How Real Estate Investment Trusts (REITs) Work in Estate Planning

When estate planning comes into discussion, the focus often tends to stay on wills, trusts, and retirement accounts. But there is another financial tool that can quietly play a meaningful role—Real Estate Investment Trusts. These may not always take center stage, but they can serve a valuable function when a long-term plan is being shaped.

Is there a way to benefit from real estate without owning the property directly?

If there is any uncertainty about how REITs might fit into a broader estate strategy, it may be helpful to take a closer look at how they operate and why they might be considered.

Estate Planning: More Than a Document

Estate planning can often be misunderstood as something limited to writing a will. In reality, it might serve as a structure that helps protect wealth, reduce complications, and bring clarity to how assets could be passed along. It may not only influence financial outcomes but also reduce emotional strain for those involved.

When structured thoughtfully, an estate plan can help reduce taxes, avoid delays, and ensure that intentions are carried out consistently. It becomes a way to preserve purpose—not just property—and Real Estate Investment Trusts can be a part of that picture.

Understanding REITs at a Basic Level

REITs are companies that hold, manage, or finance income-producing real estate. These can include apartments, commercial buildings, shopping centers, or healthcare properties. Rather than owning buildings directly, one can invest in REITs by purchasing shares. The income generated by the underlying real estate is then distributed to shareholders.

For estate planning purposes, this type of structure can be beneficial. It offers access to real estate as an asset class without requiring the effort that comes with property management. There is no need to handle leases, schedule repairs, or manage tenants—only the financial side is involved.

The Value of REITs in an Estate Plan

When REITs are utilized as part of an estate strategy, they offer several advantages, including steady income, administrative simplicity, and certain tax-related benefits. Each of these aspects may be worth exploring in greater detail.

1. A Consistent Income Source

REITs are designed to provide regular income. Regulations require them to distribute at least 90% of taxable income to shareholders as dividends. This creates a steady flow of income that may benefit not only the investor but also those who later receive the assets.

Would a consistent income stream from REITs help meet future financial support goals for beneficiaries?

For individuals who aim to make income part of the legacy they pass on, this consistency might support those goals over time. It could help ensure that financial support remains available to those who need it. Additionally, REITs can offer seniors safe investment options, providing exposure to real estate markets without direct involvement or high-risk speculation.

2. Easier Asset Transfers

Passing on physical property can sometimes become complicated. Properties need to be valued, maintained, or even sold before any distribution can occur. This process can be time-consuming and sometimes stressful.

By contrast, REITs function like other securities. The shares can be transferred more directly, and in many cases, the process may involve fewer delays and fewer questions. This could help families avoid unnecessary complications and reduce the likelihood of misunderstandings during emotionally charged times.

Is simplifying asset transfer a priority when considering what loved ones will experience during the estate administration process? At the same time, using tools like REITs can support investment risk management by helping to reduce overexposure to a single type of asset, such as a single property or location. This broader spread of real estate exposure can help balance risk across a diversified portfolio.

3. Considerations Around Taxation

REITs have tax rules that differ from those of many other investment types. Depending on how an estate is set up, REIT dividends may be treated differently under tax law. Additionally, REIT shares often qualify for a step-up in basis when inherited. This means that capital gains taxes could be minimized if the heirs sell the shares in the future.

While this may not be the primary reason to hold REITs, understanding how these rules work can be beneficial. The advantages become more meaningful when they are included within a broader estate strategy that considers timing, goals, and specific assets.

Could tax efficiency and reduced burden on heirs make REITs a better option than holding physical real estate? It’s also worth noting that real estate investment tax benefits might extend to REIT holdings in specific situations, offering more flexibility in designing a tax-conscious estate plan.

Building an Estate Plan That Includes REITs

No estate strategy should rely solely on a single tool. REITs may contribute to the plan helpfully, but they should work in conjunction with other elements. The overall strategy should reflect a clear understanding of current assets, financial objectives, and future intentions.

Someone who is comfortable with real estate but wants to avoid hands-on involvement may find REITs to be a suitable alternative. Others who already hold physical property may use REITs to diversify holdings and reduce concentration in any one asset type.

The important part is this: REITs should be included intentionally. They should have a reason for being in the plan, and their role should align with long-term priorities.

Planning with Confidence and Care

REITs may not be the first element that comes to mind in estate discussions, but they often deserve a closer look. They combine real estate income with market liquidity and may offer a smoother path when estate transitions eventually take place.

For anyone reviewing a plan or starting one, REITs might offer the balance between income, simplicity, and structure that aligns with long-term thinking. Estate planning is about more than preparing for what happens next—it’s about preparing with care, so what matters most is protected.

Consult a financial advisor today to explore Capital Gains Tax Strategies like the Deferred Sales Trust, and discover how tax-efficient planning can help you achieve your long-term financial goals.