Estate planning is a complex process with various goals, one of which is to help reduce estate taxes and ease the burden on heirs. There are a few strategies you can employ to support these goals, such as investing in an umbrella partnership real estate investment trust (UPREIT).
UPREITs do not actually have a direct effect on how much tax your estate is going to pay after your passing, but there are indirect benefits that are useful for long-term estate planning. Below, Realized 1031 outlines some potential ways UPREITs can support estate planning strategies.. Let’s take a closer look.
Refresher on UPREIT Structures
UPREITs are legal entities where investors can contribute their real estate assets in exchange for operating partnership (OP) units. This contribution may be eligible for tax deferral under Section 721, which generally allows for the deferral of capital gains recognition at the time of the exchange. These OP units are typically convertible into shares of the REIT after a holding period.
Here’s a general outline of how a UPREIT is structured
- A REIT forms an operating partnership and holds a controlling interest.
- Real estate owners or investors contribute their assets in exchange for OP units.
- OP units are economically similar to REIT shares, allowing investors to participate in the REIT’s performance.
- The OP units can later be converted to REIT shares or retained indefinitely, though conversion may trigger a taxable event..
This structure may help investors defer recognition of capital gains and preserve wealth over time. Additionally, certain characteristics of UPREITs may support estate tax management strategies, though outcomes depend on individual circumstances and should be evaluated with tax and legal professionals.
Estate Tax Considerations of a UPREIT Structure
UPREITs do not provide a direct tax credit or deduction for estate tax. However, certain characteristics of these structures may support estate planning strategies under appropriate circumstances.
1. Step-up in Basis
One commonly cited feature of UPREIT OP units is the potential for a step-up in basis upon your death. In this case, the fair market value upon your death may become their new cost basis. As a result, if heirs choose to convert OP units to REIT shares and sell them, any taxable gain may be minimal or eliminated, depending on the specific facts and timing.
2. Fractional Ownership
There’s also the fact that OP units or REIT shares may be more easily divided among heirs instead of real property. This flexibility can help support estate distribution goals and may reduce the likelihood of a forced sale, which could lead to legal or administrative complications.
3. Valuation Discounts for Estate Purposes
In some cases, interests in partnerships—such as OP units—may be eligible for valuation discounts when determining estate tax liability. These discounts may reflect:
- Lack of marketability: OP units are not publicly traded like REIT shares.
- Lack of control: Minority ownership in the OP may carry limited decision-making power.
These factors could lead to a discounted valuation of the estate, thus reducing the taxable estate value even though the underlying real estate is substantial.
Wrapping Up: UPREIT Estate Tax Connections
Can UPREIT structures help in reducing estate taxes? There is no direct benefit, but there are ways UPREITs may support broader estate planning strategies through certain structural features. The potential for capital gains deferral, step-up in basis at death, and fractional ownership of OP units may help facilitate asset transfer and tax efficiency.
These indirect benefits can assist heirs in managing estate-related tax obligations and may support efforts to preserve generational wealth—depending on the investor’s overall estate plan and circumstances. As with any estate planning strategy, professional tax and legal guidance is essential.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://www.law.cornell.edu/uscode/text/26/721
