One Of The Best Assets To Inherit Might Surprise You

Inheritances, while sounding alluring, can be a mixed bag financially when you consider the logistics. Sure, certain investment accounts can be some of the best assets to inherit, but other assets like vacation homes, storage lockers, and cryptocurrencies can be more of a hassle to handle than they're actually worth. However, there is one class of asset that may seem like a terrible inheritance on paper, but can actually come with minimal hassle in reality: an item that depreciates in value.

At first, inheriting a depreciating asset might sound more like a nuisance than anything else. But the real benefit of property of this nature comes in how it can be used for tax strategy. Inherited assets receive a step-up in basis, which adjusts their value from what the original owner paid for them to their market value at the time of that person's death. If an item's value goes down in that time, the depreciating asset would result in a lower value when adjusted and could help significantly lower the value of the estate, thus reducing the taxable burden for the heir. For example, if an individual bought a luxury vehicle for $250,000 and its value fell to $100,000 at the time of their death, the inheritor would only pay estate taxes for the adjusted value, not the original price.

Despite the tax benefit of depreciating assets, this should not be an excuse for individuals to offload junk as it requires planning to favor the inheritor. For a depreciating asset to provide tax benefit for the inheritor, it should be expected to continue to decrease in value after the death of the original owner, meaning that items likely to become collectibles and increase in value may not be a good fit to lower taxes. In general, inheriting collectibles is a curse because of their tax implications. Some depreciating assets that may help lower estate tax include cars, farm equipment, boats, and RVs.

While there is not a defined process to realize the tax benefits, there are steps both inheritors and estate holders can take to maximize the benefits that result from a potential step-down in basis. For example, inheritors should establish the updated value of their assets — and even get a professional appraisal, if necessary — as close to the time of inheritance as possible to minimize potential complications. Meanwhile, those leaving their assets behind can ensure the transfer to their beneficiaries goes smoothly by working with an estate planner. A good estate planner will likely be able to ensure all forms of inheritance can get passed down in an optimized way. They will also find other means to lower an estate's tax burden such as avoiding certain financial accounts in a trust or opting for an irrevocable trust over other alternatives.