Receiving an inheritance is typically considered positive, offering newfound property or funds. However, certain assets may bring challenges, such as tax implications or additional efforts to unlock their value. Some inheritances could even result in financial costs without guaranteed returns. Here's a look at some of the less favorable assets to inherit.
Timeshares
Timeshares are marketed as offering free vacations, yet they often come with hefty annual maintenance fees and can be challenging to sell.
Nick Hughes, an investment advisor representative at Visionary Horizons Wealth Management in Knoxville, Tennessee, suggests that some may view timeshares not as assets but as liabilities.
If you happen to inherit a timeshare and find it more burdensome than beneficial, you do have the option to disclaim the property, according to Hughes.
Family businesses
Mallon FitzPatrick, the head of wealth planning and managing director at wealth management firm Robertson Stephens, suggests that a family limited partnership can serve as an effective means of transferring wealth before an individual's demise.
On the contrary, inheriting a portion of a standard small business might pose challenges. Potential issues include strained relationships due to disagreements among family members regarding the business's future and financial complications if there's no formal succession plan in existence.
Furthermore, the process of selling a business or liquidating one's share can be complex.
Traditional IRAs
Inheriting a traditional IRA, a popular retirement account, comes with tax implications, as the IRS views it as untaxed income, according to Nick Hughes, an investment advisor representative with Visionary Horizons Wealth Management.
Exceptions aside, heirs are typically required to withdraw all funds from the inherited IRA within 10 years, potentially placing them in a higher tax bracket. Conversely, inheriting a Roth IRA is advantageous, as taxes have already been paid on the funds, and in most cases, there is no obligation to pay the IRS.
Collectibles
Receiving an inheritance of baseball cards, coins, or comic books could hold significant value, but converting these assets into cash may require considerable effort.
“I'm certain there's a market for a $100,000 comic book; I just need to locate it,” notes FitzPatrick, emphasizing the potential value but acknowledging the effort needed to realize it, in conversation with Money Talks News.
No Value Heirlooms
It's conceivable that you might inherit collectibles or heirlooms with minimal or no monetary value. Acquiring items that could be considered less valuable poses one challenge, while another concern is the potential for inheriting something of sentimental value to others. This situation could lead to contentious disagreements and strained relationships among heirs.
To preempt such issues, Hughes advises his clients to append a personal property memorandum to their will, detailing instructions on the distribution of specific items. While not universally legally binding, Hughes notes, "this can mitigate a lot of conflicts."
Anything in a will
Whether it's a collectible or a sum of money, anything specified in a will holds the potential to create challenges for heirs.
"It's likely to be subject to probate," Hughes notes.
Probate courts are tasked with carrying out the directives of wills. This entails incurring fees and waiting for the court to complete its proceedings before heirs can assume ownership of their inherited assets. Some states offer a streamlined probate process for smaller estates.
To sidestep the probate process, individuals can designate beneficiaries or employ transfer-on-death designations for various financial accounts. Another alternative is to establish a trust and transfer assets into it. Subsequently, the assets can be distributed to beneficiaries after death, bypassing the need for probate court involvement.