Transmitting Assets? Leave These Out

Estate planning mostly focuses on deciding a structure for the transmission of our assets. But a common mistake made in this process is not knowing which of our assets should NOT be passed on. So today, I will talk about those assets which ideally should not be passed on as part of our estate plan. I will also show why each of them should not be passed on. I will finally show how those assets can be dealt with effectively.

Real Estate

In today's world members in a family rarely live in the same area. Managing properties held in various geographical areas can be a challenge. Therefore passing on multiple properties to our beneficiaries may actually burden them. Exposure to real estate should therefore ideally be be restricted to the house we live in. A maximum of one additional residential property may be held. It would serve as a backup in case we need to relocate.

We also have to realise that we may live for longer than we expect to. So our house may be physically inaccessible to our beneficiaries when it passes on to them. This is especially true for homes with multiple levels. For instance, let us say I pass away at the age of 90. By that time my beneficiary is say 65. A multi level home may not be feasible in light of the likely physical condition of a 65 year old.

Also, real estate needs to ideally be passed on through a legally registered will. This clearly shows why real estate is a complicated and inconvenient asset to pass on. Most real estate holdings may therefore be liquidated and converted into financial assets. The ideal time to do this would be around or post retirement.

Physical Gold

Holding gold physically does not allow real time tracking of gold prices. Physical gold therefore cannot be considered an investment. Also, we cannot be assured of getting a fair estimate of a sale price for our jewellery. This is especially true if we have jewellery that is around a few decades old. Therefore physical gold is better left outside the pool of assets we wish to pass on. Gold ETFs would instead be a much better medium through which to pass gold on across generations. The reasons for this are given in the graphic that follows.

Insurance Cum Investment Products

Life insurance is solely meant to cover the risk of an earning member's death. Most insurance cum investment products achieve very little both in terms of life cover or investment returns. They also demand disproportionately high premium payments. Therefore, parents and grandparents must not make them a part of the pool of assets that are passed on. A portfolio of simple, low cost financial assets represents a much better option to pass on wealth to children.

Shares Held In Physical Form

The possibility of people holding shares in physical form today is very low. But there may still be a few such cases. This is especially true for those passing on shares that are 4-5 decades old. Regulations currently mandate that stocks must be dematerialised before they are sold or passed on. The process of dematerialisation involves a number of procedures as set out in the graphic that follows (DP here stands for Depository Participant, meaning the broker with whom we have a demat account). 

Therefore, those of us passing on stocks or market linked assets must ensure that everything is appropriately dematerialised beforehand. If not, we must at least ensure that our beneficiaries are well versed in the process of dematerialisation. They can complete the process if required.

Final Thoughts

Convenience must be given prioritised over size when passing on a pool of assets. It would be a good practice to pass on most of our wealth in the form of liquid financial assets. Physical assets may form a minor portion of the asset pool that we pass on. Involving our families while formulating our estate plans would be ideal. It would help us know which of our assets they would be comfortable handling. This would make our estate planning exercise a lot more relevant. Thus our beneficiaries would fully enjoy the fruit of our wealth.