Not all assets are equally beneficial to inherit.
People have preferences.
Sometimes these are fairly arbitrary like whether someone enjoys dark or milk chocolate.
[Given a choice, I always opt for dark.]
Other preferences stem from what makes the most sense well-considered reasons.
According to a recent Kiplinger article titled “6 of the Best Assets to Inherit,” your preferences regarding what assets are distributed to your heirs and how they are distributed should be based on the laws governing taxes and estate planning.
Some assets work better as an inheritance than others.
What should you know about different assets and estate planning?
Cash is the least complex of all asset classes.
As “they” say, “cash is king,” right?
Transferring it to heirs is quite simple.
The value is known based on the amount inherited.
It is also simple to divide between multiple heirs.
Your heirs have to do very little to access and use the funds.
In contrast to cash, leaving real estate will require time and energy to sell the property and will require the division of cash afterward.
Also, real estate can be a very “emotional asset, whether the family home to generations or family farmland worked with the sweat of your ancestors.
After all, “they” are not “making any more of it and real estate was the only ask on the Christmas list of Lucy Van Pelt.
There is just something different about real estate that can ignite family feuds that then sometimes burn for generations.
Teaching point: handle with care.
Although cash is certainly the easiest liquid asset to inherit, certain cash substitutes require little effort on behalf of the heir.
Life insurance is one example.
After the death of the policy owner, the beneficiaries will receive the payout in cash while simultaneously avoiding probate.
Banks also carry products like CDs and money market accounts.
These too are liquid and can be easily distributed to heirs without probate, especially with “transfer on death” or “pay on death” arrangements made directly with the financial institutions.
Taxable brokerage accounts are used for investing.
These assets typically include bonds, stocks, and mutual funds.
The heirs will be able to see the market price of publicly traded investments.
This provides accountability in dividing assets.
With a step-up-in-basis, your heirs will owe a significantly lower capital gains tax should they choose to sell the asset later or no capital gains tax if they choose to sell immediately.
Assets that Quickly Decrease in Value.
This strategy can benefit those who may owe estate taxes by helping to reduce your total net worth.
How does it work?
Near the end of your life, you could use cash to purchase valuable assets.
When these assets lose value immediately, you may be able to bring your estate below the taxable threshold.
With a Roth IRA, you fund the retirement account after you have paid taxes.
This means the principal and appreciation of a Roth IRA can be withdrawn in retirement without owing income tax.
Your heirs will also benefit from the break on income taxes when the Roth IRA is inherited.
Assets in a Trust Fund.
Certain trusts can protect assets for your heirs from external forces like creditors as well as from the financial immaturity of your heirs.
This is possible through the provisions of the trust document itself.
It is important to work with an experienced estate planning attorning when setting up a trust.
As you choose who inherits what assets, consider carefully the impact of each decision.
Reference: Kiplinger (Dec. 9, 2021) “6 of the Best Assets to Inherit”