How to leave stocks, bonds, real estate or small businesses to your heirs
By John Waggoner, USA TODAY
Few of us are as far-sighted as Franklin. But most of us do want to leave a legacy, either to our children or to our favorite organizations. And it doesn't matter how old you are: You simply have to choose the best way to leave money.
But even if you plan to give away all your wealth this year, you still need a will. One advantage of leaving money in your will: Your heirs don't have to pay the tax on any built-up appreciation. Their cost basis for tax purposes will be the value of the asset when you die. If you bought Google at $100 a share and die when the stock is $600, your heirs will pay capital gains taxes only if they sell the stock for more than $600 — and only on the gain.
The other: You control who gets what. If you die without a will, a court will split up your assets for you.
Your assets — minus your debts — will be your estate, which is subject to estate taxes. For most people, that's not a worry: The estate tax kicks in only for estates greater than $5 million.
If your family situation is complex, you may consider a testamentary trust, which is a trust created in your will that starts when you die. The assets are still part of your estate, so it won't reduce your estate taxes. Typically, the trust is created to provide income for a second spouse; upon the spouse's death, the money in the trust goes to your children, rather than your spouse's kids.
Passing it on
If you simply want to give cash while you're alive — something your kids will appreciate — you can give them $13,000 apiece this year ($26,000 for a couple) without triggering gift taxes. Gift taxes only apply to the giver; the recipients don't owe taxes on gifts.
A disadvantage: If you give shares of appreciated property, such as stocks, the recipient will owe taxes on it using your cost basis.
If you bought Google for $100 and it's $600 now, the person who gets the gift will owe capital gains taxes on any gains above $100 when he sells the stock.
You can also contribute to a charitable gift trust, a fairly simple way to donate to charity, even after death.
Community foundations are another option. These are local charitable organizations that let you set up funds within the foundation that distributes your money according to your guidelines. You get the tax deduction in the year you make the donation. The foundation handles administrative details.
Giving your kids the business
Leaving the family business to your children is a more complex matter.
Pat Stevens, 63, owned a Great Clips hair salon franchise and wanted to let his son, Brian, take it over. Pat had Brian get experience in retail stores before he even began working at his father's salon franchise. And, once there, Brian had to start at the bottom. "I started as a receptionist, swept hair, did grunt work," Brian says.
And that's the way it should work, says Jerry Spicer, who coaches Great Clips franchisees on transferring the business from one generation to the next. It's a tricky business, and it's hard for owners to let go. "There are very close emotional and psychological bonds to the business," Spicer says.
The biggest mistake people make: not having a plan. Pat Stevens began the process early, eventually moving Brian into the role of franchisee for their 10 Minneapolis Great Clips units. They now have 12 units, Brian says.
Starting the plan means doing a lot of talking to the family, Spicer says. If there's more than one child, you have to figure out how to split the business — assuming they're all interested in going into the business.
Pat Stevens' other son, Dan, 33, was living in Montana and wasn't interested in the Great Clips franchise. "I told him that if he wanted to start some other business, I'd help him," Pat says. Dan and Pat now co-own a Jimmy John's Gourmet Sandwiches franchise.
If you have business partners, you need to make sure that your heirs can afford to buy out another if he or she dies — and for that, you'll need an expert adviser who can figure out what combination of insurance, cash or buy and sell agreements suits your needs, says Gary Schatsky, a New York City financial planner.