a significant portion of high-net-worth families’ wealth, making estate planning essential for preserving assets across generations. Learn how strategies such as trusts, step-up in basis planning, valuation discounts, entity structuring, and passive ownership solutions can help real estate owners minimize tax exposure, avoid probate, and create a smoother transition for future heirs.
For many families, real estate is a cornerstone of generational wealth. Whether your portfolio includes rental properties, commercial assets, development projects, or a family vacation home, transferring real estate to the next generation requires careful planning to avoid unnecessary taxes, family disputes, and administrative burdens.
As trillions of dollars in assets move from baby boomers to younger generations — a phenomenon many advisors refer to as the “Great Wealth Transfer” — real estate owners face important decisions about ownership structures, succession planning, tax strategies, and long-term family goals. In the latest segment of our Real Estate webinar series, Aprio’s thought leaders explained how a comprehensive estate plan can help you preserve wealth, simplify transitions, and create flexibility for future generations.
Start with a Clear Transfer Strategy
Before you start building your estate plan, one of the first questions you should address is what you want to happen to your real estate when transfer ownership.
While many property owners assume they can simply leave assets to their heirs through a will, the reality is often more complex. Commercial properties may have multiple owners, partnership agreements, financing obligations, management responsibilities, or buy-sell provisions that impact how ownership can be transferred.
For investment real estate, you should review your governing documents to identify:
- Transfer restrictions
- Buy-sell agreements
- Partnership provisions
- Management obligations
- Existing debt and financing arrangements
- Personal guarantee requirements
It’s also equally important to understand whether the next generation actually wants to own and manage your property. In many cases, parents assume their children will continue operating family-held real estate assets, only to discover that their heirs have different goals, lifestyles, or levels of interest.
You should have these conversations with your heirs well before a transfer event takes place. Aligning family expectations early can help you avoid future conflict and create a transition plan that reflects both your wishes and the next generation’s capabilities.
Avoiding Probate Through Proper Ownership Structures
Probate can create significant delays and administrative burdens when transferring real estate after death.
One of the most difficult challenges arises when property is located in a state different from the owner’s primary residence. In these situations, families may face ancillary probate proceedings, requiring separate legal processes in multiple jurisdictions before property can be transferred or sold.
If you have real estate holdings in several states, probate administration can become time-consuming and costly. Many estate planning professionals recommend utilizing trusts or other ownership vehicles that allow assets to pass outside of probate. Properly structured trusts can help you:
- Streamline asset transfers
- Reduce administrative complexity
- Protect privacy
- Address blended-family concerns
- Minimize disputes among beneficiaries
While every situation is unique, proactive planning can help your family avoid lengthy probate proceedings and facilitate a smoother transition of ownership.
The Power of Step-Up in Basis
One of the most valuable tax benefits available to real estate owners is the step-up in basis at death.
When an individual passes away, many appreciated assets receive a new tax basis equal to their fair market value as of the date of death. This adjustment can significantly reduce or even eliminate capital gains taxes for heirs.
If you are a real estate investor, this benefit can be particularly powerful. For example, let’s say you purchased a property decades ago for $500,000 that has appreciated to $3 million. During your ownership, the property may have generated substantial tax deductions through depreciation, further reducing its adjusted basis.
If you sell the property during your lifetime, significant capital gains and depreciation recapture taxes may be triggered. However, if the property receives a step-up in basis upon your passing, your heirs may inherit the asset at its current fair market value, effectively resetting the tax basis. In many cases, this can dramatically reduce future tax exposure. The step-up also creates new depreciation opportunities, allowing heirs to begin depreciating the property based on its updated value.
Due to these benefits, estate planning often involves balancing two competing objectives:
- Reducing future estate taxes
- Preserving valuable income tax benefits through a basis step-up
Determining the right approach requires careful modeling and coordination among your advisors.
Understanding Valuation Discounts
Valuation plays a critical role in estate and gift tax planning, particularly when you hold real estate through partnerships, LLCs, or family entities.
When transferring ownership interests in privately held real estate entities, the value of those interests may differ significantly from the value of the underlying property itself.
Qualified valuation professionals often evaluate factors such as:
Lack of control
Minority owners typically cannot independently make decisions regarding the sale, financing, or operation of a property. Due to the fact these interests have limited control, they may qualify for valuation discounts.
Lack of marketability
Unlike publicly traded securities, you can’t sell your ownership interests in private real estate entities quickly or easily. This reduced liquidity can support additional valuation discounts.
These discounts may reduce the reportable value of transferred interests for gift and estate tax purposes, potentially helping your family maximize available exemptions and minimize transfer taxes. However, you must carefully document and support your valuation strategies with qualified appraisals to withstand IRS scrutiny.
Structuring Real Estate for Long-Term Ownership
Many real estate investors hold properties through limited liability companies (LLCs), partnerships, or other entities designed to provide liability protection and operational flexibility.
Beyond liability protection, entity structures can support your broader estate planning objectives by:
- Facilitating ownership transfers
- Centralizing management
- Providing governance frameworks
- Simplifying succession planning
- Creating opportunities for valuation discounts
You must review your operating agreements and partnership documents regularly to help ensure they align with your family’s estate planning goals and current ownership structure.
In many cases, entity planning becomes even more valuable as your portfolios grow across multiple properties, jurisdictions, and generations.
When Your Heirs Don’t Want Active Management Responsibilities
A growing challenge in estate planning is the disconnect between property owners and their heirs regarding active real estate management.
While one generation may have spent decades acquiring and operating properties, the next generation may prefer passive ownership structures that provide income without day-to-day responsibilities.
If you are in one of these family situations, alternative ownership vehicles may provide you with more attractive solutions. One option receiving increased attention in the marketplace is the Delaware Statutory Trust (DST).
DSTs allow investors to exchange investment property into institutional-quality real estate while maintaining many of the characteristics associated with direct ownership. These structures may provide:
- Passive ownership
- Potential cash flow
- Professional asset management
- Continued exposure to real estate markets
- Simplified succession planning
If you and your family are focused on preserving wealth while reducing operational burdens, passive ownership structures can help bridge the gap between legacy goals and evolving family preferences.
Leveraging Intentionally Defective Grantor Trusts
Another advanced planning strategy involves the use of Intentionally Defective Grantor Trusts (IDGTs). Despite the unusual name, these trusts can provide powerful estate planning benefits.
With an IDGT, assets transferred to the trust are generally removed from the grantor’s taxable estate for estate tax purposes. However, the grantor remains responsible for paying income taxes generated by trust assets.
This arrangement can create several advantages:
- Future appreciation occurs outside the taxable estate
- The trust beneficiaries receive the economic benefits
- The grantor’s tax payments effectively provide additional wealth transfers without using gift tax exemption amounts
When combined with income-producing real estate, depreciation deductions may continue to offset your taxable income while future appreciation shifts outside your estate.
If you and your family are seeking long-term wealth transfer strategies, IDGTs can be an effective component of a comprehensive estate plan.
The Importance of Coordinated Planning
Perhaps the most important takeaway for real estate owners is that estate planning cannot happen in isolation.
Tax consequences, legal structures, valuation considerations, financing arrangements, and family objectives are all interconnected. If you make decisions without input from your broader advisory team, you may create unintended consequences that can be difficult or expensive to reverse.
Successful estate planning often requires collaboration among:
- Tax advisors
- Estate planning attorneys
- Real estate attorneys
- Valuation specialists
- Wealth advisors
- Investment professionals
A coordinated approach helps ensure that ownership structures, tax strategies, and succession plans work together to support your family’s long-term goals.
Final Thoughts: Real Estate Requires Comprehensive Estate Planning
Real estate owners face a unique set of estate planning challenges and opportunities. From probate avoidance and basis step-up strategies to valuation discounts and passive ownership solutions, the decisions made today can have lasting implications for future generations.
Aprio’s helps individuals and families navigate complex wealth transfer planning, business succession, estate tax exposure, trust administration, and valuation considerations. We work alongside your legal and financial advisors to develop integrated strategies that help preserve wealth and support your legacy objectives.
By developing a comprehensive plan and working with experienced advisors, you can protect your assets, reduce tax exposure, simplify transitions, and preserve the legacy you have worked so hard to build.
