No matter what your net worth, you likely have tangible personal property that is important to you. While such a term typically does not elicit much emotion, the items that constitute tangible personal property—jewelry, artwork, collectibles, family heirlooms, antiques, household furniture, photos and the like—are often collected over a lifetime and represent a family’s story. In some instances, these items might also have tremendous financial value. Because of the sentiment these items represent, the potential market value and inability to easily divide certain pieces, personal items in your estate can often create the greatest source of conflict among those inheriting these assets.
Disputes over tangible personal property often arise when an owner has not left sufficiently detailed instructions for how these items should be divided or has not carefully considered an item’s value. For example, tangible personal property may pass under a will or revocable trust using a simple bequest that leaves “all items of personal tangible property, wherever located, to my children in equal shares” without specifying what should happen if an item is desired by more than one child and the children cannot agree to a resolution. Alternatively, an owner may have left a specific item to an individual without realizing the item’s value has appreciated significantly, unintentionally leaving other family members with much less.
To help you try to avoid or at least minimize conflict over personal property, here are some important considerations:
1. Have a clear plan: Letting your loved ones know your wishes for your tangible personal property—during your life and at your death—may help prevent some disagreement among them. A good way to get started is to create a list of your personal items, particularly those that have the most sentimental value to you or your family and those that have the most market value. Then, working with your estate planning attorney, address the following questions:
• Do you have certain items that you want specific individuals to receive? If some of these items are of great value, do you want to equalize the inheritance among your beneficiaries with other assets?
• If some items should be divided as the beneficiaries agree, how should a conflict be resolved?
• What should happen to the property if a particular beneficiary is not living or is a minor at the time of the transfer?
• Who should pay for appraisals, taxes, transport, insurance and other expenses related to the transfer of the property?
• Do you have any unique assets, such as firearms, wine collections or reproductive property, that create special issues?
2. Create a personal property memorandum: One option for communicating your wishes for your tangible personal property may be a memorandum separate from your will that lists certain items of tangible personal property and the intended recipients. This is often a way to make sure your beneficiaries know exactly what your intentions are. If using such a memorandum, consider the following:
• Many states allow residents to prepare a personal property memorandum that is legally binding, while other states provide that the memorandum is merely guidance to the executor and family.
• A memorandum can be more convenient than putting specific bequests in your will because you can typically change the memorandum without observing the formalities of a will.
• It is important to consult with your attorney to ensure the memorandum is consistent with applicable state law.
• Your memorandum should also be as specific as possible to avoid any questions or disagreements later.
3. Remember all family members: Blended families may bring additional considerations for how you plan for your tangible personal property. While many people think the simplest approach is to leave all tangible personal property to their partner for distribution consistent with their intentions, that does not always work out as intended for a variety of reasons. For example:
• Your partner may not have the capacity to carry out your intentions.
• Your partner may have (or may later develop) intentions contrary to yours.
• Your partner may pass away soon after you without having the opportunity to carry out your intentions.
Instead of relying on your partner, you can prepare legally binding instructions in your will or in a personal property memorandum (as described above) as to which personal items should be given to your family members at your death.
4. Consider charitable beneficiaries: In addition to individual recipients, you can also specify one or more charities to receive certain items of your tangible personal property. Designating a charitable recipient can be desirable under many circumstances, including the following:
• To fulfill philanthropic goals
• To avoid favoring one individual over another
• To avoid disagreements over a particular item
• To dispose of an unwanted item
• To obtain a tax deduction
5. Timing of transfer: While many think of giving away their tangible personal property at death, it may also be beneficial to transfer certain items of personal property during life. The benefits of lifetime giving include:
• Experiencing the joy that the item brings to the recipient
• Potential to avoid future conflicts over ownership and ability to equalize among family members by transferring multiple items
• Ability to transfer ownership without incurring a gift tax liability if the gift’s value is within the donor’s annual exclusion and/or lifetime gift tax exemption. Note that the recipient will have the same basis in the asset as the donor.
All is not lost for those who wish to hold onto all or some of their valuable personal property until death. Benefits of making a transfer at death include:
• Ability to use and sell items, as necessary, for personal lifestyle and enjoyment
• Having more time to decide how items should be divided among beneficiaries
• Recipients receive a step-up in basis for income tax purposes, helping to eliminate or minimize income taxes if the asset is later sold
• Items may be able to pass free of federal estate tax depending on the size of the overall estate and the available estate tax exemption at death
Developing and documenting a clear plan regarding your tangible personal property helps to ensure that your wishes will be fulfilled and more likely that your beneficiaries remain harmonious.
Leslie Kehoe is a senior wealth strategist for CIBC Private Wealth in Atlanta, with more than 25 years of industry experience. Theresa Marx is a senior wealth strategist for CIBC Private Wealth in Chicago, with 20 years of industry experience.