As you get older, you, your older relatives or both may need to address questions about how to leave assets to others when you pass away. The more assets you have, the more complicated things can become. The Investopedia article, “Estate Planning: Which Assets Are Best to Leave Your Family,” says that there are three main factors to consider when looking at how to distribute assets: liquidity, sentiment and tax planning. Each of these impacts what makes the most sense when leaving your assets.
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.
Capital gains, death and income taxes all come into play when planning for the transfer of wealth from one generation to the next. Comprehensive estate planning always includes a discussion of these tax implications and ways to avoid or minimize the tax bite on your estate.
Reference: Investopedia (June 27, 2016) “Estate Planning: Which Assets Are Best to Leave Your Family”