How can you prepare your children to handle the investment assets they’ll eventually inherit? One strategy is to have them meet with your professional advisors, who can explain what you’ve been doing.
For example, they should meet with your accountant for an explanation of any tax planning tactics that you’ve been using, so those tactics can be continued after your death. If you have a broker or a financial planner, your heirs should meet with this adviser for a review of your portfolio strategies.
If you hold investment property, that might pose special problems. An investment portfolio can be divided among your children, who can follow their individual inclinations, but it’s not easy to divide physical property. Your heirs might not agree about how the property should be managed.
With any assets but especially rental property, you must be realistic. Ask yourself whether your children can work together to manage the real estate. You may be better off leaving investment property to the one child who really can manage real estate while leaving your other heirs additional assets instead. Alternatively, you might provide that some of your children can buy out the others, at a price set by an independent appraisal.
You also can help them by proper handling of appreciated assets such as stocks. Suppose you bought $20,000 worth of XYZ Corp. shares many years ago. Now those shares are worth $50,000. If you sell those shares to raise $50,000 in cash for retirement spending, you’ll have a $30,000 long-term capital gain.
Instead, you might raise retirement cash by selling other securities where there has been little or no appreciation. That may permit you to retain the shares and leave them to your heir. At your death, your heir might note that the shares were worth $50,000 that day. That $50,000 becomes the new basis (cost for tax purposes) in those shares. If your heir sells them for $50,000, he or she will owe no capital gains tax. All of the appreciation in those shares during your lifetime will escape tax altogether.