Table of Contents
Table of Contents
While an inheritance can be a wonderful gift, it can lead to trouble in the wrong situation. When family members are grieving and dealing with the loss of a loved one, emotions can give way to disagreements over assets. This is even more likely if the terms are unclear or beneficiaries are surprised by the stipulations.
Planning ahead may help prevent these family inheritance disputes. Here are several strategies to help minimize inheritance-related friction, both while your loved one is still alive and then after their passing.
8 Strategies While Your Loved One Is Alive
Your loved one can help prevent family inheritance issues by creating an estate plan before they pass away. That way, they can give instructions, prepare their documents and referee arguments. If your family member is still alive, here are strategies you can use to prepare together:
1. Make Sure They Have a Will
A will lists a person's instructions for how they want to distribute their property and assets after death. This can defuse arguments by clearly laying out where everything should go. If a person dies without a will, known as dying intestate, then the courts determine how to divide their property according to state law. This takes the element of control away from your family. It can also increase the chance of the potential beneficiaries fighting in court.
Ask your loved one if they have a will and if it's up to date. They may want to consider sharing these instructions ahead of time so people aren't caught off guard. A nasty surprise discovered after death can quickly turn into battles over the inheritance.
2. Double-Check Beneficiary Designations
Not all property is transferred through a will. Life insurance policies and retirement plans identify who is a beneficiary. This is the person who's meant to inherit the death benefit proceeds after the policyholder's death. Even if a will says something different, a beneficiary designation within a life insurance policy still applies. For example, your loved one might have divorced but forgot to remove their ex-spouse as a beneficiary on their retirement plan. It's a good reason to ask whether their instructions are up to date.
Your loved one should also give thought to any banking and brokerage accounts where they've listed someone as a co-owner. That co-owner would keep the account after death even if the will says otherwise.
3. Prepare Other Estate Plan Documents & Trusts
Besides a will, there are other documents that can prevent arguments over decisions. Your loved one may want to set up a living will, also known as an advanced directive. This document explains their instructions for medical care when they are unable to speak for themselves, such as if they're in a coma. They could also name someone to make health care decisions on their behalf. Having these instructions in place can help avoid stressful arguments over end-of-life medical decisions.
Your loved one may also want to set up a financial power of attorney. This document names someone they trust to handle their finances if they become mentally incapacitated. Designating someone ahead of time prevents family members from arguing.
If your loved one is worried about whether a beneficiary can handle an inheritance — such as leaving a large sum of money to a young family member — they could set up a trust fund. This legal entity manages property and assets on behalf of someone else. The older family member gives instructions controlling the distribution. For example, they might say the beneficiary can only receive disbursements once they turn 25.
4. Pick a Proper Executor
An executor is in charge of managing a deceased person's final affairs, including distributing their assets for an inheritance. They review a deceased person's will and temporarily manage their property until it's all passed on to their beneficiaries. The executor, for example, might maintain the person's house until it's transferred to the new owner.
It's an important role and should be left to a responsible family member. Your loved one shouldn't pick someone without carefully considering the choices. If they don't select someone, a family member will need to request this role in court. If your loved one is worried about whether a family member could handle this role, they may also hire a professional, such as a lawyer.
5. Identify & Discuss Complicated Assets
Some assets are much easier to inherit than others. For example, cash and brokerage accounts can easily be divided. A piece of real estate or a business can be much more complicated. Not only are they harder to value and sell, but there are also more ongoing costs to cover. For example, a vacation home would require paying for maintenance, taxes, insurance and other routine fees while decisions are made.
It's possible that some beneficiaries might not want to inherit these complicated assets. If two siblings want to keep the family home but the third does not, it could turn into a drawn-out battle. Instead, they could reach an agreement together before the owner passes away. Perhaps the sibling who isn't interested opts to receive other valuable property for an inheritance or the other siblings agree to buy out their share at death.
If it doesn't appear an agreement is possible, it may be best for the loved one to sell the asset before they pass away. They can then just leave the cash proceeds as an inheritance. Keep in mind that this could lead to extra taxes. The original owner would owe capital gains taxes on any appreciation from when they first bought the property.
However, if the loved one holds onto the asset until death, the property receives something called a "step-up in basis." In this situation, beneficiaries then only owe tax on appreciation after the date of death. In other words, they receive the tax-free value of the property on the day the owner dies. There could be a considerable tax cost to selling early, but it could be one worth paying to avoid family inheritance disputes.
6. Watch Out for Property With Emotional Value
Sometimes the inheritance issues that lead to the biggest fights aren't those with the largest financial value but rather those that carry emotional value, such as an engagement ring, an antique that's been owned for generations, or other sentimental objects.
If multiple family members hope to get a particular piece of property, it's worth discussing before the inheritance is finalized. While your loved one is alive, they can help mediate the discussion and arrive at a compromise for dividing these assets. People typically respect the wishes of their parents or other elder family members. Their will should also list who receives what piece of property to avoid confusion and disputes.
7. Consider Life Insurance
Life insurance can be another worthwhile inheritance strategy to consider. When a family member passes away, the policy would pay out a cash death benefit. Cash is simple to divide. The cash could also cover final expenses as well as any costs for the inheritance, such as legal fees.
Life insurance could help offset unequal terms in an inheritance, for example if the policyholder is leaving behind a family business that only one beneficiary wants to deal with. Your loved one could provide for one beneficiary with life insurance and leave the business to another.
Your loved one would need to qualify for life insurance and may need to pass a medical exam in order to do so. It might not be possible for them to purchase a policy depending on their health and age. The younger and healthier they are when they apply, the better their chances of qualifying.
8. Start the Conversation Early
The earlier your loved one can start planning their estate, the more options they can consider. They could have time to plan out complicated assets, consider strategies like life insurance and smooth out any disagreements. If they wait until they start having health issues and struggle to make decisions, it can become much harder to make plans. After death, planning options become more limited. Additionally, some decisions might not be possible to reverse, like the wrong beneficiary listing.
Consider having this conversation when the whole family is together, such as around the holidays. Present it like you're trying to make sure an estate plan is in place to avoid family inheritance disputes. People may even appreciate your leadership on this issue.
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5 Strategies for After Your Loved One Passes
After your loved one passes away, family inheritance issues become much more likely. Emotions often run high, people can see what they will inherit and what they won't, and your family member is no longer there to mediate. If you see a potential argument on the horizon, these strategies can help you get through:
1. Figure Out a "Fair" System to Distribute Personal Property
If your loved one had personal property that multiple family members want but didn't leave instructions for, it can lead to arguments over every single item. Trying to debate or mediate an argument could leave everyone feeling frustrated.
Instead, you and your fellow beneficiaries could agree on a system for dividing things up. For example, each person could take a turn and pick one item. You could also hold a lottery, drawing names out of a hat for each item. While some still might not be thrilled about the outcome, at least luck and fate, not arguments, are settling the decisions.
2. Consider Liquidating Complicated Assets
More complicated assets such as real estate and businesses can be more difficult to manage as part of an inheritance. These assets require work and carry ongoing costs. If some beneficiaries aren't thrilled about taking over an asset, it might be simplest to liquidate their position. They could receive a buyout from the other beneficiaries, or the asset could be sold and the proceeds divided evenly.
3. Bring in a Professional
If it doesn't appear your family can settle things, you can hire a professional mediator. These experts help people with a dispute come to a resolution without going to court. The mediator would give both sides a chance to present their arguments. They then point out the strengths and weaknesses of each case while trying to guide everyone toward an agreement. Remember that a mediator is not a judge and won't make any binding decisions for you. Their job is to bring an impartial view to the discussion and keep everyone calm as your family seeks a compromise.
4. Avoid Legal Battles as Much as Possible
When tempers are flaring and your family can't agree, it might be tempting to fight it out in court. Think carefully before going this route. Things may escalate, and legal fees can add up quickly. Inheritances have been entirely wasted because the beneficiaries refused to come to an agreement.
There may be extreme situations when legal action is unavoidable. For example, a family member might be concerned that the most recent will was fraudulently created at the last minute by someone besides your deceased loved one. However, before taking legal action, ask whether it's truly your only remaining option.
5. Remember That Family Still Comes First
You can always acquire more assets and property, but you can't replace your family. Remind everyone of this as emotions run high. If one family member seems especially frustrated with an outcome, consider whether you'd be willing to give up part of your share to preserve the relationship.
While managing an inheritance will always involve at least some emotions and stress, using these strategies can help avoid the kinds of disputes that tear families apart. Consider reaching out to a financial professional for additional insight and assistance navigating these conversations.
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