When you are over 60, what do you and your kids do with your real estate investments?

Bluestone and Hockley Real Estate Services

Tom and Irma spent a lifetime buying real estate. By the time they were in their sixties they owned 4 houses, a 30 unit apartment building, three commercial buildings, and had additionally invested with a couple of friends in some real estate partnerships.

Their cash flow was pretty good. They had almost paid off all of their investments. They kept their properties up. You could call them pride-of-ownership owners. They even found a property management firm that helped them care for their investments so that they only had to read the monthly reports, help prepare annual budgets, and inspect their properties from time to time. Things were going pretty well.

Their three kids had all finished high school. One daughter had gone on to graduate school and was working for a real estate developer. The middle child, a son, was a carpenter and an artist. Their youngest daughter was a school teacher. All were comfortable and did not need money from their parents.

Tom and Irma had focused on buying real estate when they were young and had developed their holding with a goal towards retirement. They were concerned that social security was under funded and doubted that there would really be any income or medical care for them, in their retirement. See excerpt from May 2, 2006 Yahoo news article below:

“The annual (Social Security) trustees’ report moved up the date that the Social Security trust fund will be depleted by one year to 2040 and moved up the date that the Medicare hospital insurance trust fund will be depleted by two years to 2018.

The problems in Medicare were depicted as far more serious because of the skyrocketing costs of health care, but the trustees presented a somber assessment of both programs facing the looming retirement of 78 million baby boomers.”

At this point in their life, they were healthy — relatively speaking. Irma had been struggling with diabetes for 10 years and Tom had some arthritis in his knees. They had been traveling all over the world and loved going to sea on cruise ships. They took two cruises a year all over the world. They were very happy except for one nagging question. What were they going to do with their real estate assets as they got older and it became tougher for them to take care of their investments?

Roger and Janine
Tom and Irma had always taken care of their real estate together. They had learned a valuable lesson when their close friend Roger passed away and his wife Janine was left with great real estate assets but no understanding how to manage them. Janine sold all of their assets within 12 months after his death because she just did not understand all of the details. She wanted all of her money in cash where she could see it. She had no idea that she was going to get taxed by the state and the federal government when she sold her real estate and ended up with almost 30% less than she had started with. In addition she was no negotiator and lost some of the value of her assets because she just did not want to be bothered with the process of going back and forth.

What was most important to Tom and Irma was to maintain their independence for as long as they could so they would not be a burden on their children. They had been able do this so far. As their friends grew older they noticed a disturbing trend.

As their friends gave significant financial gifts to their children, the children began to expect more and more cash or other gifts: stocks, real estate, cash, etc. This was most likely due to the increase in the standard of living and the struggle for every one to keep up with the Joneses. Real estate values had skyrocketed and only the fewest of their friends’ children were able to own homes.

Tom and Irma noticed significant skirmishes between children who wanted a piece of their parents rock (i.e. real estate or other estate holdings). The word “greed “came to their mind. This concept disturbed them. Most of these skirmishes were driven by the kids not seeing the future in real estate, and not seeing themselves as real estate investors. They definitely wanted the cash to spend and not real estate to care for.

One of Tom & Irma’s friends, Dolores, was in her 80s and owned 3 homes in a trust. The cash flow from these homes paid for her stay in a senior assisted care facility. Her daughter Margaret was the trustee of her estate. Margaret took good care of her mother and in return charged the trust $500 a month to look after her mother and the properties. This was okay for a while, but Dolores had five children who wanted to know what was going on. They asked Margaret for monthly financial reports. Margaret refused to share the information, so they banded together and got an attorney involved. They just wanted to know what was going on, but Margaret became defensive and it became all-out sibling war. Margaret used Dolores’ cash reserves to hire an attorney. As a result Dolores’ asset values dropped to the point where they had to sell one the rental houses to pay the bills.

The Plan
Tom and Irma realized that not every child is the same. They decided that they needed to get all of their kids on the same playing field with them, so they decided to skip their next cruise and arranged for all of their children to meet them for two days without their families for a “business” retreat. Their intent was to plan for the next twenty years and the end of their lives. First they needed to make the kids relax and make sure they still got along. Then they explained to their children that one of them needed to be the real estate point person and another, the senior care point person. They laid out their plans for their investments and also asked the kids whet their needs would be.

Critical to the success of the business meeting was that the kids saw their future as tied together at least through their parents lives and then also after the parents deaths. Tom & Irma invited their property manager, their stock broker, their insurance agent, their CPA and their attorney to the meetings so the kids could see the whole picture.

What was extremely important was to make sure that the kids established common and a way to communicate. Then they discussed the issue of spouses, the potential for future divorce, and how to plan the future. None of the kids saw divorce on the horizon, but they did agree that one spouse had a very strong personality and could be very pushy and intimidating. They also agreed that the husband of the teacher was a good conciliator and could be very helpful to the group once the parents passed away.

This was a very difficult meeting, mostly because the kids had to come to grips with the mortality of their parents — something no one wants to do. At the end of the meeting they had hammered out a plan and an agreement to meet once a year make sure all were still on the same page. The kids also agreed that the daughter with the development experience would work closest with the parents and would give the rest of the siblings a monthly update.

At the end of the two days Tom turned to Irma and said, “I feel much better now.” She agreed.

Tom and Irma managed to plan a strategy. But what happens if you do not have children, or your children are not old enough, don’t have the skills or are not capable? What happens if the kids have no desire to be involved at all? If you find yourself in this situation, you may want to involve hired help. Trust companies, trust departments of banks, attorneys, friends, partners, and charities can provide help here. If you need to use one of these resources, you need to be aware that there is a significant additional cost involved. In addition you need to set annual investment goals, and develop a double check system of people you trust to administer the funds for you. For example, if you could set up a trust and have a board of advisors make decisions. This board must be selected by people that do not have a vested interest in your decisions or the implementation of your decisions. In other words, they should not be employees of the trust organization due to conflicts of interest.

At this point Tom and Irma are back to being semi-retired, paying attention to their investments, and planning their next cruise, knowing that their future is planned for.


Monthly Archives