3 Bad Inheritance Shortcuts

Nov 20, 2019

There are many great ways to leave your assets to your children, but it’s just as important to know the not so great ways. Here are the 3 bad inheritance shortcuts we see parents doing with an inheritance to a child that may result in some negative legal consequences.

1. “Oral Statements”
Some people think its great to just “tell” their loved ones what they expect at their death, especially their children. Often times parents will sit their children down and let them know what each of them are receiving at their death. These oral statements hold no weight in the probate system. Even if your loved members wanted to follow your directions, they may not be able to. Without a written document, any assets you own individually will go through the probate court. The Judge will decide what happens to your assets, not you or your children.

2. Joint Tenancy
Instead of setting up a trust, some parents will name their children as joint tenants on their property. This means the child will become owner of the property with the parent. The idea behind this strategy is that when the parent pass on, the child will automatically become owner of the property while keeping the property out of probate.

However, as we have discussed in previous newsletters, this exposes you to your child’s unpaid taxes or creditors. Their debt may even result in a forced sale of your property.

In addition, choosing this approach exposes you to otherwise avoidable capital gains taxes. With joint tenancy, your child does not receive the full step-up in basis for capital gains purposes and will incur a hefty capital gains tax when your child decides to sell the property, meaning she’ll pay more capital gains taxes. We have also discussed this topic in detail in prior months.

3. Giving Away The Inheritance Early
Some parents choose to give children their inheritance early–either outright or incrementally over the years.

But this strategy comes with several negative consequences:

First, to avoid gift taxes, you are limited to giving each child $15,000 per year (2019) which may be incremental compared to what you would like to give. You can give more, but you start to use up your gift tax exemption and must file a gift tax return, which can be an additional administrative expense and burden.

Second, a smaller yearly amount might seem “spendable” to your children, instead of a lump legacy sum, so they might spend it rather than invest.

Third, if situations change that would have caused you to re-evaluate your finances, it’s too late. You have already given away the money, and likely they have spent it. You don’t want to be dependent on your children giving the cash back if you need it.

Shortcuts and ideas like these may look appealing on the surface, but they can actually do more harm than good. Contact our office for a free consultation on how you can avoid these bad inheritance shortcuts (818) 649-9110.

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