As a follow-up to the “Why an Inheritance is Usually Not Taxable Post” we thought it timely to go one step farther and explain inheritance asset flow and the unique characteristics an inheritance has, even if you reside in a community property (most assets viewed as joint) state.
Inheritance has Direct Ownership Tracking
An inheritance is a unique transfer of assets with a very detectable and separable source. Given that inheritances are mostly determined by either beneficiary designations on specific assets such as an IRA beneficiary, Wills, Trusts or a transfer on death (TOD) which is basically specific beneficiaries for funds/assets, the source of an inheritance is very specific and very clear, which gives it unique characteristics regarding joint or co-mingled assets.
So how does an Inheritance Stay Separate?
It’s as easy as keeping the asset in her/his own name, and ABSOLUTELY not adding or depositing co-mingled assets into the separate property.
How to make Separate Property Joint?
Just the opposite as above, mix it up, in many cases there may be situations where there is a need or desire to make separate property joint property, possibly tax, inheritance tax, other asset location issues may make this appealing; taking the separate property adding a spouse or significant other and mixing the assets will efficient will effectively make the separate property joint property.
Once Joint, it is nearly impossible to separate again!
Have a Great “Inheritance Separate or Co-Mingled” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Last week a very flattering article for J.K. Financial, Inc. (lead interview) was written by a division of the FT on inheritance planning. Since this article was geared more towards advisors, we thought clarification would be worthy.
Some Estimate Trillions to transfer
Over the next several decades there will be a large transfer of wealth. According to this ABC news article, the amount could be in the trillions.
FT Article on Inheritance Planning
After an extended interview, a division of the FT had the following article on Inheritance planning geared toward advisors featuring J.K. Financial, Inc. and John Kvale. Here are the questions from the reporter (Chris Latham) and my answers. Following this electronic communication, we also had a lengthy discussion which formed the basis of the article. (Click the picture to see the article.)
- How far in advance should the inheritance planning process begin for clients who expect to receive?
- What does the planning process involve, for clients’ life goals, types of investment assets, tax mitigation, etc?
- What can the advisor do to address any potential emotional fallout for the client regarding guilt, family squabbles, etc.?
- If the client wants to splurge on that dream home after an inheritance, rather than invest the assets according to the advisor’s plan, what is the best next step?
- How does any of this change based on whether the inheritance is modest versus significant, comes when the client is under age 40 versus over age 60?
- Planning in advance is usually completed by helping to insure the heir’s predecessors have completed an accurate plan and process. Depending on the size of the inheritance, we actually try to not include inheritance in our current clients recipient plans.
- The planning process is very dependent on the type of inheritance, but would mainly change life goals as well as tax mitigation, again depending on the type of inheritance.
- Family squabbles are a commonality, expect them and plan for them through full, complete, accurate and ongoing disclosure of the process. We find the biggest squabbles occur due to lack of contact and clarity for all members. Keep them all in the loop and less feelings will be at risk.
- Splurging is ok as long as it does not create an unsustainable expense i.e. Property tax that the client cannot afford. Staying frugal at first is usually the best option.
- The smaller and the younger an inheritance may occur the less overall effect on the client. The larger and the later, GENERALLY the more planning that is necessary.
Have a Great Monday! John Kvale PS Since this was a rather long article, I have limited my comments. PSS Looks like capital markets are going to stumble to the end of a second straight quarter.
8222 Douglas Ave # 590
Dallas, TX 75225
Last week as mentioned here, I was honored to have a long interview with a terrific reporter from the Financial Times. In the world of media, you never know if anything will be printed, or even when and where. Luckily I was the lead interview and even garnered a mug shot. Thanks Chris (reporter)
Click on the heading or the picture for the story. The article turned out to be more for advisors but has already been picked up by the Wall Street Journal as well.
I will go over the questions and answers of the article shortly in another post, as Inheritance Planning is something we have great experience. We will share our thoughts in a more planning for clients manner, rather than tips for other advisors. We are delighted with the article and thank the FT and Chris Latham for the great coverage.
Have a Great Day!
8222 Douglas Ave # 590
Dallas, TX 75225