Monuments and Heirlooms

Many people have assets that are treasured by the family. These can include a farm handed down through many generations, a business carefully created, a cottage, painting, a piece of jewelry, an antique or art. Some of these assets are liabilities.

In simple terms, a monument or heirloom is a nominally valuable asset with an emotional inclination to keep it.

The “Monument – Heirloom” designation creates problems.

  1. If the asset appreciates in nominal value, income taxes are due every time it changes hands.
  2. The asset is not a “good asset” for the eventual owner because a sale or using it as security for a loan is not a realistic option.
  3. The other heirs or their families often look at the asset’s value as if it were going to be sold. That misrepresents things and can cause hard feelings.

Consider this extreme case.

You have one sibling. Your parents have two assets. A diamond worth $1,000,000 that has been in the family for 250 years. Great misfortune will befall, with certainty, anyone who sells it. The other asset is a bank account with $10,000 in it. As your share of the estate, you may choose which of the two you want.

If you take the $10,000 asset, you may do with it as you choose. If you take the $1,000,000 asset, you will be faced with insurance and security costs each year and must set aside money to meet the eventual tax liability when you transfer it to your heirs. These costs will come out of your other income or assets.

The diamond is not an asset within any meaningful definition of the word. It consumes rather than builds cash flow or useful value. By any view, it is a liability.

Except as an exercise of filial duty, no one would choose to own it under these conditions.

The difference between this example and a family farm or cottage is only one of detail.

When transferring assets that have emotional strings attached, value them at a price that is representative of their value in use rather than their value in exchange. Be sure everyone with an interest knows the rules.

And don’t forget to provide funding for the taxes that will become due. Also from your other assets.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

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