Common Estate Planning Mistakes:
Assuming All Assets Are Created Equal

When deciding how to allocate the assets in their estate, many people make the mistake of assuming that a dollar’s worth of one asset is equal to a dollar’s worth of another asset.

In fact, because of capital gains and income tax laws, the final value of seemingly equal assets passing to your heirs can differ widely. Take the examples of IRA assets and stock.

IRA ASSETS

All traditional IRAs (and other qualified retirement plans) are eventually subject to income tax. These taxes come due when the assets are inherited by a beneficiary other than the surviving spouse. Thus, the real value of a $100,000 IRA to an heir in the 28% tax bracket might be $72,000.

STOCK

When inheriting stock (or other real property) which has increased in value, your heirs receive the benefit of a “step-up” in the cost basis of the asset. In effect, all the gains amassed during the your lifetime are free from capital gains tax. Thus, your heirs receive the full value of $100,000 worth of stock.

(Note that if the stock has lost value since purchase, you should give it to you heirs during your lifetime, allowing them to keep the cost basis intact and potentially declare a tax loss. More information on maximizing depreciated stock is available here.)

WHAT SHOULD I DO NEXT?

Discuss the value and allocation of your specific assets with your financial and legal advisors. These professionals will help you calculate the tax attributes of each asset in order to meet your objectives.

The previous “Mistakes” article focused on Revocable Living Trusts (RLTs), a financial planning vehicle that many people feel is an essential part of every estate plan. But while the RLT may work for some, it isn’t useful for all. To learn why, read the full article here.

Check out other articles at the Insight on Estate Planning archive and the Estate Planning News index.

Originally posted June 2001. The information in this article reflects tax laws

at the time of posting. Relevant tax laws may change.