American families are increasingly facing financial challenges when it comes to planning their estates.
Last month, the IRS quietly changed the rules regarding estate trust taxes, leaving loved ones at risk of being caught out.
And it comes at a time when families are preparing for the “great wealth transfer” as estimates suggest baby boomers will pass on a record $53 trillion to their children by 2045.
But experts insist that such difficulties can be avoided, provided parents know what they are choosing to entrust to their children.
DailyMail.com spoke to three financial planners about assets that could make your heirs worse off if you pass them on.
Financial planner and therapist Khwan Hathai advises against disposing of properties with high maintenance costs.
Chad Holmes, left, says never to gift a house while alive while Alex Doyle, right, recommends individuals avoid passing on complicated investments like cryptocurrencies.
Khwan Hathai, certified planner, who directs Epiphany Financial Therapysaid: “The common approach is to amass wealth and assets, but what about disposing of assets that could become burdensome? »
Among the assets she recommends against passing on is property with high upkeep costs, as such assets can “strain your heirs’ finances rather than boo them.”
These are often large estates or even vacation homes that can associate loved ones with ongoing expenses that drain their finances.
Instead, original owners should consider trying to sell the property before they die or even convert it to a rental so it can generate passive income for their heirs.
In extreme cases, they can even be donated to charities.
Hathai adds that business owners should think twice before passing their business on to their heirs.
She said, “Owning a specialist business may not be the best asset to transfer if your heirs don’t have the necessary expertise or interest. Rather than a gift, it becomes a complex problem to solve.
Alex Doyle, of Woodson Wealth Managementadds that investors should avoid entrusting their most complicated investments.
These include “illiquid investments”, that is, investments that are difficult to convert easily into cash.
This typically includes money invested in businesses, private equity, or even certain types of real estate.
On top of that, he claims that cryptocurrencies can also prove too complex for family members to control.
Doyle told DailyMail.com: “Digital assets can be difficult to manage and secure if heirs are not well versed in blockchain technology.
“Provide clear instructions on how to access and manage these assets or consider converting them to more traditional investments. »
And Chad Holmes, of Wealth Formulanote that some assets may have significant tax implications.
For example, Roth IRA accounts can be passed between generations. However, these retirement funds are taxed when they are withdrawn – unlike the traditional 401(K) which is withdrawn up front.
When a Roth IRA owner is taxed on their withdrawals, they are usually in a lower tax income bracket, after they retire.
But their adult children are likely to be in a higher tax bracket, which means they will be penalized more severely if they want to withdraw from the account after their parents die.
Families are bracing for the “great wealth transfer” as estimates suggest baby boomers will pass on a record $53 trillion to their children by 2045. $140 trillion.
Holmes said, “Tax brackets are key to building this proactive inheritance strategy.
“If aging parents are in a lower tax bracket than their adult children, it may make sense for parents to bring IRA withdrawals forward in the next few years.
“By spreading that taxable income over several years, they never have a tax rate hike.”
Generally, assets disposed of during a person’s lifetime are subject to capital gains tax on the increase in value of the asset over time.
The tax due is largely determined by the difference between the value of the asset at the time of its purchase and its value at the time of its transfer.
The exception to this rule is where assets, such as property, pass to beneficiaries upon a person’s death.
The death of the owner gives the beneficiaries what is known as an “increase basis”: they therefore inherit the asset as if it had been purchased at present value rather than when it was actually purchased .
This in turn eliminates any capital gains tax.
This is why Holmes recommends waiting until you die to pass your house on to your children.
He said: “Assuming there are earnings in your house, never give your house to your child while you are alive.
“The child will have to pay capital gains tax on the house if they don’t own AND haven’t lived in the house for 2 out of the last 5 years.
“If they inherit the house after you die, they will receive this magical increase.” Consider assigning children from your home so they can avoid probate.
Ten things you should never pass on to your heirs
Real estate properties with high maintenance costs
Homes that require extensive upkeep can impose ongoing expenses on heirs. Consider selling these properties, converting them to rental properties or even donating them.
Investments in companies, private equity funds or certain types of real estate may be illiquid, meaning they cannot be easily converted into cash. Consider diversifying your investment portfolio.
Complex financial instruments
Some assets require specialized knowledge to be managed effectively. Simplify the investment portfolio by selling or converting these assets into simpler investments.
Collectibles with limited demand
Collections of art, antiques or other collectibles can be difficult to sell and may not hold their value over time. Consider selling or donating them during your lifetime, or making a plan for their gradual sale.
Companies without a succession plan
If you’re passing on a family business, make sure you have a clear succession plan in place. Heirs may not have the skills or interest to run the business. Train potential successors or consider selling the business and distributing the proceeds among the heirs.
High leverage assets
A “high leverage” asset is one with more debt than equity, such as credit cards or a house with a large mortgage that is falling in value. Consider paying off debt or using other assets to offset debts before passing them on.
Intellectual property with limited commercial potential
Intellectual property such as patents or trademarks may not generate expected revenue or require ongoing legal maintenance. If the potential benefits are limited, it may be a good idea to license or sell the intellectual property before passing it on.
Although popular, timeshares often come with maintenance costs and scheduling complexities. Consider selling or transferring ownership to someone who would appreciate and use them.
Cryptocurrencies and digital assets
Digital assets can be difficult to manage and secure if heirs are not well versed in blockchain technology. Provide clear instructions on how to access and manage these assets or consider converting them to more traditional investments.
Uninsured or underinsured assets
If an asset has significant value but lacks adequate insurance coverage, it could result in financial loss to heirs in the event of unforeseen events. Secure adequate insurance coverage or consider selling the asset.
– Certified Financial Planner Alex Doyle, Woodson Wealth Management