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How to Handle Three of the Toughest Estate Planning Decisions

Published on: Jan 26 2021

Some estate planning decisions are more difficult than others. Some of those decisions have the potential to cause problems, even tearing a family apart after the decisions are revealed.There are three especially difficult decisions that have the potential to cause long-lasting problems.

Who inherits the personal items?

Most estates have a lot of what the lawyers call tangible personal property. These are the items accumulated during a lifetime. Some are small and personal, often having little value. Others can be valuable, such as art, jewelry or antiques. These are the items that are most likely to cause family arguments, strife and disruption after the estate is processed.

That’s because some of the items, regardless of their financial value, have a lot of emotional value to one or more family members. Some items might have different sentimental value to one heir than to another, or more than one heir might really want a particular item. Estate planners and owners often don’t give enough thought to the implications of how these items are handled and how to avoid potential problems.

Sometimes, the estate owner casually promises a particular item to a child or grandchild but then doesn’t follow through and include that in the estate plan. Other times, the item is lost, sold or given away during life. In some plans, personal items are carefully bequeathed to individual heirs, but some heirs complain they haven’t received equal sentimental or monetary value.

Of course, the disposition of valuable items of personal property, such as art and jewelry, can cause dissatisfaction and disputes.The problems can multiply when there is a second marriage now or in the future. Here’s one scenario. The wife passes away first and leaves all her personal property to her husband. Her intention was her children from her first marriage eventually would receive at least select pieces of jewelry and other personal items.

But the husband remarries and leaves all his personal property to his current wife. Suddenly, the first wife’s personal items belong to the second wife. The children of the first wife could be left with none of their mother’s personal items.

There are a number of ways to handle the personal property in an estate, and no one way is best for every estate.

One good rule is to avoid or sharply limit the bequests of specific property to specific heirs. Specific bequests can cause too many potential problems. Some plans provide that all personal property will be sold or donated to charity. Heirs receive only cash proceeds.

Other plans set up systems in which heirs take turns selecting property they want. A lottery system can be used to determine the selection order. Understanding family dynamics and expectations often are key to a successful plan for the tangible personal property.

Valuable property, such as collections and art, can cause problems even when you plan to leave it to a charitable or nonprofit organization such as a museum instead of family. It is important to discuss your plans and goals with the charity in advance.

You might find the charity doesn’t value the collection as highly as you or wouldn’t display the items as prominently as you hoped. Or the charity might intend to sell a lot of the collection to fund its other operations.

Should children receive equal inheritances?

Most estate planners say the default choice should be inheritances of equal value. This often is the expectation of the heirs, and inheritances often are considered expressions of love and affection. Yet, there are times when equal inheritances are not the best solution. One child might have special needs or might have a child with special needs.

Often, the prime goal of the parents is to ensure the heir with special needs is taken care of. Bequests to other children are made only after those needs are met.An equal inheritance also might not be optimum when there’s a family business or substantial real estate investments. When one child is involved in managing the business or assets and the others aren’t, it’s usually not a good idea to leave them all equal shares.

Even when the children all have been involved in the operation, equal shares are likely to result in problems when the children have different temperaments, goals or approaches to the business. Instead, look for ways to split the operation between them or mandate that the executor sell it and distribute the proceeds equally to the heirs.Another reason for unequal inheritances is that one child received more from the parents during life.

One child might have received more in tuition, help with starting a business, support for grandchildren or other lifetime gifts. It is reasonable to conclude that support was advance payment of the inheritance, and the estate distribution should be adjusted accordingly.It is not unusual for the will to state that a child’s inheritance will be reduced by the amount of lifetime sup-port a child received.

Some estate owners keep an updated list of the dollar amount of the support and ensure the executor has access to it so the bequest will be reduced accordingly.

Whatever the reason for giving unequal inheritances, it is important to let the children know ahead of time and discuss it with them. Surprises in the estate plan often cause problems among the survivors in the family.

Will the portability of the lifetime estate and gift tax exemption be used?

Under portability, when a spouse dies, and his or her estate isn’t valuable enough to use all the lifetime estate and gift tax exemption, the unused exemption amount can be transferred to the surviving spouse to add to his or her lifetime exemption.Using portability is likely to become more important in coming years, be-cause the lifetime exemption is likely to decline. More estates are likely to be subject to estate taxes.

Portability isn’t automatic. The estate of the first spouse to pass away has to elect to pass the unused exemption to the surviving spouse. Making the election requires the estate to file an estate tax return, even when the estate is small enough that one isn’t due under the law. When the estate tax return isn’t filed by the deadline, portability potentially is lost.The IRS has issued rulings allowing a number of estates to file late to elect portability. It also issued simplified procedures for estates to request an extension of time to make the election (Revenue Procedure 2017-34).

It is important for estate owners and executors to understand portability and its rules. If a spouse died in the last few years, the surviving spouse might want to ensure portability was elected or, if not, determine if it is not too late to elect portability. People in second or subsequent marriages also should determine if they have transfers of exemption amounts from prior marriages available to them.

A key point is that, while the lifetime estate and gift tax exemption is adjusted for inflation each year, any amount transferred from a deceased spouse under portability is not adjusted for inflation. The additional exemption amount stays fixed at the amount it was in the year the spouse died.

Portability will be more important in coming years if the lifetime exemption amount declines as scheduled. It is important to be sure your executor knows about portability, how to elect the additional exemption amount if you pass away first, and to use any exemption amount you’ve carried over from a deceased spouse.

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