A significant number of investors will inherit assets in the upcoming years whether they are Baby Boomers or Gen Xers. When these inheritances occur, investors are often unsure about what they should do with these assets and how to deal with them in the long term. Spectrem’s research indicates that when assets are inherited approximately 77% of investments are liquid while 23% of inherited assets are illiquid assets.
While it’s generally easy for financial advisors to assist investors with the liquid assets by investing them appropriately, dealing with illiquid assets is more complicated and often outside the expertise of a financial advisor. Yet investors are still stuck with trying to determine how to deal with these assets and have no place to turn. The most common type of illiquid asset inherited by investors is the private residence of the deceased representing 80% of all illiquid assets. Other illiquid assets include jewelry (38%), automobiles (30%), antiques (17%), farmland (16%), and art (15%). There are also other collectibles, heirlooms, commercial property, mineral interests and other assets, all of which require some type of expertise should and investor decide to liquidate these assets.
When investors were asked what they did with the illiquid assets, 42% kept some of the illiquid assets and sold some of the others. In contrast, 28% of investors sold all of the illiquid assets and 30% kept all of the illiquid assets. Only 31% of investors indicated that their financial advisor helped them determine what to do with the illiquid assets.
Investors generally do not know how to deal with these assets upon their inheritance. Thirty-one percent of investors were involved in selling the primary residence of the deceased and 13% were required to hire an appraiser. Additionally, many times there are estate taxes linked to the illiquid assets (more often state estate taxes). In fact, 23% of inheritors indicated they were required to pay some type of taxes. While 64% were able to pay the taxes from the liquid taxes received from the inheritance, a third paid the taxes from their own assets and 4% were required to sell illiquid assets in order to pay the estate taxes.
It's easy for advisors to step back and let investors figure out how to deal with these issues on their own. It's much better, however, for advisors to be able to assist investors when dealing with these issues. How can financial advisors assist with illiquid inheritances?
1. Have a network of referral sources. Develop relationships with real estate agents in different regions to whom you feel comfortable referring clients. Find out experts in various arenas from art experts to coin collectors to antique dealers. Be aware of their reputations and refer your clients to these individuals.
2. Discuss the appropriate outcome for your client when dealing with these assets. There may be an emotional attachment to various assets for which your client may be unwilling to make the best financial decision. They may be reluctant to sell their childhood home even though the ongoing upkeep may be too much for their own financial portfolio.
3. Assist in finding an appraiser. Investors don't know where to go to find an appraiser and they may be unsure of which items should be appraised. Have a list of individuals that you can share and inform them why they need appraisals.
4. Make sure they are aware of tax implications of the investment. Even if they are not subject to estate taxes, they need to be aware of other financial implications of an illiquid asset, especially real estate. Ensuring that real estate taxes and similar taxes are paid on time is important for investors to consider when they are deciding how to deal with the investment.
Illiquid assets are complicated for inheritors. While financial advisors may not have the required expertise to deal with these assets, the willingness to assist will lead to a positive outcome. If the illiquid assets are eventually liquidated, any support from the advisor in dealing with these assets may result in the benefit of a smooth transition of these assets to their liquid portfolios someday.