As an advisor, it’s the call you dread, but it’s the moment you helped your client plan for – the second-generation client is on the phone telling you that the first-generation client passed away. It’s a sad occasion, but you planned with the clients for the inheritance of the financial assets.
Did you also discuss the tangible assets? There will likely be a house and perhaps a vacation home, valuable antiques, heirloom jewelry and more. The second generation of clients, often a group of siblings, will need help understanding their options and making decisions regarding these non-financial assets, and your ability to advise them can play a role in retaining them as clients.
To better understand what advisors should consider as the inheritance time draws close, we spoke with two experts skilled in advising on real and tangible assets.
Matt Mignon, a Wealth Advisor at CI RegentAtlantic Private Wealth, is an avid collector, especially of timepieces, and supports the firm’s clients with their collections, including inheritance issues.
We asked each of them the following question:
What are three key issues advisors should be aware of when helping clients with tax and planning for inheritance of homes, land, art, heirlooms, jewelry and other property or possessions?
Here’s the advice they gave us:
Seek an appraisal. Your client should seek appraisals for all assets as of the date of death to decide whether to sell or keep the asset. It’s important to understand the current market for each asset. The piece of jewelry, art, home, land or other item may have had a low purchase price. However, the asset’s cost basis is stepped up to the date of death. Should your client want to sell it, the capital gains tax will be greatly reduced.
For example, a piece of artwork that your client inherited but now wants to sell should be appraised at the time of death for federal or state inheritance tax purposes. Your client should then use that value as their basis and calculate their taxable gain by subtracting their basis from the selling price.
If a painting was purchased for $200,000 30 years ago, but is valued at $2,000,000 at the date of death, your client avoids paying capital gains on $1,800,000 since the stepped-up basis is now $2,000,000.
Seek an insurance review. It is important to understand the role of insurance for all inherited assets. For example, homes, land, artwork, collectibles and jewelry must be properly insured. The fair market value after death should equal the current value of insurance needed.
When assets transfer, the recipient should be aware of insurance costs and that the insurance rates could be higher than previously noted. Insurance costs may also help a client decide whether to sell or keep an inherited asset.
Decide intended use for assets. When an asset is inherited, it’s critical to consider the usage of that asset. For example, with real estate it is always prudent to help your client decide if they can afford the carrying cost.
Here are some questions you should ask: What are the taxes? What are the estimated maintenance costs? If your client decides to keep the real estate, how will it be used? Will the home be used as rental property? As a vacation home? For multi-generational planning?
These are important planning discussions that should happen so each asset has intended financial implications with generating expenses or possible income for the client.
I believe in the importance of planning for tangible assets just as you would any traditional financial asset. Much of what happens when these items are inherited is, in our experience, often a result of the estate planning that was done leading up to time of inheritance.
First and foremost, we need to work to understand our client’s relationship with and goal for these assets. Do they want to sell, or is this a family heirloom that will never be sold? If there are multiple heirs, how do they each feel about the property? We believe it’s imperative to consider these qualitative factors in an estate plan. A piece of artwork cannot simply be split equally among siblings like an investment account can!
There can be many complexities when dealing with these types of assets. In addition to the complexities, these assets can often carry large sentimental value for a family – even if the financial value is just a fraction of the total estate value.
Three key issues to be aware of are:
Managing the illiquidity. As mentioned above, dividing these assets within an estate requires coordination – sometimes across generations. Transactions may take time, and costs and commissions can be elevated compared to more liquid assets. We believe it’s important to try to avoid a fire sale by planning ahead.
Tax status of the property. Just like any financial asset, it is important to understand the tax status, particularly if a sale is being considered. If the tax liability is significant, a donation of the property might be attractive, especially if there are philanthropic goals. However, donating tangible assets requires coordination with the receiving organization.
The organization must be willing and able to accept the donation. Many organizations also expect such gifts to include cash to assist with costs of accepting the donation. This is especially true when gifting artwork to a museum, for example.
The ongoing cost of ownership. Ensuring that these assets are properly protected often requires insurance. Properly insuring these items requires an inventory system and appraisals. Protecting these items physically could have costs beyond insurance as well, such as purchasing proper storage space. These services have costs that are important to understand.
James Miller, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at ContributingEd@wealthsolutionsreport.com