Three different factors to consider in estate planning are liquidity, sentiment and tax planning.
You know you’re getting older when family conversations center on who is going to get Uncle Carl’s beloved Corvette and what to do with boxes of baseball memorabilia. As time progresses, these are discussions that need to happen—for you as well as for siblings and older relatives. Also, the more assets you have in your estate, the more details that have to be managed. According to Investopedia’s “Estate Planning: Which Assets Are Best to Leave Your Family,” another way to think about your assets and their eventual distribution is to think in terms of three factors: liquidity, sentiment and tax planning.
Liquid assets can be converted to cash quickly with little effect on the price of the asset. If your estate is mostly hard assets, your heirs might be tasked with selling them for a discounted price in order to find the cash that’s needed to pay any estate tax. You should consider this when preparing your estate plan. Liquid assets are the easiest to leave to family, and the more assets you can liquidate, the easier you will make things for your heirs.
Other assets are valuable beyond money and may have wonderful memories attached to them, or they may have been passed down through the generations. Much of the real estate in estates is sentimental, and how to leave these homes to your heirs is a very personal and often difficult decision. The planned distribution of these types of assets should be discussed long before the person’s passing in order to eliminate any fighting after the person’s death.
These estate planning questions are hard to answer for most of us. They will involve taxes: most assets receive a step-up in basis upon death if the asset has appreciated in value. But some assets don’t get this step-up in basis—like retirement accounts. Other than qualified accounts, there’s not much difference between hard and virtual assets when it comes to the tax implications in estate planning with the federal estate tax. The tax treatment is the same, and the estate tax is assessed on the fair market value of an asset on the date of death (or the alternate valuation date). Remember, you should consider the tax implications when planning the transfer of assets in your 401(k) and IRA accounts.
A comprehensive estate plan that includes the transfer of wealth across generations will need to consider such issues as capital gains and income taxes as well as state and federal estate taxes. An experienced estate planning attorney will be able to help you and your family minimize the tax bite and achieve your final wishes.