What Is the Best Way to Make Sure Children Can Handle an Inheritance?
One strategy to get your children prepared to handle the assets they’ll eventually inherit, is to have them meet with your professional advisors. They can explain what you’ve been doing.
FedWeek’s recent article entitled “Preparing Your Heirs for Their Inheritance” suggests that your children should meet with your accountant for an explanation of any tax planning tactics that you have been implementing. That way those tactics can be continued after your death. If you have a broker or a financial planner, your heirs should meet with this adviser for a review of your portfolio strategies.
Keep in mind that the particular financial condition and maturity level of your children and grandchildren can be a key factor. For instance, I have seen numerous sad situations in which a child’s inheritance is seized by the child’s creditor soon after the death of the parent due to poor estate planning.
What if your children can’t handle an inheritance because they are going through divorce? Even though your assets would be the separate property of your child, those assets might be taken by the in-law if your child does keep the assets separate.
What if your child has a history of drug use? Could a large inheritance cause that child to relapse into drug use or cause a worse drug problem?
What if a child or grandchild is disabled, and they need to receive their inheritance through a third party special needs trust (supplemental needs trust)?
Each family situation, is different, and in many cases, there is no cookie cutter solution.
Also, know that if you hold investment property, it might pose special problems.
While your investment portfolio can be split between your children, who can follow their individual inclinations, it’s tough to divide physical property. Your kids might disagree on how the property should be managed. This is why co-ownership of property in Louisiana is generally a bad idea. Your children may wind up in a lawsuit against one another.
With any assets—but especially rental property—you have to be realistic. Ask yourself if your children can work together to manage the real estate.
If they cannot handle their inheritance in this way, you may be better off leaving your investment property to the one child who really can manage real estate and leave your other children non-real estate assets instead. You might also provide that some of your children can buy out the others at a price set by an independent appraisal.
Another way you can help is by proper handling of appreciated assets, such as stocks.
If you purchased $20,000 worth of XYZ Corp. shares many years ago, those shares are worth $50,000. If you sell those shares to raise $50,000 in cash for retirement spending, you’ll have a $30,000 long-term capital gain.
You might raise retirement cash, by selling other securities where there’s been little or no appreciation.
That will allow you to keep the shares and leave them to your children. At your death, your shares may be worth $50,000, and that value becomes the new basis (cost for tax purposes) in those shares. If your children sell them for $50,000, they won ‘t owe capital gains tax.
All of the appreciation in those shares during your lifetime will not be taxed.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
If you liked this article, “What Is the Best Way to Make Sure Children Can Handle an Inheritance?” read these additional articles: What Is Fair in a Second Marriage and Estate Planning? and Does Executor have to Be a Family Member? and Do I Make Too Much Money for Medicaid? and When Should Children Receive an Inheritance?
Reference: FedWeek (March 31, 2021) “Preparing Your Heirs for Their Inheritance”
