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Uneven inheritances: estate planning options

When it comes to leaving inheritances to children, problems can arise around the issues of fairness and trust. Which child should receive what? How much should each child receive? With what can each child be reasonably entrusted?

The answers to these questions often depend on the capacity, character, and personal history of each child, and various other factors such as the value of the asset under consideration and the requirements for owning and maintaining that asset.

It often happens that inheritances for children will be uneven. For any number of reasons, one child may be entrusted with more than the others. A recent article in the Star Ledger mentioned a scenario in which a couple had one child with substance abuse problems, and another child to whom they wanted, as a result, to leave the bulk of their assets, including their home. What are some estate planning options for such a couple?

One general concept to keep in mind is that giving away property during your lifetime can reduce overall New Jersey Estate Tax, and can be a good strategy for tax planning. In terms of leaving the house to trustworthy child, because there is no gift tax in New Jersey there would be no tax on the transfer of the home if that transfer was made during the couple's lifetime. At the federal level, the gift tax exemption is currently at $5 million, so neither would there be federal gift tax on the transfer of the home if it is below that amount.

Keep in mind that leaving outright lifetime gifts to a child will confer on the child your basis in calculating any capital gains on a sale of the property down the road, which will likely mean that more capital gains tax will be due.

In our next post, we'll keep looking at this scenario.

Source: Star Ledger, "Parents plan to leave children an uneven inheritance," Karin Price Mueller, 17 April 2011.

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