Avoiding the Estate Planning Personal Property Molehill-to-Mountain Track

Small items often cause the biggest Estate Planning problems. Anyone experienced with estates knows the worst disputes among heirs often are over what seem like trivial items. Even in a large estate, heirs might aggressively contest the disposition of a few pieces of furniture or personal mementos. Those small, personal items are the most likely ones to stir the emotions and resentments among surviving family members.

Items that can cause emotions to run high include jewelry, dinnerware, furniture, personal collections, and frequently-used items, even if they are essentially worthless and well worn. Sometimes, the relatives really don’t want an item, but also don’t want the others to have it.

An essential part of good estate planning establishes a system for handling the personal property in the estate. You don’t want to itemize these assets in your will. The will would be too long, and it would have to be revised every time you acquire or dispose of an item. Also, it is difficult to describe some items so that the executor can identify them. Itemization also runs up the probate costs. Especially valuable or unique items should be specifically designated in your will, but the bulk of personal property make up much of what is called the “residuary estate” and should be disposed using one of these strategies described here.

• The most common approach is to let the children or the executor (usually the surviving spouse or one of the adult kids) decide how to divide the residuary estate. The will might direct the executor to divide the residuary in equal shares among the children. Or it might direct the children to agree on a division. Ideally, everyone will agree to be a mature adult, and this approach will work. Too often, emotions take over and things get messy. There are instances of the attorney taking possession of one or more items for years until the children could agree.

• You can decide not to bother with these issues. Direct that everything that can be sold will be sold and the cash distributed to the heirs. The executor decides on the sale process. Unsold items are given to charity. This provides heirs an opportunity to buy items that have personal significance to them.

• You can label things while you are alive. Put the name of the person who should inherit it on the backs of artwork and on the bottoms of sculptures, for example. These designations are not legally binding. But usually the executor and heirs respect the designation. Unfortunately, there probably are many items that cannot be labeled in this way, and someone always can claim that a label was switched or is not in your handwriting.

• Some advisors recommend including a separate letter in your estate planning. This document would list who should get key personal items. In some states this is a legally binding document if referenced in the will. In others it is not.

There can be problems with this approach. The list has to be revised each time you dispose of or acquire an asset, or even if you lose one. The list also gives the IRS a roadmap to valuing your estate and encourages it to put high values on the items named.

• You can give the heirs an incentive to agree. The will might say that if the heirs don’t agree within a certain time (say, three months), everything that is not settled will be given to charity or sold.

When these strategies don’t seem viable, it is time to consider one of several lottery systems.

• In the most common lottery, numbers or names are drawn to determine the selection order. In the first round, the children each choose an item in the order derived from the drawing. In the next round, the selection order is reversed. Then they return to the initial order, and so on. If there are only two heirs, they can flip a coin. The winner of the flip has a choice of either going first and picking one item or going second and picking two items.

A difficulty with this approach is ensuring that the items are of relatively equal value. You might conclude that relative monetary value is not an issue. The heirs should pick the items that are most valuable to them. The real value might be in the personal meaning or usefulness of the item. Others believe the executor should assign a value to each item and keep track of the selections. If heirs end up with significantly unequal values, the difference is made up with cash. Another approach is to allow heirs to choose only from items of relatively equal value in each round. That approach, however, is time-consuming and might not be practical with all estates.

• Another lottery strategy is to let the heirs decide how to value items. There are a couple of ways to implement this strategy.

There is a round in which each heir can assign a number of points to each item. By giving the items points, they are deciding how important each item is to them. After everything is valued, in the first round each person gets one item on which he or she placed more points than anyone else did.

The points assigned to the items awarded are not likely to be equal. The person who assigned the most points to the item that he won doesn’t select again. Instead, the others pick one or more items to which they assigned points until the total points of their items equal the total of the first person. For example, the first heir might ?win? property to which he assigned 100 points, the second heir might have assigned 70 points to the item he won. The second heir gets to pick one or more items to which he assigned 30 points before the first heir picks again.

A variation is to give each heir the same number of points or some other measure of value. They use the points to bid for items in the estate in sort of a private family auction. If an item is particularly important to an heir, he might bid all or most of his points to ensure getting it. Under this approach, the heirs might end up with items of unequal economic value. But the heirs have determined the personal value of each item. More details on these two approaches are in the book, The Universe and The Teacup by K.C. Cole (Harcourt Brace & Co.).

There are a couple of points to keep in mind whichever strategy you select. Estate planning specialists say that in-laws should not be invited to participate in or view the selection process. They make a messy process even messier.

The other issue might be taxes. If the estate is taxable, it will pay taxes based on the appraised value of each item, and the taxes will reduce the total amount available to the heirs. You can decide that each heir’s inheritance is reduced by the amount of taxes due on his or her share of the estate. Or you can decide that the taxes will be paid with the liquid assets of the estate. The heirs who are scheduled to receive those assets will receive what is left after taxes. Discuss the different options for a tax apportionment clause with your estate planning advisor.

There is no right way to divide the personal property of an estate. You need to consider each of the estate planning options and decide which might work for your family. Otherwise, settling your estate might divide your family more than it does your property.

RW January 2013.