Planning Your Bequests

Who should receive what—and how much—from your estate plan? It's fairly common for one spouse to leave his or her entire estate to the surviving spouse, either by will, joint ownership, trusts or other beneficiary designations. The expectation is that the survivor's estate plan will provide for children and others. But what will happen if either or both spouses have children from a prior marriage? What if the surviving spouse should remarry? It's wise to consult an estate planning attorney who can anticipate all the contingencies that married people should consider and suggest estate planning tools that will accomplish a couple's goals and minimize taxes.

How much should you leave to children? Financier Warren Buffett has been quoted as saying: “I want to give my kids enough that they could feel that they could do anything, but not so much that that they could do nothing.” Mr. Buffett implemented that philosophy by becoming a world-famous philanthropist. Most children understand when parents wish to support important organizations through their estate plans. But there may be other concerns. Few events cause sibling rivalry to rear its ugly head more than the death of a parent. As much as parents try, it's usually impossible to divide an estate into precisely equal shares—and sometimes that's not a parent's goal. There are ways for parents to minimize friction, however:

  • Talk with your children about your intentions, particularly if you are leaving more to one child than the others. This “favoritism” may be due to health problems, financial setbacks or to “even out” assistance given to others during your lifetime. Whatever the reasons, discuss the plans with your children. Don't surprise them when the will is probated and leave them with the nagging question: “Why?”
  • A letter of instruction may prevent disputes over who should receive certain assets of sentimental value. Unlike a will or living trust, a letter of instruction is not a legal document, but it will express your wishes regarding items of personal property and can be updated without the formal requirements of a will. If it's important for one child to have a particular item, consider giving it to him or her now. A gift also removes the value of the asset from your gross estate.
  • If one child wishes to buy the family home, consider leaving it to him or her in your estate plan and dividing the rest of the estate among the other children. If the home represents a major portion of the estate, allow the child to purchase the other siblings' shares or place the home in a trust for the benefit of all the children. The child living in the home will pay rent that is then distributed to the others; he or she can also buy the home from the trust.
  • When designating assets for the children, consider valuation and tax issues. Leaving the silver to one and an antique vase to another may seem “fair” today, but the assets may not appreciate at the same rate over the years. The same certainly is true of stocks and bonds. Having periodic appraisals will help determine if one child is reaping a windfall and will also assist the executor in appraising the assets for estate tax purposes. Remember, too, that IRAs and U.S. savings bonds are subject to income taxes in the hands of heirs, while most other estate assets are not.
  • State laws can affect what beneficiaries receive. For example, life insurance and retirement plan benefits generally pass outside probate. If the will directs that estate administration expenses and taxes are to be paid by the estate, the child receiving probate assets may pay tax on assets passing to siblings outside probate. A better option may be to name all children to receive assets jointly.

These situations may seem like technicalities, but they can spoil your planning. Check with your advisers to determine if your estate plan takes taxes and other state and federal laws into account.

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