5 of the Worst Assets to Inherit
If you’re planning an inheritance, be careful about leaving these assets to a loved one. They may create more trouble than they’re worth.
Over the next 30 years, Americans will transfer trillions in wealth from one generation to the next. The median inheritance in 2019 was $92,700 for someone whose parents had a college degree and $76,200 for those with parents without a college degree, according to the Federal Reserve. This is money heirs can use to boost their retirement savings, cover college expenses and build their real estate holdings.
If you’re planning to leave an inheritance to others, you’re giving them a valuable financial leg up. But you do need to be careful about what you leave behind. Some assets can cause problems, such as arguments between family members, or may have hidden costs. While you think you’re leaving something that will help, you may actually be leaving behind a headache.
You can prevent issues from happening though with thoughtful estate planning. “A lot of people leave estate planning to the last minute, or they don’t get to it,” says Neil V. Carbone, trusts and estates partner at Farrell Fritz in New York. “For family harmony and efficiency, start your planning early with an attorney or other estate plan expert. They can get to know your assets and, in doing so, identify what might be an issue.”
Carbone finds that children and other young family members are more likely to respect a parent’s wishes if they hear them in-person, even if it’s something they don’t like, versus only hearing the news in a will, when they’re also grieving. At the same time, you can start reshuffling your assets around to those that are more effective to leave.
“In my experience, the best asset to leave behind: cash,” says Michael Romero, vice president and relationship manager at Argent Financial Group, a full-service wealth and trust management firm. He says brokerage accounts are good too because they’re so easy to value and divide. Everything else gets a little more complicated.
Here are five of the worst assets to inherit and what you can do to help manage them before you are gone.
A timeshare is a long-term contract where you agree to rent out an annual trip to a resort or vacation property. These contracts last decades, sometimes for life, and are notoriously difficult to get out of. Even if you love your timeshare, think it’s a great deal and have had plenty of amazing memories, be very cautious about leaving it to the next generation.
“If you pass away and your kids inherit the timeshare, they’ll be on the hook for the ongoing – and ever-increasing – contract costs,” says Carbone. “Some sellers even encourage buyers to put their young family members on the deed when they sign up for that very reason.”
Carbone advises not to do so and that the kids should decide at your death whether they want to take over the contract. They can refuse to accept at this point, even if your will left them the property, by making a formal disclaimer of the timeshare. During probate, they will need to send a written document to executor of your estate and to the timeshare company saying they do not accept the property.
Carbone also warns that if your heirs are on the fence, they must be very cautious not to use the property after you’re gone, like one last trip as a memorial, because this could prevent an effective disclaimer or count as taking over the timeshare contract.
If your family has decided they don’t want to inherit the timeshare and you no longer want it, you can try to get rid of it while you’re alive. How difficult this will be depends on the company. Some will simply buy you out and take it back. If not, you could also try to sell the contract to someone else or work with a timeshare exit company that specializes in getting people out of these arrangements.
If you simply decide to abandon your timeshare, the company might send letters threatening legal action, but in Carbone’s experience, they usually don’t follow through. “Most companies will not take legal action against elderly customers if the timeshare is paid off, and most elderly customers won’t be concerned about damage to their credit rating.”
Potentially Valuable Collectibles
Whether it’s gold coins, a rare stamp collection or a fine piece of artwork, there’s something special about seeing your wealth in a beautiful physical form and then imagining handing it off to your loved ones so they can enjoy it too. Another advantage of leaving collectibles as an inheritance is it can help with taxes.
The capital gains tax rate on collectibles goes up to 28%, significantly higher than the maximum 20% long-term gains rate on other investments. When you die, your heirs receive a step-up-in-basis, meaning when they sell they receive tax-free what the collectible was worth on the day you die.
Still, there are some substantial risks to leaving valuable collectibles as an inheritance. First, there’s a much higher chance that your heirs could overlook or lose these valuable assets, especially if you’ve hidden them. “If you’ve sewn diamonds in the couch cushions, you better let your heirs know so they don’t toss them out in a yard sale,” says Carbone.
Another problem with collectibles is that they’re tougher to value. It’s not like a bank or brokerage account where your heirs can just see the balance. Instead, they’ll need to go to a dealer and if they meet the wrong, dishonest person, they can be taken for a ride.
Romero shared a story where he got caught off-guard. “A client who passed away was a musician and had a collection of violins. I took a particularly impressive one in thinking it might have value. The dealer said the violin itself was worthless, but the bow? $20,000.”
If you do have any valuable collectibles, be sure to let your heirs know where they are, what they’re roughly worth and the dealers they should work with after you’re gone, so they don’t run into trouble.
Guns can also get complicated as an inheritance given the high amount of regulation. They aren’t the kind of property you can just hand over to another person without, in certain cases, the proper registration or permit. The rules depend on your state of residence and the type of gun in question.
For example, in New York, when someone dies, their executor can possess their guns for up to 15 days without incurring criminal liability, a very short window, Carbone says. “At this point, the will probably hasn’t even gone through probate yet.” What usually happens is the heirs or the executor will call the police to inventory and store the guns for up to a year during probate. The heirs can’t legally transport the guns themselves, so the police must come pick them up. If certain firearms, like fully automatic weapons and short-barreled rifles or shotguns, were not properly registered during the decedent’s lifetime, they can’t be registered after the fact or passed down to the heirs and will have to be abandoned.
If you’d like your kids or other family members to inherit guns, start that planning as soon as possible. The heir may need to set up the proper firearm permits for themselves to accept the property. You can check out gun laws by state through the Giffords Law Center to Prevent Gun Violence or the National Rifle Association Institute for Legislative Action.
You could also work with a gun dealer so they could store your guns and then sell them after you pass away. The key is to plan early so you avoid a scenario where you’ve left guns in your car trunk or a garage. That can complicate matters for your heirs and is a safety risk.
Inherited vacation properties are another potential financial and emotional landmine, especially if you’re leaving one to multiple family members. “Kids behave when the parents are still alive, but once they’re gone, that’s when the fighting really starts,” says Carbone. “I’ve seen siblings stop speaking to each other due to fights over an inherited vacation property.”
Disagreements can pop up over how often each can use the property, who owes what for the repairs, whether they should sell, and whether they should buy one of them out and at what value, especially if one heir lives far away and doesn’t want their share.
Even if everyone is on good terms, a vacation property does come with considerable expenses like maintenance, property taxes, insurance and any remaining mortgage. These costs could outweigh the value of the vacation property to your heirs. This is especially true if you’re leaving behind undeveloped land where they still need to build a home or a property with environmental problems, like a spilled oil tank.
If you have a vacation home, start the inheritance discussion early with your heirs. Do they even want the property? If they want it, can you get them to agree on the terms? You could put together and have them sign a written co-tenancy after death agreement, which would legally lay out the rights and responsibilities of each heir after they take ownership of the property when you pass away.
If it’s starting to look complicated and they can’t agree, the solution may be to sell. Yes, you’d owe the capital gains taxes on any appreciation, but that could be a worthwhile investment to avoid a big fight.
Any Physical Property (Especially with Sentimental Value)
Fights don’t just happen over rare and valuable collectibles. When it comes to family arguments, Romero finds they can happen with any type of physical property like jewelry, a nice set of silverware and old furniture. One problem is that they can carry more sentimental value than money, which adds more emotion to disagreements. They’re also harder to divide. “Let’s say there are three kids, who’s going to end up with Mom’s wedding ring?”
Another problem with physical property is that it’s harder to tell what it’s worth. For jewelry and antiques, Romero finds that people tend to overestimate what they’re leaving behind, perhaps building up unreasonable expectations. “Jewelry is usually very expensive to buy but loses its value quickly when you try to sell.” He also noted that antiques aren’t as popular as they used to be.
On the other hand, other property might be unexpectedly worth a lot. He had another client with a wardrobe full of women’s designer suits that they were able to sell for a considerable amount. If Romero hadn’t thought to check, they may have just given everything away to Goodwill.
To avoid trouble, start planning out your physical property ahead of time. Make it clear who will receive what to prevent arguments. If possible, try selling what you don’t need while alive. That way you’ll be leaving more of the simplest, most effective inheritance of all: cash.