How to Freeze an REIT Investment

A certified financial planner will guide you in setting up your REIT.

According to SmartMoney, returns on Real Estate Investment Trusts (REITs), increased 7.3 percent from January to June 2011, versus a 2 percent return for Standard & Poor's 500 Stock Index. Investments in REIT shares in the first five months of 2011 stood at $22 billion --- three times the amount for the same period in 2010. An increasingly popular way of protecting the value for heirs is to "freeze" the value of the assets. This is done by creating an Intentionally Defective Grantor Trust (IDGT). The IDGT allows an investor to lower the value of his taxable estate while continuing to pay income taxes on the investment, thus gifting additional wealth to beneficiaries.

Things You'll Need

• An investment calculator
• A certified financial planner and or real estate attorney

Instructions

Establishing Your IDGT

1. Carefully evaluate the type of REIT to invest in. Consider narrower categories of real estate that are less sensitive to the economy, which includes health care REITs, according to SmartMoney. Health care REITs include senior living communities, assisted living facilities and medical office buildings. Other high-performing REITs it recommends include lab and research and development space leasing firms, as well as those specializing in grocery, drugstore and discount retailing.

2. Consult a certified financial planner and or real estate attorney to establish the IDGT.

   "Bloomberg Businessweek" recommends making a "gift" of at least 10 percent of the REIT's value to the trust. Some financial planners recommend a higher percentage, it adds. The trust uses that cash to buy the REIT from the grantors, issuing an interest-bearing note of 10 or 15 years. Interest rates are low, ranging from 0.83 percent to 3.67 percent in April 2009, "The Wall Street Journal" reported.

3. Progress toward your investment goals. The grantor has effectively reduced taxable assets. Since the interest payments on the note are low, the underlying REIT is expected to appreciate at a faster rate. The goal is for the REIT to appreciate enough to cover the note, while leaving additional assets to your heirs.

Tips & Warnings

• An IDGT is complex and expensive to set up. Carefully investigate the credentials and track record of any financial planner or real estate planning attorney you are considering.

• Unlike other trusts, IDGTs can have a downside. If the REIT falls in value, the trust must still repay the loan, which could mean more money out of your pocket.

References

• "The Wall Street Journal"; Unusual Trusts Gain Appeal in Unusual Time; Mike Spector, et al.; May 2009
• "Bloomberg Businessweek"; One More Trust to Consider; Anne Tergesen; July 2003
• "Bloomberg Businessweek"; The Trust Freeze; Jesse Drucker; April 2011
• SmartMoney: A Real Estate Investment That Hasn't Tanked; AnnaMaria Andriotis; June 2011