Estate Planning with Illiquid Assets

One of the trickiest items that we must deal with as estate planners is to help clients transfer illiquid assets.  Illiquid assets can include: retirement plans, ownership in a family business, real estate, collectibles (such as artwork, baseball cards and comic books), expensive vehicles and even animals (such as thoroughbreds and show pets).

Illiquid assets are tricky to plan with because they almost always have huge built-in gains, sometimes multiple people want the same asset, the asset must often be sold to pay for taxes and they usually require special maintenance or care.  A client can face additional complications when most of a client's wealth is tied up in a single asset and the client wants to benefit multiple heirs. 

  

Each family requires a custom solution, but often the solution can be found in tried an true estate planning techniques, such as a life insurance trust (so that you can give the illiquid asset to one heirs and cash to another heir), a buy-sell agreement (for a family business), a pet trust (to deal with a beloved family pet), promissory notes and even charitable trusts.

While we can not help you decide which of your heirs should receive your assets, a good estate planning attorney can help you make sure that they pass in a practical and tax efficient manner.  

Gift Ideas - ROTH Style

One of the questions that frequently comes up when I speak with clients is that they want to be able to gift money to their heirs, but they do not want their offspring to waste the money. There are a number of ways to accomplish this. If you are considering gifting a significant amount of money, you may wish to set up a trust or a family limited liability company or a family limited liability partnership to manage those assets.

However, if you are like many middle class families, there is really no need to incur the expense of setting up such structures. Instead, one of the best and easiest things you can do is to contribute to your child or grandchild's ROTH IRA. For 2012, married couples can generally put in $5000 each if they have income of less than $173,000 and single individuals can put in $5000 if they have income of less than $110,000. The IRS website has a more detailed list of the ROTH IRA contribution limits.

Many people do not realize that they can contribute to a ROTH IRA even if they are contributing to their company's 401(k) or retirement plan. Many simple do not have the liquidity - which is one of the reasons this makes a wonderful gift idea. Because of the penalties for early withdrawal, it keeps most beneficiaries from withdrawing the money frivolously - but it can be used in the event of an emergency.

Another strategy is to buy relatively illiquid assets, like bonds that do not mature for a few decades - and just plop them in your safety deposit box.

Remember, in states like New York, Pennsylvania and New Jersey, you can save your heirs thousands of dollars in State Estate Taxes or State Inheritance Taxes by setting up a gifting program now. For more on gift planning, please contact our office.