Several years before Jeannie Stevens' parents passed away, they invited their three children to an unusual Thanksgiving gathering. The engraved invitation informed the heirs of their right to divvy up more than $1 million of "worldly belongings," including a $90,000 painting by Hudson River School painter Asher Durand, a Heppelwhite sideboard, and a 17th century silver kettle. The siblings drew straws to determine who would pick first and reversed order in successive rounds until everything was spoken for. All of the items were earmarked "for future delivery." At first, Stevens recalls, she and her siblings were "very uncomfortable" with the experience, in part because it forced them to confront their parents' mortality. But when their parents did die, "it made life simple at a very tough time," she says.
When it comes to estate planning, families often focus on the transfer of financial assets such as stocks, bonds, and real estate. But estate planners say it is often personal possessions—items with as much sentimental as monetary value—that can be the biggest stumbling blocks to amicably settling an estate. It's easy to understand why: In comparison with a brokerage account or an IRA, Mom's well-worn books from childhood and Dad's old penny collection are hard to value, never mind divide. Throw in the raw emotions and old jealousies that can flare up when assets are divided, and it's not surprising that arguments escalate. William Forsyth, senior fiduciary counsel at Bessemer Trust in New York City, recalls siblings who fought bitterly over an etching in their mother's home. "The appraiser said, This is not worth more than $15, and if you let me out of here, I'll pay the $15.' Of course, what they were really fighting about was not the etching but who Mommy loved best."
Most people make verbal promises about items or leave general instructions in a will, asking the executor to divide things equally. But estate planners say families are turning to less conventional methods. Some, for example, use the Web to facilitate family auctions of heirlooms or round robins similar to the one the Stevens family held.
Whether it's done online or the old-fashioned way, there are big pluses to giving things away while you're alive. Aside from seeing heirs enjoy bequests, you may realize tax savings. Under IRS rules, you can give away up to $12,000 a year per person—plus distribute another $1 million over your lifetime—without triggering the 45% gift tax. Giving things away when you're alive removes items from your estate. That can be a smart move, because any amount above the federal government's estate-tax exclusion—$2 million today and $3.5 million in 2009—is subject to a maximum tax rate of 45%. In some cases, it may make sense to pay gift taxes today to save on estate taxes tomorrow. This may be a good idea if you expect the value of what you own to appreciate significantly. Moreover, because estates must pay tax even on the dollars they use to pay the tax itself, those with very large estates may come out ahead by instead paying the gift tax, which is levied only on the value of what's given away, says Jon Gallo, an estate planning attorney at Greenberg Glusker in Los Angeles. Ask your tax adviser to crunch the numbers.
Here are creative ways families and advisers have tackled the challenge of maintaining peace while dividing the family heirlooms.
FIRST: WHO CALLS THE SHOTS?
If you decide you want to designate who gets what, rather than letting your heirs figure it out, keep in mind that it's not always possible to divide things equally. You can, however, strive to be fair. So if you want to give the grand piano to a child with musical talent or a painting to an heir with an artistic bent, consider allocating a greater share of the financial assets to the others. Mitchell Rubin, a certified financial planner in New York, recalls a client who bequeathed her prized possession—a three-carat diamond ring—to her only grandchild with a daughter.