Assets like timeshares, vacation homes, and rare collectibles are among the more problematic assets to leave to your heirs. Complicated assets may come with difficult-to-break contracts and maintenance costs, and determining their value might be challenging because of their niche market. So, what kind of inheritance should you leave your heirs? Cash. Piles and piles of cash.
Practically, we don’t have piles of cash lying around; however, many of us have retirement or investment accounts, bank accounts, and insurance policies. These assets are highly desirable because they are easy to value. Retirement accounts and insurance policies are directly payable to your named beneficiaries, bypassing your estate and probate. Individually titled checking, savings, and investment accounts do not bypass your estate unless you proactively create “payable-on-death” or “transfer-on-death” designations.
When you pass away, your Will distributes your assets to your loved ones. Unfortunately, this can take time, as the executor of your estate must account for all your assets, settle any outstanding debts, and then transfer assets to the correct heirs. The process is often subject to probate court oversight, further drawing out the process. However, if your heirs need immediate access to cash to pay for the funeral, mortgage, or other expenses, consider leaving some money in a bank money market account or certificate of deposit payable upon death. Insurance policies with a death benefit payable to a beneficiary also bypass probate and can provide immediate cash.
Retirement accounts, like 401(k)s and IRAs, also pass by beneficiary designation. If someone other than your spouse inherits your retirement plan, they must withdraw all assets within 10 years of your death. Accounts funded with pre-tax money are taxable to your heirs when they withdraw the money, meaning some retirement accounts pass on an income tax liability to your heirs and could push an heir into a higher tax bracket. Furthermore, a pre-tax $200,000 account isn’t worth $200,000, so consider that if you wish for equitable distribution of your assets. Roth IRAs, funded with after-tax money, provide tax-free withdrawals; however, they still must be depleted within 10 years. Therefore, you may want to consider age and tax status of your beneficiaries.
Taxable brokerage accounts are attractive inheritances because your heirs receive a step-up in basis when your investments pass at your death. When you buy stocks, real estate, or other investments, you establish a cost basis—typically your original purchase price. If the value of your investments increases over time, you would likely owe capital gains tax on the appreciation when you sell. However, when investments pass to your heirs, the cost basis of the asset is “stepped up” to its value at the time of your death, which effectively erases any capital gains that accrued during your lifetime and can result in significant tax savings for your heirs if they sell the asset shortly after receiving it.
If you want to control how your heirs receive and possibly how they use their inheritance, you may consider establishing trusts under your Will, known as testamentary trusts. Upon your death, your beneficiaries would receive the assets according to the trust terms described in your Will. Assets in a Revocable Trust established during your lifetime and accounts that list a Revocable Trust as a payable-on-death beneficiary can be distributed by your successor trustee upon your death, avoiding probate.
If you have questions or need help deciding how to distribute your assets, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166