When a beneficiary receives an inheritance, the actual assets they receive can have legal consequences. At the time a loved one passes, the beneficiary may not be in the correct frame of mind so its best to consider the issues surrounding these special assets that we refer to internally as “hot assets.” Generally speaking, hot assets tend to fall into three camps - taxable assets, regulated assets, and risky assets.
With respect to taxes, unless your estate exceeds $4 million dollars in Illinois, there is typically little concern about inheritance tax. Since most estates are under $4 million, there is likely no inheritance tax when someone dies. There are few important exceptions to this rule. The most common of which is a retirement account like a 401(k) or an IRA and another type is an annuity. These hot assets carry with them a built-in tax liability. Understanding the tax implications surrounding these assets can help you plan for the inevitable tax hit. You don’t want to spend the funds and then later get burned with a hidden tax liability.
Other types of assets that raise unique issues are highly regulated assets such as guns. Guns require the recipient of a gun, i.e., the beneficiary, to in essence obtain a gun license before inheriting and taking possession of a firearm. In the absence of planning, this can be an issue in an estate. A gun trust can help avoid the regulatory issues regarding the handling of firearms. Otherwise, if an unlicensed individual takes possession of firearm, they can be committing a felony.
In the business setting, professional corporations (such as a medical practice, law firm, dental practice, engineering firm, etc.) have restrictions on who can own them that need to managed. Restaurants have unique issues regarding liquor license ownership. These issues need to be sorted out in advance; otherwise they create problems and lost opportunities later on.
Another type of assets are assets by their nature that bring with them inherent risk. These are assets such as a business, especially a sole proprietorship, where active management is required in order to wind them down. Real estate can also bring with it inherent risk such a strict liability under local code or waste clean up. If an heir takes possession of these assets without proper planning, they can expose themselves to strict liability arising from the asset itself or liability from improperly winding down the asset. There are steps you take to mitigate risk for heirs both before and after the death of the owner.
Out-of-state assets have both practical and administrative unique issues. First, it can be difficult for someone to manage real estate in a different location. Secondly, real estate in a different state is subject to the rules of that state. By using trusts, these issues can be better managed if not avoided all together.
Accordingly, when preparing an estate, you should be looking at the underlying assets and consider the consequences for the beneficiaries. By planning ahead, you can help avoid head aches and facilitate planning.