How to Close a Major Gap In Most Estate Planning Strategies

Some people with estate planning strategies do something that is almost as bad as not having a plan. They avoid key decisions in their estate planning. The result can be the same as having no estate planning: Potential problems for loved ones, including loss of wealth and family disharmony.

Once people start on estate planning, they generally find it easy to decide who in general should inherit their wealth. For example, it’s common for estate planning to provide that the surviving spouse will receive all or the bulk of the estate, and the children will receive equal shares of the estate after the surviving spouse. There are variations, but that’s a popular basic plan.

Unfortunately, the decisions that should be made after that first one often are avoided.

The most important of these decisions is: How should the specific property in the estate be divided among the children? When an estate consists of cash and other liquid assets, dividing it equally is easy. The executor distributes equal amounts of the assets to each child.

But most estates have assets that are not easily divided into separate, equal shares the heirs can take away. Failing to recognize this and to decide how the assets should be divided can lead to major problems.

Suppose you own a vacation home. You believe the children like the home, have pleasant memories of time spent there, and want to keep it in the family. You plan to leave it to the children equally for them and their families to enjoy.

Yet, this arrangement raises an array of questions, and estate planning professionals have seen the arrangement cause many problems.

How much time should each heir and his or her family be able to spend at the home alone? Who’s in charge of ensuring repairs and maintenance are done? How will the costs of owning the home be divided? What if a sibling cannot afford the expense? Suppose one sibling wants to expand or modify the home? What if one sibling lives far away and can visit once a year at most while another lives nearby and can use it frequently? What if one sibling needs cash and wants to sell the home, but the others cannot afford to buy his or her share? Or maybe one sibling wants to refinance the home to take out equity and the others don’t want to take on the debt. Suppose one sibling wants to reap the maximum value from selling the home someday while the others want to donate it for conservation or some other cause?

The easy solution for an estate owner is to ignore these issues and their potential to cause problems. Often the estate owner says the children will share things equally and let them and the executor work out the details. In some families, the siblings will be able to work out the issues outlined above and reach an amicable solution. In other families they won’t find a solution, and that will escalate problems in the family and perhaps lead to legal actions and high lawyers’ fees. I think most estate planning professionals would say that the siblings frequently aren’t able to work out good solutions, and there is a potential for the situation to cause major problems.

The issue of division and co-ownership arises with many assets: real estate, businesses, collectibles, and art are the most common.

Even personal assets can cause problems when heirs have to decide who gets which assets. Ironically, the assets with the lowest financial value tend to cause the most problems.

For these reasons, you should decide not only how much of the estate each child will inherit but also which property will make up that share. There are several ways to solve these problems. You should consider which method is most likely to work for your family.

1. An easy solution is to direct the executor to sell all the assets and distribute the cash to the beneficiaries. An heir who wants a particular asset can offer to buy it just as any interested buyer can. There are potential pitfalls with this approach. The sale price might not be maximized because of poor timing of the sales or an urge to sell quickly so the estate can be closed. Or the executor might hold out for the best possible price or a price estimated by an appraisal, and that could mean heirs don’t receive proceeds for some time. Of course, some assets might not be marketable. Another problem is that children who want a certain asset might not be able to afford it.

2. A related solution is to direct that charitable contributions be made with the assets that would be most difficult to divide or sell. This assumes you want to leave part of your estate to charity.

3. With major assets such as real estate, a business, or a collection you should give careful thought to ownership. Leave the asset to someone who wants it and will be a wise owner. You may decide someone outside the family would be the best owner. In that case, arrange the sale during your lifetime or leave the executor directions for selling the property. The cash proceeds and perhaps life insurance can be your heirs’ inheritance.

If you decide to name siblings as co-owners of such property, give some thought to how they will manage the property and considering setting up the original rules and format for making decisions. Allow them to change the rules if they can agree on changes, but set up the initial ownership mechanism.

With some assets, especially a small business, it often is best to leave a major asset only to the child or children who will operate it. Then, you’ll have to leave the other children assets to equalize the value of their shares. In some cases, life insurance is used to equalize inheritances.

4. Personal assets can be more even more difficult to divide than major assets. The personal assets tend to be difficult to sell or even give to charity. It is not practical to list each asset in the will and designate an heir for it. The personal assets also are most likely to have more sentimental or emotional value to heirs than monetary value, and the value to an individual may not be clear until the estate is being settled.

One recommendation is to informally designate the heir of each asset, or at least most of them. You can write a letter to your executor directing who receives which items. Similarly, you can put labels on items naming their inheritors, such as on the backs or undersides of art or furniture. These methods are not legally binding, but people generally will follow your wishes. You won’t be able to cover everything through these methods, but many key items will be determined.

There also are lottery systems that can be used, though we don’t have space to review those choices now.

5. Some people name a non-family member as executor and give the executor discretion to distribute individual assets as long as the monetary value of each heir’s share is equal. While practical, this method may not seem fair or objective to at least some of the heirs and does not have the imprimatur of representing your specific choices.

The right way to divide property depends on your estate and family. You should, however, do more than leave the children equal values of the estate and expect them and the executor to work out the details.