Estate Planning: 4 Factors for Deciding Who Should Get What

A difficult component of estate planning is deciding which of your family members should get specific assets or types of assets and in what amounts.

Here are some common factors to consider when deciding how to divide your estate’s assets among your potential beneficiaries.

Who is Getting the Non-Probate Assets?

Life insurance, 401(k), IRAs, Annuities, and any other asset held in a transfer-on-death or payable-on-death account, or titled “Joint Tenant with Rights of Survivorship”. These are non-probate assets and the will always have a beneficiary designation or a joint tenant attached. Who is the beneficiary and what sort of value are they going to get from those assets after you pass? Will the assets be immediately usable (liquid) or will they be in tangible form (the house)? Someone who is your non-probate beneficiary may not need any further inheritance to sustain themselves.

Liquidity

Liquid assets are ones that are either in cash or cash form, or can be converted to cash easily with little or no loss in their overall value. This would include savings, checking, brokerage, money market, or other securities-based accounts. Tangible assets like antiques, art, collectibles, real property, etc. are more difficult to liquidate, cost more to administer through your estate or trust, and will likely lose value if you need to sell them quickly. Apportion the liquid and non-liquid assets across your beneficiaries if you intend to split things evenly, rather than giving equal present value of liquid assets to one beneficiary and non-liquid to another. Their value will not actually end up the same in the end.

Sentiment

Money is only one half of the asset value calculation: some assets have sentimental value. Most of the time this will be in the form of real property (family home or vacation house) or heirlooms/collectibles. Sentimental property is normally the root of most estate battles amongst heirs. It’s best to have a frank discussion with your potential heirs before making a decision of who gets what – better to understand who is expecting to get what first.

Tax Planning

Not estate taxes – although that will be important for high net worth families – we’re talking about tax basis and income tax planning. ALWAYS consult a CPA and Financial Adviser as to the tax implications of different estate planning techniques, as your Estate Planning attorney already should be getting your financial team on the same page before finalizing a plan. Most assets receive a step-up in basis upon the death of the owner of the asset if the asset had appreciated following its purchase. EX: If you bought a house for $50,000 in the 80’s and that house now worth $200,000, your tax basis is $50,000 and you’ve made a gain of $150,000, which would be taxed as a capital gain if you sold the house today. If you passed today and left the house to your kids, your kids would have a taxable basis in the house of $200,000, meaning if they sold the house the next day, they would pay no capital gains tax on the $200,000 in proceeds. So, this is a substantial benefit – resulting in a tax savings of nearly $33,000.

Some assets, like qualified retirement accounts, do not receive a step-up in basis, so there could be substantial income tax ramifications to leaving these types of assets to your children. it’s important to review with your financial team how these assets will impact each of your heirs and who will receive the greatest benefit without also having a substantial tax impact.

Work with a team of financial professionals, including an estate planning attorney, to get your plan fully ironed out.