Succession Planning: How Real Estate Dynasties Pass the Torch
Billy Gray March 5, 2013, 10 a.m.
When it comes to succession plans, real estate insiders start reading the tea leaves early. After Martin Burger was tapped as Silverstein Properties’ co-chief executive in December 2011, Mr. Burger told The Commercial Observer that the company’s larger-than-life chief executive, Larry Silverstein, now 81, had “already made the decision” during conversations between the colleagues two years prior.
“I don’t think Larry’s ever going to retire,” Mr. Burger added. “He’s a force of nature.”
The prescience among real estate dynasts to plan ahead often collides with their desire to remain in control as long as they can, real estate titans and accountants acknowledge.
“Real estate companies do organize, but what I see there as opposed to in other industries is more of the people staying involved a lot longer,” said Rob Gilman, a partner at the accounting firm Anchin, Block & Anchin LLP. “In other businesses, people retire at 65 years old. The matriarch or patriarch of a lot of these real estate families stays on well into her or his 70s.”
When it comes time to put baton-passing plans into place for family real estate businesses, an accounting firm’s goals are twofold: transfer wealth to the next generation in terms of assets, and install children and grandchildren at the helm of a corporation.
There was a spate of succession planning late last year during the run-up to the fiscal cliff and potential tax modifications to gifting rules as of Dec. 31, 2012. Individuals would have only been able to give away $1 million each as opposed to the $5 million threshold that went into effect in 2011—a threshold made permanent and indexed for inflation each year.
The new rules were extended in early January, but David McKelvey, a tax and business consulting partner at Friedman LLP, said that “no one regrets scrambling around and getting it done last year. It motivated them to actually move on the planning that they should have been doing all along.”
A popular mechanism in real estate succession planning is intentionally defective grantor trusts, in which the grantor is the owner of the trust for federal income tax purposes even as it bleeds down the value of his estate.
“Basically, an IDGT is a complete gift to the child,” Mr. McKelvey said. “Your parent is still paying the taxes on any income that comes to it.”
Another succession technique is called a partnership freeze. Clients create two classes of interest—preferred and common—on existing real estate in a partnership or LLC. The senior generation takes back a preferred interest on its holdings, which also allows them to keep the cash flow for their lifetimes.
“You’re essentially freezing the value of the preferred interest,” said Marco Svagna, a tax partner at Berdon LLP. “But any upside on the holdings—any potential increase—now belongs to the common interest, which you mostly transferred to the children, or trusts for them, when you created the transaction.”
Tax and accounting partners agree that the earlier succession planning is put into place, the better. But longevity is another asset in real estate, and official transitioning may lag more than outsiders think.
“We don’t handle the Trumps, but you see the kids are involved in the business,” Mr. Gilman said. “You’d think there was some kind of transitioning going on there. But Donald’s not going anywhere probably until he’s 80, 90, 100 years old.”