If you thought the tax treatment would be complicated when you acquired more assets, wait until you split the assets among multiple children when planning your inheritance.
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“Dividing assets equitably among heirs is one of the most difficult aspects of estate planning, especially when dealing with complex holdings such as indivisible real estate, family businesses and investments,” says Operon LLP estate planning. Attorney Matt Odgers said.
Your legacy is at stake and you need to get this complex and sensitive process right the first time. Here’s what you should know:
First, decide between equal and fair distribution
According to Rise to Win, “Equality means everyone is treated exactly the same, regardless of their differences. Fairness means everyone is provided with what they need to succeed. means that
If there are multiple heirs, you must choose one of them.
“The concept of ‘equality’ doesn’t always lead to fair outcomes,” says Paul Wood, FRSA and founder of C-PAID, which deals with probate and inheritance disputes. “Given the individual circumstances of the heirs, an equitable distribution may be more appropriate.”
Wood gave the example of a child who is healthy, owns a business and has a home without a mortgage, and another who is unable to work and relies on government benefits.
“An equal solution is to divide everything evenly,” he said. But perhaps the first child in this example needs less help than the second child. A fair, or just, solution might be to give the latter children a bigger share, allowing them to significantly improve their quality of life. “
Trust provides security and flexibility in fulfilling your wishes
Trusts are the preferred legal mechanism for estate planners because they avoid probate, offer tax benefits, and protect assets from creditors. However, it also provides a means to ensure the desired distribution.
“Trusts are valuable tools that allow you to control how and when your heirs receive your inheritance, ensuring that it is distributed according to the wishes of your parents,” Odgers said.
Trusts can be revocable or irrevocable, living or testamentary, and can contain custom rules and special arrangements to suit almost any situation. However, two asset classes are particularly difficult to distribute equitably, even trusts.
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Real estate and business: the indivisible division
Assets such as savings accounts can be easily split in a number of ways. However, indivisible assets pose unique challenges.
Jason Gray, owner and attorney at Pinnacle Estate Planning, said: “When dealing with complex asset holdings such as businesses and real estate, the power relationships between beneficiaries and what potential issues can arise. It is important to consider whether there is
In real estate distribution, it is essential to establish the current market value using the latest appraisal value.
“This ensures a fair distribution among the heirs,” Odgers said.
But more important is the decision whether to liquidate the property and distribute the proceeds or establish joint ownership between the beneficiaries.
“If the property cannot be divided evenly, such as a single-family home, consider setting up a trust that allows the property to be held jointly,” Odgers said. “Alternatively, a trust can be set up by selling the property and distributing the proceeds to the heirs.”
Alternate plans if the heir wants a different outcome
It is common for heirs to have conflicting wishes regarding indivisible assets. People who live nearby may want to run a business or hold a property, but those who live far away may not.
“One approach would be for the will to include clear instructions requiring the liquidation of the assets if the beneficiaries do not reach a unanimous agreement on how to manage the assets,” Gray said. “This option avoids potential disputes, results in a clean settlement and allows for a fair distribution of the proceeds among the heirs.”
For family businesses, Odgers recommends a sales contract
“This allows one of the heirs to buy the shares of the other heirs at a predetermined price, ensuring that everyone receives their fair compensation,” he said. “Alternatively, family-only partnerships can be established to maintain control within the family while sharing benefits fairly.”
In some cases, a trust may be required to authorize a neutral third party.
“Alternatively, appointing a professional trustee as trustee could be a smart decision,” Gray said. “A skilled impartial trustee can navigate the complexities of managing business interests and real estate holdings and make decisions that put the interests of all beneficiaries first. It ensures the continued management, growth and protection of assets while minimizing potential conflicts.”
Investing and insurance are difficult for many reasons
Real estate and businesses are not the only assets that may require third party involvement.
“Investment splitting can be complicated by fluctuations in value and the potential tax implications associated with the liquidation of assets,” Ogders said. “It is therefore important to work with financial advisors and lawyers to understand these complexities and develop a plan to minimize the tax burden and ensure fair distribution.”
For retirement accounts and life insurance policies with named beneficiaries, heirs can be named as beneficiaries as well, or a trust can be set up and named as beneficiaries, Ogders said.
“In that case, the trust would need to have instructions on how to distribute the property to the heirs in a fair and equitable manner, if that is the intention of the giver,” he said. “Retirement account and life insurance policy beneficiary designations need to be updated regularly to ensure they are aligned with the overall estate plan. to ensure that naming the trust does not have adverse tax implications.”
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: Here’s How to Divide an Inheritance Equally Among Heirs