Personal and financial maturity are fundamental to being prepared to receive an inheritance.
Your children are adults.
Each of them has embarked on higher education, technical training, done a stint in the military, or gone right into the workforce.
As you prepare your estate plan, you begin to wonder whether your children are capable of managing an inheritance.
According to a recent FedWeek article titled “Preparing Your Heirs for Their Inheritance,” there are steps you can take to set your children up for success as an heir.
What can you do?
First, arrange for your children to meet with your accountant.
This professional will be able to explain the tax reasons for how you have managed your money.
If your children understand the “why” behind your choices, they will be more likely to adopt your wise financial management.
Do you have a financial planner, investment advisor, or life insurance agent?
If yes, your children should also meet with them, too.
Your children will likely take a more thoughtful approach to handling their inheritance than if they had received no advice.
If you hold physical property, it might pose special problems.
It can be challenging to divide physical property evenly, and it requires greater collaboration and agreement among heirs to manage the property.
If you own rental property or real estate, you must be realistic.
Can your children work together to manage this part of your inheritance?
If the answer is no, it may be wiser to leave real estate to the one most capable and willing to manage the property.
You can leave non-real estate assets to your other children.
Another option would be to provide the option for the one child to buy out the share of the other children in the real estate.
If this option is chosen, the fair market value should be set through an independent appraisal.
Another way you can support your children in handling their inheritance is help them make wise choices when it comes to handling stocks.
For example, assume you originally purchased stock in a company for $20,000 and that stock has now appreciated to $50,000.
If you sell these shares , you will need to pay capital gains taxes on the $30,000 growth.
If you do not sell these stocks, but simply pass them to your heirs, then the stock will receive a stepped up basis of $50,000 when you die.
This means your heirs will not owe capital gains tax on the sale of this stock.
Although this step-up in basis is current policy, it may change under the new biden administration.
If this happens, your estate planning strategy for handling investments will certainly change.
Regardless, by thoughtfully planning your estate plan and preparing your children for their inheritance the chances of both succeeding greatly enhanced.
Reference: FedWeek (March 31, 2021) “Preparing Your Heirs for Their Inheritance”