Wealth Transfer

When developing an estate plan, there should be a discussion on how assets are to be passed on to heirs. The way property passes to beneficiaries depends on several factors: How much, to whom, and in what form.

How Much?

It may seem like a fairly simple question to answer, but it can be surprisingly difficult.  The reaction of many married couples is that each will leave everything to the other.  But what if there are children from a previous marriage?  If both spouses have wealth of their own, then maybe the plan would be for the first spouse to leave some portion of his or her estate to his or her children from the previous marriage.  Another challenging point is how much is enough for children?  Parents want to leave their children enough to increase their happiness but not so much that it drains their initiative.  This issue may be addressed by deciding to give children less or pass on wealth in a restricted fashion such as a trust.

To Whom?

Giving to family: Consider making gifts to grandchildren.  This can benefit the children as well since they won’t have to cover expenses like education that the gift to the grandchildren may cover.  Assets passing to grandchildren are not subject to creditor claims of the child.  Gifts to grandchildren won’t be subject to estate tax at the child’s death.

What Form?

Outlined below is a sample case with different options on how wealth can be passed on to beneficiaries. In this simplified example, a retired parent with two children has two assets:  a home worth $3 million and an investment account worth $5 million.

Option 1 – Equalizing Gifts

Scenario – The parent knows her son wants the home, while the daughter has a business and could use the liquidity.  So the parent leaves the home to the son and the investment account to the daughter.

Considerations – The retired parent may be living off her investment account to the point that her expenditures are greater than her earnings.  This can mean that, while the value of house might be appreciating, the investment account value is shrinking resulting in an imbalance.

Option 2 – Percentage of Estate or Trust

Scenario – The parent leaves 50 percent of her estate to both children

Considerations – The children are free to divide the property up so that the son could wind up with most or all of his share in the form of the house, but the daughter might take part of the house as well to make up for the dwindling size of the investment account.  If the percentage gifts are not going to be equal to all beneficiaries, then the person making the gift should be very clear in communicating the reason why.  This will go a long way to ease the hurt feelings.

Option 3 – Share Ownership

Scenario – Each beneficiary owns a fractional interest of the assets given.

Considerations – This is perhaps the most “fair” solution, in the sense that all beneficiaries receive the same interest.  The children or other beneficiaries have to get along.