Leaving Specific Assets to Specific Heirs is an Estate Planning “No-No”
Planning your estate around gifts of specific assets is risky and, in most cases, should be avoided. If you leave specific assets – such as a home, a car or stock – to specific beneficiaries, you could end up disinheriting someone else inadvertently.
Unintended consequences
Here’s an example that illustrates the problem: Kim has three children – Sarah, John and Matthew – and wishes to treat them equally in her estate planning documents. Intending to be fair, she leaves a $500,000 mutual fund to Sarah, and her $500,000 home to John. She also names Matthew as beneficiary of a $500,000 life insurance policy.
By the time Kim dies, however, the mutual fund balance has grown to $750,000. In addition, she has sold the home for $750,000, invested the proceeds in the mutual fund and allowed the life insurance policy to lapse. She didn’t revise or revoke her estate plan. The result? Sarah receives the mutual fund, with a balance of $1.5 million, and John and Matthew are disinherited.
Safer alternatives
To avoid this outcome, it’s generally preferable to divide your estate based on dollar values or percentages, rather than specific assets. For example, Kim could have placed the mutual fund, home and insurance policy in a Trust and divided the value of the Trust equally between her three children.
If it’s important to you that specific assets go to specific heirs – for example, because you want your oldest child to receive the family home, or you want your family business to go to a child who works for the company – there are planning techniques you can use to help ensure that outcome while avoiding undesirable consequences. As an example, your Trust might provide for your assets to be divided equally, but also for your children to receive specific assets at fair market value as part of their shares.
It’s also important to consider assets with built-in deferred tax, such as retirement accounts. A gift of an Annuity or IRA carries tax liability on the deferred income which may make it less valuable than an equivalent non-retirement fund.
Please contact us for additional details on estate planning strategies that can help ensure your assets are distributed as you wish without causing unintentional consequences.