American families are increasingly facing financial headaches when it comes to organizing their estates.
Last month the IRS quietly changed rules around taxes on estate trusts, leaving relatives in danger of being caught out.
And it comes at a time where families are preparing for the so-called ‘Great Wealth Transfer’ as estimates suggest baby boomers will pass on a record-breaking $53 trillion to their children by 2045.
But experts insist such difficulties can be avoided – so long as parents are savvy about what they choose to hand over to their kids.
DailyMail.com spoke to three financial planners about the assets that could make your heirs worse off if you pass them down.
Financial planner and therapist Khwan Hathai recommends not passing down properties with high maintenance costs
Chad Holmes, left, says to never gift a home while you are alive while Alex Doyle, right, recommends individuals avoid passing down complicated investments like cryptocurrencies
Certified planner Khwan Hathai, who runs Epiphany Financial Therapy, said: ‘The common approach is to amass wealth and assets, but what about eliminating assets that could become burdensome?’
Among the things she recommends not passing down include a property with high maintenance costs as such assets can ‘drain your heirs’ finances rather than boost them.’
These are often large estates or even vacation homes which can lump loved ones with ongoing expenses.
Instead, the original owners should consider trying to sell the property before they die or even convert it into a rental so it can generate passive income for their heirs.
In extreme cases, they can even be donated to charitable organizations.
Hathai adds that business owners should think twice about passing on their firms to their heirs.
She said: ‘Owning a specialized business might not be the best asset to transfer if your heirs lack the expertise or interest in it. Rather than a gift, it becomes a complex problem for them to solve.’
Alex Doyle, of Woodson Wealth Management, adds that investors should avoid handing down their most complicated investments.
These include ‘illiquid investments’ – meaning assets which are hard to convert into cash easily.
Usually this tends to include money plunged into businesses, private equity or even certain types of real estate.
On top of that he says cryptocurrencies may also prove too complex for family members to take control of.
Doyle told DailyMail.com: ‘Digital assets can be challenging 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.’
Families are preparing for the so-called ‘Great Wealth Transfer’ as estimates suggest baby boomers will pass on record-breaking $53 trillion to their children by 2045. American households are said to own $140 trillion worth of wealth
Typically, assets that are disposed of during a person’s lifetime are subject to capital gains taxes on the increase in value of the asset over time.
The levy owed is largely determined by the difference between how much the asset was worth at the time it was purchased, versus its value at the time it is transferred.
The exception to this rule has been when assets, such as property, are passed on to beneficiaries at the time of an individual’s death.
The death of the owner gives the recipients a so-called ‘step-up in basis’ – so they inherit the asset as if it had been purchased at the current value rather than when it was actually bought. This, in turn, reduces capital gains taxes.
Chad Holmes, of Formula Wealth, recommends waiting until after you have died to pass on your home to your children.
He said: ‘Assuming there are gains in your home, never gift your house to your child while you’re alive.
‘The child will have to pay capital gains taxes on the home if they haven’t owned AND lived in the home for two out of the last five years.
‘If they inherit the home after you pass, they will receive that magical step up in basis. Consider deeding the children your home so that they can avoid probate – though this is not available in all states.’
The ten assets you should never hand down to your heirs
Real Estate Properties with High Maintenance Costs
Homes that require extensive upkeep can burden heirs with ongoing expenses. Consider selling such properties or converting them into rental properties or even donating them.
Investments in businesses, private equity, or certain types of real estate can be illiquid – meaning they cannot be easily converted into cash. Consider diversifying the investment portfolio.
Complex Financial Instruments
Certain assets require specialized knowledge to manage effectively. Simplify the investment portfolio by selling or converting these assets into more straightforward investments.
Collectibles with Limited Demand
Collections of art, antiques, or other collectibles can be difficult to sell and might not hold their value over time. Consider selling or donating them during your lifetime or setting up a plan for their gradual sale.
Businesses with No Succession Plan
If you’re passing on a family business, ensure there’s a clear succession plan in place. Heirs might lack the necessary skills or interest to run the business. Train potential successors or consider selling the business and distributing the proceeds among heirs.
Highly Leveraged Assets
A ‘highly leveraged’ asset is one with more debt than equity such as credit cards or a home with a large mortgage which is decreasing in value. Consider paying down the debt or using other assets to offset the liabilities before passing them on.
Intellectual Property with Limited Commercial Potential
Intellectual property like patents or trademarks might not generate the expected revenue or could require ongoing legal maintenance. If the potential benefits are limited, it might be wise to license or sell the IP before passing it on.
While popular, timeshares often come with maintenance fees and scheduling complexities. Consider selling or transferring ownership to someone who would appreciate and use them.
Cryptocurrencies and Digital Assets
Digital assets can be challenging 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 proper insurance coverage, it could lead to financial loss for heirs in case of unforeseen events. Ensure adequate insurance coverage or consider selling the asset.
– from Certified Financial Planner Alex Doyle, of Woodson Wealth Management