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Uneven inheritances: estate planning options, P.2

On Behalf of | Apr 25, 2011 | Estate Planning |

In our last post, we began looking the issue of uneven inheritances between children and what estate planning options a couple has in a situation where one child is not considered trustworthy enough to be left with significant amounts of property.

As we said before, leaving one’s home to the trustworthy child as a lifetime gift would have some tax advantages, but would confer upon that child your basis, meaning there will be more capital gains tax down the road at a future sale of that property. However, if one makes a testamentary gift under one’s will, the child will get a stepped-up basis and likely reduce the amount of capital gains tax owed on the sale of that property.

Another advantage of making a lifetime gift of property is that it will avoid a potential will contest later on down the road if the untrustworthy child is unhappy with the uneven division of the estate. And it is generally harder to challenge a lifetime gift than a gift under a will.

One particular advantage of leaving property under a will, though, is that one can change one’s mind concerning property division up until one’s death.

Another option is to deed the property to the trustworthy child and retain a life estate in the property. Doing this would allow the property to immediately pass to your child at your death and give that child a “stepped-up” basis later on.

One could, of course, simply choose not to leave any property to the untrustworthy child, but couples often do not wish to leave their untrustworthy children without any support. They key is finding a solution that controls how that property is used. Trusts are great tools for this purpose.

As far as the untrustworthy child, one great option is to leave property to that child in trust rather than distributing it outright. You would then be able to set specific terms on the trust and instruct the trustee when to make distributions for that child’s benefit or directly to the child. The trustee could be a family member or friend you trust, or a corporate trustee from a bank or trust company.

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