About to inherit? Tips for avoiding family fights and tax trouble

A. Raymond Benton for the Denver Post writes: Today's generations are ill prepared to transfer — or receive — an inheritance.

A 2012 study of 3,200 wealthy families by U.S. Trust showed that 70 percent failed to successfully transfer the family's assets to the succeeding generation. The study found three reasons for this failure: lack of communication among family members; absence of a generally acknowledged purpose for family possessions; and lack of preparation on the part of heirs.

If families with substantial resources stumble, it is very likely that others will find that capitalizing on an inheritance is at least as difficult. Lack of preparation, operating without guidance or support and faltering in the face of irreversible tax decisions can negatively impact even diminutive estates.

This definitely is an area where failing to plan is planning to fail.

The first step is communication. Family meetings can engender both an appreciation of the values and virtues of the older generation, as well as helping heirs address their own money issues and attitudes.

If nothing else, all parties concerned can come to a shared understanding of what is expected and heirs can begin to recognize the importance of preparation. Dan Rothenberg, author of "The Inheritors Handbook," told Bankrate.com that "90 percent of the problems people have regarding an inheritance could be solved if they had a conversation with their parents when they were alive."

The conversation should include gathering some of the information that will ultimately be needed, including the names and phone numbers of the family attorney, accountant or financial adviser. Also, find out where important papers are kept and establish who is to be a co-signer on the family's safe deposit box.

Heirs should take the time to educate themselves on the importance of good tax decisions. With the lifetime applicable exclusion for estate taxes now set at $5.34 million (adjusted each year for inflation), for many inheritances income taxes will take center stage. Assets that are gifted carry forward the original owner's tax basis, while inherited assets receive a "step up" (to market value) at death. On the other hand, retirement assets do not receive a basis step up and are particularly susceptible to costly tax mistakes.  [snip]/   The article continues @ the Denver Post, click here to continue reading...