As the baby boomer generation approaches one of the largest transfers of wealth in U.S. history, many people are focusing on how to facilitate the flow of their assets to their children, grandchildren and great-grandchildren.
While passing along more liquid assets like stocks, bonds and cash can be straightforward, “hard” assets like property, art and jewelry are not always as simple. Since families rarely keep a comprehensive inventory of these assets, their value may be outdated or unknown, and family members may have different expectations of how to handle them. Additionally, many families don’t know how to discuss them with their heirs.
As a result, hard assets are often completely overlooked — in spite of their potential value. Like with liquid assets, illiquid assets require a formal plan that begins with conversations between the family decision-makers, financial advisers and oftentimes outside appraisers. To kick-start the illiquid assets distribution discussion, here are three key questions to answer.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How much is it worth?
Regardless of whether you want to pass down the asset itself or any profit from the sale of that asset, you must start with its fair market value. This is the foundation for any plan, because it attaches an actual, current number to an item that has almost certainly changed in value over time.
For example, take an individual with a collection of jewelry valued around $10,000 at the time of first appraisal. Over 20 years, the value of that collection grows — putting it in the range of $40,000 — as our collector nears retirement. It’s not only critical to understand the collection’s true value to update important insurance coverages, but also to ensure estate planning decisions are made with the most accurate information.
When it comes time to get an asset appraised, find an experienced, accredited appraiser. Especially when it comes to artwork, there are many seemingly free options for valuing your collection. But the financial risk of mispricing your assets could be significant. Don’t rely on online art price guides, advice from your aunt who was once a painter, or even the original seller — who may have a conflict of interest.
Instead, find an appraiser who has been certified by one of the three main accrediting bodies: the Appraisers Association of America, the American Society of Appraisers or the International Society of Appraisers. Especially for large collections, the cost of the appraisal is worth understanding its true value, and how that value will impact your estate.
Who wants it?
Beyond actual monetary value, it’s important to consider the emotional or sentimental value of your hard assets. While your family heirlooms may carry substantial weight in your mind, your children may have stronger attachments to the family’s vacation home where memories were made.
If multiple heirs are vying for the same asset, you’ll need to figure out if and how it can be divided. If it cannot be split, you’ll need to plan for how to equitably divide other assets. If some, but not all, of your heirs want to keep the asset, it might be more effective to create an equitable buyout situation that transfers ownership to the heirs who want it.
Also remember that the market for assets like artwork is cyclical, so timing may affect the attractiveness of a sale. Take the case of an individual who inherited a collection of artwork from his parents. The artist was a family friend, and the heir knew the collection was valuable — but not sure of its exact worth. At the time, the artist was quite popular, and an appraiser found the collection to be far more valuable than expected. In this case, the heir was able to capitalize on a hot market to sell the collection and walk away with much more liquid assets.
How can it be passed on?
You have a number of options for passing on illiquid assets. In most situations, the best choice is to allow an heir to inherit the asset itself. Illiquid assets receive a step-up in cost basis that alleviates some of the capital gains tax burden even if the inheritors sell it. You can also put the asset in a trust, family partnership or LLC and formalize the transfer of ownership in a tax-efficient way, while also saving on future estate taxes. As a last resort, if you don’t feel like your heirs understand the asset enough to sell it for a fair price, you can opt to sell it yourself, pay the appropriate taxes and gift the cash.
Conversations about illiquid assets can become emotionally charged, so many families choose to push off discussions about how certain items will be handed down. But disregarding these potentially valuable assets can create both legal challenges and also family conflict in the future. Discussing these questions will put you and your family on the path toward a comprehensive plan, which financial and legal professionals can help execute.
-
The Retirement Bucket Rule: Your Guide to Fear-Free SpendingForget market declines or rising inflation. With this strategy, you won’t have to worry about any of that during retirement.
-
How Big Will the Fed Rate Cut Be This Fall?A dismal July jobs report has lifted expectations for fall rate cuts. But just how low could the fed funds rate be by year's end?
-
Five Ways to Maintain Charitable Giving During Volatile Times: A Giver's GuideWhen the economic outlook is uncertain, charitable giving is even more important — and impactful. You can be strategic by using donor-advised funds, diversifying assets and prioritizing unrestricted gifts.
-
Avoid Medicare's 'Shadow Tax' With This Financial Expert's IRMAA-Busting TipsYou're cruising along in retirement, and then bam: Your Medicare premiums soar because your income crossed the limit. Take a breath. There could be a solution.
-
Grilling Season and ETFs: There's More Than One Way to Cook Up a PortfolioExchange-traded funds come in a multitude of 'flavors' these days, from passive to active to factor-based. Their flexibility is what makes them so delicious.
-
You Don't Want It, But You Should Plan for It Anyway: An Expert Guide to Long-Term CarePlanning for long-term care is crucial to protect your independence, family and financial stability against unexpected health events and rising care costs not covered by standard insurance.
-
You Don't Want Just a Financial Plan: You Need a Purpose and Retirement IdealsThese five questions will help you drill down to what you really want out of retirement. Then you can get down to the business of crafting a financial plan to make it happen.
-
I'm a Financial Adviser: This Is How You Can Save for Big Goals Even if You Feel Like You're Barely Getting ByLearning good financial habits — building an emergency fund, paying down debt, saving consistently — gives you flexibility, options and a path to security.
-
How to Buy an Annuity Online (Without Regret)You should never be rushed into buying an annuity. But now that they can be sold quickly and easily online, you need to be more alert than ever to pushy salesmanship. Here are four signs you're working online with a professional.
-
How Much Income Will an Indexed Annuity Get You? An Annuities Expert Lays Out the NumbersGuaranteed lifetime income sounds great, but how much will it be? Several factors determine your future payout on indexed annuities with an income rider.
