How to Divide an Inheritance Equally

Minimize the need to decide taxes and transaction costs for all beneficiaries

Nothing ignites family arguments like inheritance. If you plan to leave money to more than a few beneficiaries, for the sake of peace and your own emotional legacy, know how to divide the proceeds fairly.

First, you can divide your estate among however many heirs you want: three, seven, 11 or 13 and so on. Here are best practices for how to divide your wealth.

Beware of Taxes
Dividing an estate doesn’t need to trigger taxes. Don’t try to be the financial advisor of each beneficiary when you divvy the estate. Afterward, each beneficiary can decide financial and tax moves based on individual circumstances.

For example, let‘s say Jim, Susan and David become heirs of a taxable account of stocks, bonds and mutual funds. The account includes:

  • 351.362 shares of XYZ mutual fund at $36.34 per share, worth about $12,768.49
  • 2,000 shares of ABC stock at $100 a share, worth about $200,000 (this holding comprises two trade lots of 1,000 shares each and each trade lot has a different cost basis, or original price)
  • $85,000 face value of CorpCorp bond at $97 par value, about $82,450 (traded in $5,000 face value units)
  • $100,000 face value of MuniMuni bond at $102 par value, about $102,000 (also traded in $5,000 face value units)
  • $5,236.45 in cash The total account value is $402,454.94, making each heir’s share $134,151.64 with two pennies left over.

To Divide the Account Evenly
The 351.362 shares of XYZ can be divided into three equal portions of 117.12 shares, leaving 0.002 shares left over. Jim and Susan receive 117.121 shares and David 117.12 shares, plus 0.001 times the closing valuation of XYZ on the day of transfer. This probably results in David receiving about four cents in lieu of missing out on 0.001 of a share.

The ABC stock comprises two trade lots: 1,000 shares purchased one year ago at $80 a share, and 1,000 shares purchased six months ago at $105 per share. Both positions divide equally into three 333- share portions, leaving just two shares to be divided, each with a face value of $100.

If all three heirs are in the 15% capital gains tax bracket, the value of each share is the closing valuation on the day of transfer adjusted for 15% Copyright © 2019 RSW Publishing. All rights reserved. Distributed by Financial Media Exchange. capital gains taxes. In large estates with many assets to distribute, divide leftover shares as evenly as possible to minimize the difference between capital gains that heirs incur.

Note that taxable assets usually receive a stepped-up basis, meaning that the asset resets to its fair market value at the date of the holder’s death. Often, however, half an estate’s assets will go into a marital trust when the first spouse in an estate-holding couple dies.

When the second spouse dies, the entire estate is settled. But assets in the marital trust might have received a step-up in basis years earlier. In that case, potential differences in capital gains do apply when planning.

You can divide the $85,000 face value of CorpCorp equally only into 17 units each worth $5,000 in face value. In our example, each heir receives five $5,000 units, with two $5,000 units left over. Whoever doesn’t receive a unit receives the equivalent in cash instead.

The $100,000 face value of MuniMuni divides equally only into 20 units each worth $5,000 in face value. Each heir therefore gets six $5,000 units with, again, two left over. Also again, whoever doesn’t receive a unit receives the equivalent in cash instead.

(These examples assume no significant tax considerations on either bond. One recommendation is to vary who receives the cash.)

Common Questions
Why not just sell everything and split the money? Tax consequences to one or more heirs, illiquidity in one or more assets and the custodian fees to sell are all considerations to immediately selling and splitting.

What if two heirs want to sell an asset before dividing the money equally? Jim and Susan both wanting to sell the CorpCorp bonds doesn’t need to affect David. Of the 17 units of CorpCorp, you can sell 12 units and agree to split the proceeds. Jim and Susan each receive 47.22% of the proceeds and David 5.56%, plus the five unsold units.

Dividing your estate this way minimizes your need to decide on behalf of all beneficiaries what to sell and how and what transaction costs and taxes to incur.

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. 

12 Estate Planning Must-Dos

Many of you already have estate documents, probably executed many years ago. You need an estate attorney to look over your documents every 10 years or so. Here are a dozen points to review.

i. Do you have a will and powers of attorney for health care and property? These are part of every complete estate plan. With health-care power, you choose an agent to act on your behalf if you become unable to make your own decisions. With durable power for property, you select an agent to act if you are incapacitated and can’t sign a tax return, make investment decisions, make gifts or handle other financial matters.

Make sure your health-care power addresses the Heath Insurance Portability and Accountability Act (HIPPA). This Governs what medical information doctors can release to someone other than the patient.

ii. Do you need to change any beneficiaries, executors, trustees, guardians or others named in your documents? Are all still living? Can someone you recently found fill a role better?

iii. Any updates needed to addendums to your will that specify who gets what of your personal property? Often, I read wills that mention addendums for personal property and the addendums don’t even exist.

iv. Did you move to a different state since the execution of your estate documents? If so, seek out a local estate attorney to check any legal differences for planning between your old and new states.

v. Do you still need your trust documents, or can you decant, which allows you to change some provisions? Consider this technique of emptying the contents of an irrevocable trust into another newly created trust if you are unhappy with your irrevocable trust. Not all states allow decanting.

You may also want to discuss possibly moving assets out of a living trust (where a trustee holds them, a technique sometimes used to avoid probate) and holding them in the name of an individual.

This discussion will weigh the income tax benefits of a step-up in cost basis, the original cost of an asset, versus other reasons to keep the trust. (“Step up” means that the cost basis of an asset resets to the fair market value of the security as the date of the holder’s death – potentially a much higher value than when they bought the security.) The higher the cost basis, the less capital gains tax your heirs pay when they sell the asset.

You may also want to see whether you need an irrevocable life insurance trust, a device once used to move assets, typically life insurance, out of a taxable estate. Now that thresholds are higher -individuals can leave $5.34 million and married couples $10.68 million tax-free – you may not need to move assets.

Also check when your life insurance expires. Consider how long to keep it if you think you might outlive the policy

vi. Have your children passed the ages specified in a children’s trust (in which you designate money for such specific purposes as education, home down payments or weddings once the kids reach stipulated ages)? If your estate documents call for a trust to give children access to money at certain ages after you die, you may be able to delete that language if the kids are older than the specified ages.

vii. What happens if one of your kids gets divorced? A trust can help you protect assets for your child or grandchild.

viii. Do you have heirs with special needs? Don’t assume typical estate documents help such an heir. Seek out a financial advisor and attorney who specialize in this planning.

ix. Check beneficiary designations on brokerage accounts, insurance policies and retirement accounts. Anybody you don’t want there?

x. If you filled out a brokerage account application (or any beneficiary designation), understand the firm’s policy when one beneficiary dies before the others. If you want the share of the assets to pass by blood line – to the deceased’s children, for example – you may need to put in language specifying per stirpes (distribution of property when a beneficiary with children dies before the maker of the will).

Otherwise, the remaining listed beneficiaries may simply divide the assets.

xi. Often a parent names a child on a bank account so the child can access or use the money if the parent can’t act. Understand that if you name your child as a joint owner on an account, the money passes to your child no matter what your will dictates. The child splitting the money with someone else constitutes a gift, though one probably not subject to gift tax now that gifts of less than $5.34 million aren’t taxed. Still, think carefully so you keep the family peace.

xii. Do your heirs know where to find all your important information? Let someone know the password to the app where you keep all your passwords – you must remember digital assets now, too.

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. 

5 Avoidable Mistakes in the Will You Write

We have seen our share of client-drafted wills. While most people opt to have a lawyer draft their last will and testament, there is no requirement that an attorney do so. If you do opt to draft your own will, make sure to avoid the following five mistakes that we repeatedly see in layman-drafted documents.

1. No Inclusion of Your Family Tree

The core idea of a will is that you can leave your money to whomever you choose. However, most people don’t understand that your nearest family members are allowed to contest your will in court. Yes, they will most likely lose that contest, but your next of kin do have the right to know that you are disinheriting them, so they must be placed on notice when you dies, and your will is submitted to the court for probate. The court will want to know your nearest heirs, particularly if you are estranged from them, since the court assumes, they are the most likely parties to contest your will. Include the members of your family tree (spouse, children, parents, siblings) who are alive and deceased (so that the court knows that these people do not need to be put on notice) and addresses of where your next of kin reside. If a close family member is being disinherited, make sure to state that in the will. Excluding your next of kin or ignoring their existence does nothing to bolster the validity of your will.

2. Leaving Funds to Beneficiaries Who are Minors

Remember being 13 and receiving $100? It seemed like all the money in the world … until it was spent within one week. Remember: Minors cannot own substantial funds in their own name, clearly with good reason. In the case of any minor beneficiary receiving significant amounts of money outright, a court would be required to hold a guardianship or conservatorship proceeding. A judge would appoint someone to oversee the funds (at your estate’s expense) to safeguard them until the child reaches 18 (at which point the child “buys the fraternity”). This guardian appointment is something you would have no control over, so, while it would be unusual, it could even be the judge’s campaign contributor or golf buddy attorney. Your will can avoid this by not transferring your money directly to a minor. Allow your executor to leave bequests made to minors to a Uniform Transfers to Minors Act (UTMA) account. This allows the funds to be administered by your choice of custodian until the minor reaches 21. Yes, 21 is still a young age to leave significant funds to a child, but UTMAs do avoid court oversight, because the account is not being given directly to a minor. For larger sums, you should create testamentary trusts in your last will and testament (testamentary get it?). These trusts can be as expansive or limited as you want. You can say “funds shall be used for the beneficiary’s health and education until she reaches 30, at which point all remaining trust funds are to be distributed,” or “the Trustee shall have full discretion how funds are used.” Name a suitable trustee (much like you do with an executor, see below), and state who receives the funds if something happens to the beneficiary.

3. Selecting Executors Without Flexibility

Naming an appropriate executor is critical, because this person will be in charge of your estate’s affairs. Your executor “steps into your shoes,” meaning he can enter into contracts, collect your property, pay taxes and creditors, distribute your estate, order financial and medical records … basically everything you can do. You should attempt to name the most trustworthy and capable person you can think of to serve as executor. One mistake people make is naming either too few or too many executors. If you name only one executor and she cannot serve (due to inability, disinterest or her own death) your beneficiaries may wait a very long time for the court to appoint another executor. If you name too many people to serve at one time you risk them disagreeing with one another or not coordinating effectively. Name responsible, reliable individuals as executors; naming at least one or two younger people to succeed your initial choice should ensure your estate is successfully brought to closure without excessive court intervention.

4. Incorrect Will Execution

For people drafting their own wills, this is the moment of truth… and the point at which many well-drafted wills are made completely ineffective. We have seen more self-drafted wills fail due to improper execution than all other reasons combined. Wills require your signature (or someone signing for you at your explicit direction and in your presence) at the end of the will in front of two disinterested witnesses. The witnesses cannot be beneficiaries of your estate. And they may need to sign an affidavit in front of a notary. Failing any of these steps may cause your will to be invalidated. The sole exception is the notary requirement for the witness affidavit: They may be able to sign the affidavit after you die … but your executor will need to be able to read the witness’s names … and 50% of the time their signatures are little more than illegible chicken scratch that looks more like Sanskrit than a signature, meaning you can’t identify the witnesses.

5. Not Finding the Original Will

Finally, you need an original, signed will, particularly if you try to draft your own document. If an attorney drafted the will and it is subsequently lost, the drafting lawyer can sometimes verify a signed copy of the original will in a court during a lost will proceeding. Most states don’t allow these proceedings if no drafting attorney can be found, so when you lose your original will there is no one to question to prove its validity. Just so everyone is clear: An unsigned copy of a will is 100% useless and won’t be admitted to probate. We do not suggest drafting your own will, because what you create is sometimes worse than nothing at all. However, we appreciate that some people sometimes want to take a shot at directing their estate’s destiny. If you are one of these people, take note of these five suggestions before executing your document.

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. 

1099 Forms

What is a 1099 form? This is a record of payment from an individual or entity, showing a payment, generated for your records. The individual/entity sends a copy to both the payee as well as the I.R.S.1

Who might be sending 1099s? Clients send their freelancers 1099s, recording work performed. Banks send 1099s to reflect interest from a savings account. A state may send a 1099 for a tax refund. If the financial institution who handles your retirement account writes you a check, they will also send you a 1099.1

In any event, a 1099 includes the taxpayer identification number or Social Security Number of the payee. Receiving the 1099 does not automatically mean that the payee owes tax, as there could be situations that offset that income, but it definitely means that the I.R.S. also has a record of that payment.1

There are many types of 1099 form. Here are a few of them:

1099-A. This form is a consequence of foreclosure or bank repossession of secured real property – “acquisition or abandonment,” in I.R.S. terms. Lenders send it to the foreclosed party and the buyer.1

1099-B. Brokers and barter exchanges report proceeds from securities, futures, commodities, or barter exchange transactions with a 1099-B.1

1099-C. The 1099-C reports debt cancellation. You must claim the indicated amount on the 1099-C form as income in the year the debt was forgiven. When you pay income taxes on that amount, the creditor cannot come after the debt again. This form sometimes follows a foreclosure.1

1099-CAP. This one is for those who own shares in a corporation that has been acquired or has undergone a significant change in capital structure. If it was sold or changes have been made where you’ve earned cash or stock, for example, this form would be necessary.1

1099-DIV. When you receive dividends, capital gain distributions, or liquidation distributions, you get one of these. For example, when a mutual fund sells off funds and realizes a capital gain, the fund informs you of your share of the capital gain through a 1099-DIV.1

1099-G. This form reports payments from government agencies and qualified state tuition programs – everything from state and local tax refunds and unemployment benefits to agriculture payments, gambling winnings, and taxable grants. It is usually issued to show unemployment benefits or a state tax refund.1

1099-INT. This form reports interest income of $10 or more, and sometimes other tax items related to interest income (such as federal tax withholding or early withdrawal penalties).1

1099-LTC. As the LTC part hints, these forms report distributions (payments) from long term care insurance contracts and accelerated death benefits paid out as a result of a life insurance contract or a viatical settlement.

1099-MISC. This category includes “miscellaneous income,” including awards and prizes.1

1099-OID. The 1099-OID reports the difference between the stated redemption price of a bond at maturity and the issue price of that bond.1

1099-PATR. This form reports patronage dividends, such as in a farm cooperative.1

1099-Q. Have you been paying for school expenses from a 529 plan or a similar savings plan? Withdrawals will be reported on this form.1

1099-R. The 1099-R reports distributions from all types of retirement, pension, and profit-sharing plans as well as any IRA or annuity contract.1

1099-S. The 1099-S reports gross proceeds from real estate transactions or exchanges.1

1099-SA. This form reports distributions from Health Savings Accounts (HSA), Archer Medical Savings Accounts (Archer MSA), or Medicare Advantage Medical Savings Accounts (MA MSA).1

Questions? Are you thinking you should have received one of these forms? Or maybe sent one of these forms? Be sure to talk with a qualified tax professional or qualified financial professional today; they can help you generate, request, and understand the 1099 forms in question.