Estate planning gives you many difference methods to leave your property to your loved ones as an inheritance. However, it is just as important to know poor ways to leave an inheritance as it is to know good ways to leave an inheritance. Here are some options that are used far too often, but which you should avoid.
Many people think that because everyone in their family has a good relationship with each other, they do not have a lot of property, and other positive dynamics, they only need to tell their children what they want to have happen, and it will happen exactly in that way. Unfortunately, your wishes are not the only consideration to take into account. If you have no will, then your assets are subject to your state’s relevant laws, your assets go through probate, and your oral will means nothing during this process. Your state’s laws and the probate judge will determine what happens to your property, not your loved ones nor your heirs. You should never rely on this strategy.
Many people know that property owned in joint tenancy avoids probate. Joint tenancy means that the surviving owner automatically owns all the property after one co-owner passes away. While this does avoid courts getting involved after you die, joint tenancy creates problems. Join tenancy opens your property up to your children’s creditors, divorce, bankruptcy, or other financial problems. In the event of bankruptcy, your property may even have to be sold to satisfy their debts.
There is another issue. If you hold the property in joint tenancy, you wipe out the tax strategy that employs an adjustment of basis after you die. Basis means how much you have invested in a property. When you die, your property gets a full adjustment of basis. This means that if the property is sold right when you die, there would be no capital gains taxes paid, because there would be no difference between the selling price and basis.
Joint tenancy destroys this advantage. By putting your property into joint tenancy, only the portion that you own, not the entire property, gets a step-up in basis. This in turn will force your children to pay more in capital gains taxes than they would have otherwise.
Giving the Inheritance Early
Some parents decide that they want to give inheritances to their children while they are still alive. While this idea is not necessarily bad, there are several considerations you need to be aware of. If you give more than $14,000 to an individual child during a calendar year, you either have to pay large gift taxes or use up your lifetime gift tax exemption and file a gift tax return. Another issue is that if you give your children part of their inheritance, you lose all control over how they use that money, and they may waste it. Lastly, if after giving away the inheritance, your life may change and you may suddenly need the money you gave away, it is now too late. You do not want to have to go back to your children and ask for financial support after giving them money.
It is important that as you think about these strategies that you talk with an attorney who can help you understand the potential pitfalls to these ideas. Contact The Rains Law Firm or schedule a complimentary initial meeting to discuss the best strategies for your family.