When building an estate plan, the primary focus is typically on how to transfer assets to heirs in order to best set them up to feel secure and comfortable. That could mean splitting everything up equally, but sometimes that’s not the case. No matter how you divide your assets, ideally, the estate plan should create a positive outcome. After all, your children will be better off with more assets, won’t they? But you might be surprised at how easy it is to force an unintended negative outcome on your loved ones.
Your most valued asset is your family, so you don’t want your children to look back and say, “I really wish my parent would have done this instead.” To make sure that doesn’t happen, it generally means doing something that can be uncomfortable for many of us: talking about your wealth with your heirs.
Unforced errors in your legacy planning can occur for several reasons, but most stem simply from a lack of communication and a lack of understanding of your heirs’ financial situations. The following are just a few examples of how you may be forcing unintended consequences on your heirs when your assets transition with your estate—and how to navigate these situations to help safeguard your legacy.
Passing Unequal Tax Liability to Your Heirs
When you pass on assets, you are also passing on any taxes and required minimum distributions (RMDs) associated with that account, so you need to consider the tax implications of gifting to your children. Unless your children all pay tax at the exact same rate (they likely don’t), each of their inheritances will come with a different tax liability, and therefore what they actually end up with in their pockets, after-tax, will be different too. This means your children in a higher tax bracket will get to keep less of their inheritance than your children in lower tax brackets. If giving each of your heirs an equal share of your assets is important to you, be sure to consider that when you determine how to split your assets in your estate plan.
Vacation Homes Could Bring Stress, Not Relaxation
If you own a cottage, cabin, lake home, timeshare, condo or any other kind of vacation property, it’s likely you hope that your children will be able to enjoy it as a part of your legacy for years to come. After all, you shared countless memories there as a family and would hope that these traditions continue long after you’re gone.
While wanting to protect those traditions and memories is a fine motive and hope for your children, it’s worth having a conversation with them to ensure that they share the same intent for their future. Depending on the circumstances, the vacation home that holds fond memories for your children can quickly become a burden. What if they aren’t ready or willing to take on the management and maintenance of the property? What if one or more of your children wants to keep the property and the others do not? Situations like these can lead to the property needing to be sold at a discount and leaving none of your kids in a happy spot.
If you are considering leaving a vacation home to your children, be sure to have candid conversations with them to ensure that it’s something they want and are prepared to handle.
Selling Assets at Fire Sale Prices
Illiquid assets are those that are hard to value and hard to sell, including things like farmland, real estate, collectibles, and other alternative investments. If you plan to leave these kinds of assets, it’s up to your heirs to keep or sell them. Remember: your infatuation and expertise with these items may not be the same as your heirs. And even if they say they are interested in it now, that interest can, and often does, change after you’ve passed.
If they ultimately decide to sell the illiquid asset, keep in mind that these often occur at an auction or at a fire sale price, leaving your heirs with less than you had envisioned. Even though you love these assets, if you know that your children might not want to hold onto them, you may want to consider selling them while you, the most informed party, can work to ensure you receive the fair market value for these items.
Trusts That Don't Align with Your Intent
Many individuals use revocable trusts as a way to protect their family members from the probate process and maximize their legacy. This may be a great intention, but when you pass, the trust becomes irrevocable, and the distribution of the funds is dependent on the terms of the trust. This may create unnecessary restrictions toward accessing the funds. Consequently, it’s important to make sure your wishes for the trust are supported by the terms in order to appropriately address your family’s situation.
Create an Estate Plan to Help Safeguard Your Legacy
An effective estate plan not only transfers assets to your heirs, but also aligns the personal, emotional and financial situations of all parties involved. It’s not just about what you give—it’s also about what your heirs receive.
To create an effective estate plan that protects your financial legacy, it’s essential to have an open conversation with your heirs to make sure that your intended financial objectives are in alignment with how they plan to utilize the assets once received.
Discussing your finances and end-of-life scenarios is tough, but having these conversations will ultimately lead to a better outcome for all. You need an advisor that understands that your most valued asset is your family and offers advanced planning services to help protect them after you’re gone. When meeting with a financial advisor, make sure to consider the following:
- Have you discussed your estate plan with your heirs
- What sort of restrictions are you intentionally or unintentionally imparting on your heirs?
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended as a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
CFP®, Series 65 Advisory Registration† Lily has more than 25 years of experience in financial planning, investment, and accounting. Prior to joining Wealth Enhancement Group, she had held various senior positions at Pillar Pacific Capital Management, PacWest Financial Management, Bank One, Bright Bank, Blue Cross, and Adobe Oil & Gas Inc. Lily excels in coordinating various aspects of her clients' financial lives with advanced planning strategies to meet their life goals through...Read More