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  • Home
  • About Us
    • Gratia Schoemakers
      • Community Outreach Program
    • Testimonials
  • Virtual Services
  • Estate Planning
    • Estate Planning Basics
    • Last Will and Testament
    • Revocable Living Trusts
    • Durable Power of Attorney
    • Medical Power of Attorney
    • Living Will
    • Family Estate Planning
    • LGBTQ Estate Planning & Asset Protection
    • Kids Safety Plan™
    • Business Succession Planning
    • Guardianship
      • Guardianship Planning
    • Special Needs Planning
    • Legacy Preservation Planning
    • Asset Protection
    • Trusts
    • Pet Trusts
    • Gun Trusts
  • Probate
    • Texas Probate Guide
    • Probate of a Will
    • Texas Affidavit of Heirship
    • Texas Small Estate Affidavit
    • Texas Heirship Determination
    • Texas Muniment of Title
    • Trust Administration
  • Family Law
    • Divorce
    • Collaborative Divorce
    • Mediation
    • Custody / Visitation
  • Blog
  • FAQs
    • FAQs – Videos
    • FAQs – Estate Planning
    • FAQs – Beyond Money in Estate Planning
    • FAQs – Divorce and Estate Planning FAQs and Myths
    • FAQs – Estate Planning for Newlyweds Myths and FAQs
    • FAQs – Estate Planning for Young Adults
    • FAQs – The Estate Planning Cast of Characters
    • FAQs – Expecting an Inheritance
    • FAQs – Myths and FAQs – Planning for Conflict Prone Families
    • FAQs – New and Expanding Families
    • FAQs – Pet Trusts
    • FAQs – Probate
    • FAQs – Standalone Retirement Trust Myths and FAQs
    • FAQs – Trust Modifications
    • FAQs – Unwinding Obsolete Planning
    • FAQs – Why You Want to Avoid Probate
    • FAQs – Year-End Planning Myths and FAQs
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3 Decidedly Dumb Ways to Leave an Inheritance for Your Children

August 13, 2019 By Gratia P. Schoemakers, Esq.

Estate planning offers many ways to leave your wealth to your children, but it’s just as important to know what not to do.  Here are some things that are all-too-common, but textbook examples of what not to do or try….

“Oral Wills”

If you feel you have a good rapport with your family or don’t have many assets, you might be tempted simply to tell your children or loved ones how to handle your estate when you’re gone.  However, even if your family members wanted to follow your directions, it may not be entirely up to them.  Without a written document, any assets you own individually must go through probate, and “oral wills” have no weight in court.  It would most likely be up to a judge and the intestate laws written by the legislature, not you or your desired heirs, to decide who gets what.  This is one strategy to not even try.

Joint Tenancy

In lieu of setting up a trust, some people name their children as joint tenants on their properties.  The appeal is that children should be able to assume full ownership when parents pass on, while keeping the property out of probate.  However, this does not mean that the property is safe; it doesn’t insulate the property from taxes or creditors, including your children’s creditors, if they run into financial difficulty.  Their debt could even result in a forced sale of your property.

There’s another issue.  Choosing this approach exposes you to otherwise avoidable capital gains taxes.  Here’s why.  When you sell certain assets, the government taxes you.  But you can deduct your cost basis—a measure of how much you’ve invested in it—from the selling price.  For example, if you and your spouse bought vacant land for $200,000 and later sell it for $315,000, you’d only need to pay capital gains taxes on $115,000 (the increase in value).

However, your heirs can get a break on these taxes.  For instance, let’s say you die, and the fair market value of the land at that time was $300,000. Since you used a trust rather than joint tenancy, your spouse’s cost basis is now $300,000 (the basis for the heirs gets “stepped-up” to its value at your deatah). So, if she then sells the property for $315,000, she only has to pay capital gains on $15,000, which is the gain that happened after your death!  However, with joint tenancy, she does not receive the full step-up in basis, meaning she’ll pay more capital gains taxes.

Giving Away the Inheritance Early

Some parents choose to give children their inheritance early–either outright or incrementally over time.  But this strategy comes with several pitfalls.  First, if you want to avoid hefty gift taxes, you are limited to giving each child $14,000 per year.  You can give more, but you start to use up your gift tax exemption and must file a gift tax return.  Second, a smaller yearly amount might seem more like current expense money than the beginnings of your legacy, so they might spend it rather than invest.  Third, if situations change that would have caused you to re-evaluate your allocations, it’s too late.  You don’t want to be dependent on them giving the cash back if you need it for your own needs.

Shortcuts and ideas like these may look appealing on the surface, but they can actually do more harm than good.  Consult with an estate planner to find better strategies to prepare for your and your families’ future.  Call or contact us to see how we can help.

Filed Under: Estate Planning Tagged With: Children, Inheritance, Mistakes

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