Dividing the Family Jewels: How to pass along your most personal belongings
by Kaamil Khan
When most people first start working on their estate plan, they focus on their biggest assets such as their home, rental properties, retirement accounts, and other financial investments. However, sometimes the most important items to your family members are those with the most sentimental value: your grandmother’s wedding ring, your father’s watch, family photo albums, your favorite painting, an antique hunting rifle. Things such as these have significant sentimental value associated with them, which can make them valuable keepsakes for your children and other heirs.
A will in Virginia should cover these assets in detail. The use of a broad residuary clause will pass these items in large general shares. However, you are then placing the burden on your executor or trustee to divide these items equally amongst your beneficiaries. Read below on some potential techniques to reduce conflict and ensure that your family heirlooms go to those who will appreciate them the most.
Tangible Personal Property Memorandum
One of the best ways to pass along such keepsakes is the use of a Tangible Personal Property Memorandum. Under Virginia law, a separate writing can be incorporated into your will listing these items and their intended beneficiaries. This document does not have to be prepared at the same time you sign your will. In fact, you can create it after your will has been signed and continually update it as you need to without necessarily having to consult with an attorney.
When using such a memorandum, you need to be as specific as you can. Many times, this kind of property lacks a certificate of title so the description you provide will be the only guide to determine what you meant. Confusion and other problems arise when vague, general terms are used. For example, you should say the “watch with the black band and the silver face” instead of just “my black watch.”
These Personal Property Memorandums need to be signed and dated. They should also kept with your will so that the instructions contained within it will be binding on your executor.
Use of Lifetime Gifts
For those individuals where the Federal Estate Tax is a concern, an inter vivos gift is an advanced planning option. An inter vivos gift means a transfer of property made by a person while still alive, as opposed to being made through a will or trust. When you make a gift, you give your giftee the immediate benefit, use, and control of the item.
However, there are some drawbacks to the use of lifetime gifts. First, you must be aware of the Federal Gift Tax exemption (currently $14,000 per year). Any gift that exceeds this annual exclusion will reduce your other tax exemptions such as the Federal Estate Tax. While this may seem like a problem only rich people have to worry about, the federal “death tax” laws are never truly permanent and there is always the potential they could be drastically reduced from their current levels.
Second, capital gains savings are lost for receivers of lifetime gifts. When an item is passed through a will, a person will receive it at its current fair market value. When the same item is made through an inter vivos gift, the receipient will get the same tax basis as the gift giver.
To illustrate the previous paragraph, Abe buys a painting worth $10, which is now worth $100. Becky will be the recipient of this painting and will later sell it for $120.
If Becky receives this painting under Abe’s will, she will have capital gains of $20. She receives its fair market value ($100) when the gift is made through a will, which is subtracted from the selling price ($120). However, if Abe gave it to her during his lifetime, Becky stands to have capital gains of $110. This is because she receives the same tax basis Abe had, which was $10.
While you can provide your beneficiary with the immediate benefit of your gift by using a lifetime gif, it should be reserved for items worth less than the annual gift tax exclusion as well as with low capital gain accumulation. When distributing property in such a way, one must always be aware of potential tax consequences.
Actually Dividing the Property
While the the Tangible Personal Property Memorandum or Lifetime Gifts are ways to pass along specific items of property, you must first still divide these items amongst your family members. With any estate plan, family members and other potential heirs should always be consulted about what they would like to have and what things are most important to them.
One of the easiest things to do is allow your beneficiaries to personally choose the items they would like to have while you are alive. Perhaps each child or other potential beneficiary can choose items invidiually in a pre-selected order similar to a sports draft.
You can also give different color stickers to each individual and allow them to select what they would like to have. This easily narrows down items where a conflict could arise and allows you to resolve it during your lifetime rather than relying on your executor or trustee to make a decision after your passing.
You can even have an auction style bidding. Each child could be given a set amount of points which can be used to bid towards certain items. This way, a person can choose to bid on several smaller items or heavily invest in one or two items he or she truly desires.
The most important take-way from this blog post is that you should discuss the distribution of your family keepsakes and heirlooms with your beneficiaries while you are still alive. Do not rely on your executor or trustee to handle this as part of administering your estate. You could possibly place them in an awkward situation of having to resolve an easily avoidable family conflict. If this executor or trustee is also a beneficiary of your estate, this can be a source of intense bitterness and ugly fighting amongst your family. Regardless of whether you use a memo with your will or a lifetime gift, these options are only effective when the wishes contained within them are carefully considered and implemented by you.
If you have questions about passing your legacy, contact K.M. Khan law today.