Yesterdays article discussed the potential tax implications in wealth transfer, today you'll learn how to give and prepare assets effectively. If you’re planning to leave your heirs an inheritance, you can help them by choosing the assets that provide the most value. Kiplinger’s recent article entitled “6 of the Best Assets to Inherit” explains that assets you may leave your heirs that are more effective for tax and financial purposes.
Cash. This is the simplest asset to deal with in terms of a transfer. Your heirs also know exactly what it’s worth, and they can easily divide it according to the terms in your will. They also don’t have to do any hard work to access it. Compare that to something like real estate, which can take months to sell.
Cash Substitutes. There are a few types of accounts that are almost as effective as cash as an inheritance. One is a life insurance policy on yourself because when you die, the life insurance company pays your beneficiaries in cash. Moreover, this avoids probate. Bank products like money market accounts and CDs are also liquid inheritances, which your heirs can easily divide and cash out immediately.
Brokerage Accounts. Investments made through a taxable brokerage account, like stocks, bonds, and mutual funds, also make for nice inheritances. These are also easy to divide and value because your heirs can see the market price of these publicly traded investments. Publicly traded investments are easy to sell and convert to cash. Your heirs could also receive a significant tax benefit on these inheritances, by getting a step-up-in-basis. That means the investment basis goes up to the market value on the day you die. If your heirs sell soon after you pass away, they could sell these appreciated assets owing little to no taxes.
Assets that Quickly Decrease in Value. This is not really a strategy for everyone. It is for use in more limited circumstances, such as if it looks like you might owe estate taxes at death. Instead of leaving your heirs cash, you could buy valuable assets yourself towards the end of your life and then leave them as an inheritance. If the assets lose value immediately, it reduces your total net worth and your taxable estate.
Roth IRA. A Roth IRA is a retirement account which you fund with after-tax dollars. In exchange, your retirement withdrawals are income-tax-free, including your investment gains. The tax-free treatment continues when your heirs inherit the Roth IRA, making this another effective asset to leave behind.
Assets in a Trust Fund. A trust fund can help protect the inheritance for your family because if you leave property to your heirs outright, it’s subject to the claims of their creditors. A trust fund can also protect your family members against themselves, such as if you’re concerned that they might spend the money too quickly. You can ask an experienced estate planning attorney to set up a trust that restricts the amount of cash they can receive at any one time.
To discuss how to prepare your assets and create an estate plan contact Vick Law, P.C. We specialize in creating customized estate plans in the Greenwood and Indianapolis area.
Reference: Kiplinger (Dec. 9, 2021) “6 of the Best Assets to Inherit”