3 Tips for Understanding Assets

Understanding your assets is a crucial step in the estate planning process. Knowing what you own, and the nature of these assets can significantly impact how your estate is managed and distributed after your passing. Preparing a thorough asset list, balance sheet, or net worth statement before meeting with an estate planning attorney allows the attorney to better understand your financial situation and provide more tailored advice. Here are three essential tips to help you understand your assets and prepare for your estate planning journey:

1. Probate versus Non-Probate Assets

One of the first things to understand is the distinction between probate and non-probate assets. Probate assets are those assets held solely in your individual name and that either (a) do not have a beneficiary designated, or (b) have an invalid beneficiary designated (i.e., naming a predeceased relative). Without a beneficiary designation, third parties such as banks and other financial institutions will look to the Probate Court for further instructions, and the Probate Court will look to your Last Will and Testament (Will) to determine how these probate assets shall be distributed and by whom (i.e., your Executor). The probate process can be time-consuming and costly. In my practice, probate assets typically include vehicles, houses, and bank accounts.

Non-probate assets, on the other hand, bypass the probate process and transfer directly to the named beneficiaries. These include the house you own jointly with rights of survivorship with your spouse, jointly held accounts, or other assets such as life insurance or retirement accounts with valid beneficiaries designated. Assets held by or designated to a revocable trust are also non-probate assets.
Knowing which of your assets fall into these categories and updating the ownership and beneficiary designations is a crucial step in creating and implementing an efficient and cost-effective estate plan.

Hard-to-Value Assets

Some assets can be difficult to appraise due to their unique nature. Closely held business interests, rare or unique collector’s items, and other specialized collections fall into this category. The value of these assets is not readily determined outside of a unique or specialized group of collectors or experts.
It is essential to obtain a proper valuation for these assets to ensure accurate reporting and fair distribution. Working with appraisers and professionals who specialize in these types of assets can provide a clearer picture of their worth. This step is vital not only for the estate planning process but also for determining potential tax liabilities and ensuring equitable distribution among heirs.

Tax Impact on Certain Assets

Understanding the tax implications of your assets is critical for effective estate planning. Not all assets are created equally, and different types of assets can have varying tax consequences. Here are two important tax considerations:

A. Step-Up in Cost Basis

Upon the owner’s death, certain assets receive a step-up in cost basis, meaning their value is adjusted to the fair market value at the date of death. This can significantly reduce capital gains taxes for heirs when they sell the asset. Assets such as real estate, stocks, and other appreciated property typically benefit from this step-up in basis.

B. Pre-Tax Assets

Pre-tax assets, such as 401(k)s, IRAs, Qualified Pension Retirement Accounts (QPRA), and annuities, have different tax implications. These assets are funded with pre-tax dollars and will be subject to income tax when withdrawn by the beneficiaries. Understanding these differences is crucial in planning for potential tax burdens on your heirs.

Conclusion

By understanding the nature of your assets and their potential impact on your estate plan, you can better prepare for your initial meeting with an estate planning attorney. Differentiating between probate and non-probate assets, valuing hard-to-appraise items, and considering the tax implications of your various accounts are all crucial steps. Creating a comprehensive asset list, balance sheet, or net worth statement in advance of your initial meeting will provide your estate planning attorney with the necessary information to craft a tailored estate plan that meets your goals and ensures the smooth transfer of your wealth.