By JUDD MATSUNAGA, Esq.
Over the past 25 years, I have had the opportunity to witness hundreds of wealth transfers. Some went well and others tore the family apart. I’ve seen seemingly simple situations be slaughtered with poor planning, and I’ve seen extremely complicated situations resolved without a hitch – with the family unit still intact.
Leaving an inheritance to your children is a blessing, but inheriting certain assets can also be a curse. Of course, your children will appreciate what you leave for them. But if the asset you donate is too complicated to understand or difficult to value, it could cause stress. Especially if the items you’re handing over require work, time, money, or space.
Most kids aren’t going to turn down inheritances that can bring them money. However, sometimes your kids just don’t want your stuff. The thing is, not everyone will see their heritage as an advantage. Some assets can actually be a hassle to inherit and may even have hidden costs. Other inherited property can cause disputes between family members.
The point is, some assets are better left than others. In my experience, the closer assets are to cash, the less difficult they are. The best asset to leave is cash and other brokerage accounts because they are easy to value and split. Everything else gets a bit more complicated. When it comes to an asset that people don’t understand, it’s very difficult to assess and divide it.
To avoid adding to your children’s grief when you’re gone and to make life easier for your loved ones, here are six of the worst assets to inherit and what you can do to help deal with them before you leave: (Source: www. aarp.org/retirement and www.kiplinger.com/retirement)
Timeshare seems like a dream come true: you have a vacation spot and you don’t have to spend a fortune. Some even give you the choice of your vacation spot. Even if you love your timeshare, think it’s a good deal, and have had lots of amazing memories, be very careful about leaving it to the next generation.
But often, timeshare can take a toll on your sanity and your bank account. There are annual maintenance fees, utilities and taxes, which can quickly add up. And getting out of a timeshare can be difficult and time consuming. These contracts last for decades, sometimes for life, and are notoriously difficult to terminate.
If you die and your children inherit the timeshare, they will be responsible for the ongoing and ever-increasing contract costs. If your family has decided not to inherit the timeshare and you no longer want it, you can try to get rid of it while you are alive. The difficulty will depend on the company. Some will simply buy you back or take it back (for a small fee).
You can also work with a timeshare company that specializes in getting people out of these arrangements. However, don’t expect too much. If you simply decide to give up your timeshare, the company may send letters threatening legal action. If the timeshare is fully paid for, most companies won’t take legal action against older customers who aren’t too concerned about hurting their credit rating.
2. Holiday homes
Vacation homes and other real estate can be a valuable asset to leave to your children, as real estate can go up in value. Yet, a vacation home comes with significant expenses such as increased property taxes (reassessed under Proposition 19), maintenance, insurance, and remaining mortgage payments. These costs could exceed the value of the vacation property to your heirs.
If the property is shared between several family members, vacation homes can also cause untold headaches and hassles. Disagreements can arise over how often each can use the property, who owes what for repairs, whether to sell, and whether to buy one and at what value, especially if one of the heirs lives far away. and only want their share.
If you have a vacation home, start the inheritance discussion with your heirs early. Do they even want the property? If they want, can you get them to agree on the terms? If it’s starting to look complicated and they can’t get along, the solution may be to sell. Yes, you would have to pay capital gains taxes on any appreciation, but it could be a worthwhile investment to avoid a big fight.
If paying a ton of capital gains taxes makes no sense since: (1) value is all gain; and/or (2) the handover of the gain on death is not so long away, then you could leave instructions for your successor trustee to sell the vacation home after your death and distribute the proceeds among your heirs. This could avoid many conflicts and give your children an additional basis by increasing the value of their inheritance.
3. Potentially Valuable Collectibles
Whether it’s gold coins, a collection of rare stamps, or a beautiful piece of art, there’s something special about seeing your wealth in beautiful physical form and then imagining the pass it on to your loved ones so they can enjoy it too. Nevertheless, there are substantial risks in leaving valuable collectibles as an inheritance.
First, there is a much greater chance that your heirs will neglect or lose these valuable assets, especially if you have them hidden away. Another problem with collectibles is that they are more difficult to appraise. It’s not like a bank or brokerage account where your heirs can just see the balance. Instead, they’ll have to go to a dealership and if they meet the wrong person, they can be taken for a ride.
If you have valuable collectibles, be sure to let your heirs know where they are, what they’re worth (appraisals are best, but a rough estimate will do), and suggest dealers to go with. they should work after you leave. Otherwise, your loved ones have to come by and clean all your belongings or take on the extra expenses of cleaning your house.
4. Tangible physical property
Adult children do not fight over your bank account, that is, it is easy to split a bank account in three ways. They fight over things, especially if they have sentimental value. For example, who gets Mom’s diamond wedding ring? I watched brother and sister not talk to each other for years because the day after mom died, the son backed a U-Haul truck up to the house and took out all the valuables.
As a lawyer specializing in estate planning, our living trust packages come with a section called “Memorandum of Tangible Personal Property”. Parents are asked to list items for which there might be a potential dispute, then give instructions on who should get them. The recipient of the gift can be anyone, for example, a friend, a neighbor, it does not have to be a child. That way the kids can’t get mad at each other, “That’s what mommy and daddy taught.”
5. A family business
You’ve dedicated your whole life to building your business, so it’s natural to want to pass it on to your children. It’s great if they want it. But even if family members seem likely to take over the business, that doesn’t necessarily prevent conflict. There is an inherent conflict between those in the business who are paid and may want to grow the business, and those who are passive owners and want to monetize.
However, if the children in your family cannot reasonably expect to continue the business, your inheritance is at risk. If your children are not interested, it is advisable to seek a successor or plan the sale while the founder is alive and can provide the practical transition that is important to the continued success of the business which will maximize the sale price.
Guns can present considerable problems as heirlooms because they are not something you can simply pass on to another person. The heir may need to arrange the appropriate firearms permits for themselves in order to accept ownership. The rules vary widely depending on your state of residence and the type of firearm.
For example, if you inherit a firearm in California, you are required by law to register the transfer of ownership or, in some cases, dispose of it. The new owner must take a firearms safety course and receive a firearms safety certificate. However, certain rules do not apply to the transfer of a firearm by gift, bequest, intestacy, if certain conditions are met, for example, the person receiving the firearm is a California resident and 18 years or older.
You can also work with an arms dealer so they can store your weapons and resell them after you die. The key is to plan early to avoid a scenario where you’ve left guns in the trunk of your car or in a garage. This can complicate things for your heirs and is a security risk. The new owner should check with a local gun store to comply with all rules and regulations.
In conclusion, some assets can be problematic. However, you can prevent problems and aim for family harmony through thoughtful estate planning. The best advice is for parents to have an honest conversation with their children first. Often the heirs express that they simply do not want the property and in these cases the owner may want to sell it during their lifetime.
The key is to plan ahead and resolve any potential issues to avoid conflict. Specify who will receive what to avoid arguments. If possible, try to sell what you don’t need in your lifetime. In this way, you will leave more of the simplest and most effective legacy of all: money.
Judd Matsunaga, Esq. is the founding partner of the law firms of Matsunaga & Associates, specializing in estate/medical planning, probate, personal injury and real estate law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. The opinions expressed in this column are not necessarily those of The Rafu Shimpo.