Q: My husband and his siblings are already fighting about their inheritance, and their mother isn’t even dead yet--far from it. But she’s promised various heirlooms to more than one person and let it slip that she plans to divide her money according to the neediness of her children. We feel we’re being punished for being successful and careful with our money, while my husband’s brother, who lives on credit cards and floats from job to job, is going to be rewarded. What can we do to change her mind?
A: Not a thing. You need to change your mind about what you do and don’t deserve.
Your mother-in-law can do anything she likes with her money and her possessions. Some parents divide their estates equally, others based on need; some use money to reward or punish their children for the life choices they’ve made. A few decide “the heck with all of you” and leave it to charity; more than a few decide not to deal with estate planning at all and let state law determine who gets what after they’re gone. It’s up to the parent, not to you, and any sense of entitlement you have will only cause you unnecessary pain about a process over which you have no real control.
If it makes you feel any better, your money skills and success mean you will probably have more than enough to get you through the rest of your life, even without an inheritance, while your brother-in-law is likely to blow the money as he’s blown everything else.
Instead of fostering more resentment, you could be a force in reducing family squabbling by encouraging your mother-in-law to come to some decisions about who gets which heirlooms. Consider discussing this first with the siblings and approaching her together, rather than taking it on yourself to broach the issue (and perhaps raise suspicions and resentment among other family members). She could detail this information in her will, make a handwritten list or even affix labels to the items in question with the intended beneficiaries’ names on them. As a family, you can emphasize that you only want to reduce the possibility of hurt feelings or disagreements after she goes.
She might resist this, of course. It’s one thing to promise a bauble in a moment of generosity--"Of course I want you to have it, darling!"--and another to formalize these wishes. More than a few superstitious people believe that even thinking about wills and bequests could bring on the Grim Reaper. Others don’t want to give their heirs a sense of ownership. All you can do is raise the issue.
When she does die, you will still have one another. Wouldn’t you rather cement your relationships with one another than risk losing that bond through fighting?
Q: I inherited stock when my mother died in December and recently sold it for $100,000. Will I have to pay the capital gains tax for year 2000 when I file my return? Do I need to know the value of the stock at the time she purchased it 50 years ago in order to calculate the tax?
A: My condolences on the loss of your mother. You don’t need to know what she paid for the stock to determine your taxable gain; because you inherited the stock, you most probably will use the value of the shares on the day she died as your “tax basis.” That basis is what you subtract from the sale price to determine your tax. You’ll pay capital gains taxes of 20% on the profit, plus California state income tax of up to 9.3%, and you may need to make an estimated tax payment by July 17, depending on your tax situation. I’d encourage you to talk with a tax advisor.
A big item like that could increase your chance of audit and you would benefit from getting professional help.
Q. I am 82 years old and very close to a couple that I consider to be like my own family. They take care of me when I need them and I consider their children to be my grandchildren. Quite a few years ago I put aside some money in certificates of deposit for the children. I take the interest out to live on, and occasionally add more money, so the total is now about $15,000 each. When I die, will they have to pay tax on this money that I gave them?
A. What a kind and generous gesture. The family is lucky to have you, as you are to have them.
If the CDs are in your name, you haven’t really given the money to them yet. Be clear in your will where the money is to go, and while the children are minors, you should name their parents as custodians. Even without a will, you can make the accounts payable on death to the parents as custodians for the children. Ask your bank for details on how to set this up.
If you have put the money in the children’s names already, you probably have created tax and possibly legal problems for yourself by taking out the interest. Check with a professional tax advisor for help. Your adopted grandchildren won’t have to pay taxes on money they inherit from you, but they will have to pay income taxes on any interest the money earns after they get it.
Gifts and gift taxes
Q: Three years ago, my father made his bank account joint by putting my name on it. He is now 89. Recently, I took all the money out and put it in my name only. I was told I had to file a gift tax return because the amount was more than $10,000. Is this correct, even though the account was in both names?
A: A gift tax return needs to be filed. But more important, just what the heck do you think you’re doing?
Most parents put an adult child on their accounts so that someone will be able to pay the bills if the parent becomes incapacitated. It’s not an invitation to raid the piggy bank.
(Some parents also use joint accounts to avoid probate, the often costly court process that ensues after a death. That may not be the smartest idea; it’s just as easy to make the account a “pay on death’ account and name the children as beneficiaries. That avoids both probate and the possibility that your child will do what this one has done.)
Creating a joint bank account is not in itself considered a gift. But your taking money out of the account is. Any withdrawal greater than $10,000 requires that your dad file a gift tax return, and the excess is subtracted from your father’s estate tax exemption. If the account had $50,000 in it, then a gift tax return should be filed declaring a $40,000 gift, and that amount is subtracted from the $650,000 that is now allowed to be passed to heirs without estate taxes.
Whatever your motivation, your transfer has potentially serious tax and estate-planning repercussions. You should consult a tax expert about what to do next.
Q: I am retired and financially independent. I generally give my children and grandchildren generous cash gifts for birthdays, Christmas, etc. It has been suggested that I annually give each of them $10,000, the maximum cash gift allowed without gift tax consequences, in order to reduce future estate taxes. I have so far refrained from doing this because I want to remain independent and pay for long-term care, if necessary. Why should I be concerned about the taxes after I’m gone?
A: It’s interesting that those doing the “suggesting” didn’t mention that you can also reduce your estate by giving money to charity.
Some people want their heirs to get the maximum possible inheritance. Other people want to keep as much money from the government as possible. Because estate tax rates climb pretty quickly to 55%, and because the tax hit on retirement funds can go even higher, many people with estates larger than the exemption limit (currently $675,000) look for ways to shrink the future tax bill.
One simple way to reduce an estate before death is to make annual gifts of up to $10,000 each to family members or friends. Another way is by making charitable donations, which also have the benefit of offering a tax break. If you really don’t care one way or another, however, there’s little reason to take your heirs’ hints about dispensing money now. If you would like to reduce the estate tax bill but are not sure you’ll have enough money for yourself, it would make sense to talk to an estate-planning attorney.
Q: My husband and I are fighting about money. Not because we don’t have any, but because we truly have more than enough and I’d like to give more to our adult children. I gave him your column about reducing future estate taxes by giving away money now, but he refuses to consider the idea. He says we never know when we might need it. He does give them money in dribs and drabs when they ask for it, but I’d like to give them a real chunk that they could use to start a business or buy a house if they wanted.
A: If you really do have more than enough, then the issue--as you may suspect--probably isn’t about money. It’s about losing control. Your husband may relish the power he has by doling out the dough in small portions, keeping your children on a string. He may fear that they won’t need him anymore if he gives them a larger amount.
Also, some people find it nearly impossible to give away what they’ve accumulated, preferring to hoard it in the event of some unlikely disaster rather than trust that their good fortune will continue. Sometimes this fear defies all logic, but you can start addressing it by using the rational approach: Meet with your financial advisor for a real nuts-and-bolts talk about your financial situation. If you don’t already have an advisor, you can get a list of fee-only financial planners from the National Assn. of Personal Financial Advisors at (888) FEE ONLY.
Have your advisor prepare projections about how much money your husband is likely to need in his lifetime and how much he is likely to die with. Your husband or the advisor could also play with the Monte Carlo simulations at https://www.financial engines.com--an Internet site that uses all kinds of scenarios from worst-case to best-case--to get an idea of the probability of his outliving his money.
Once it is established that he truly does have enough, have your advisor detail exactly what will happen, in terms of money lost to taxes and lawyers, if he doesn’t take advantage of the opportunity to reduce his estate before he dies.
If he’s still fearful about losing control of the money and there are grandchildren in the picture, investigate the possibility of establishing accounts for the little ones in a state-run college savings plan. He can give money for the children’s future educations and it will grow tax-deferred, outside of his estate. But he can also get the money back if necessary (although he would have to pay taxes and penalties on the withdrawal).
This feature is pretty unusual in the world of estate planning--typically money given away is gone, period. But college savings plans treat contributions as a completed gift for estate planning purposes while still allowing the contributor to get the money back. You can get more information by calling the National Assn. of State Treasurers at (606) 244-8175 or by visiting its Web site at https://www.collegesavings.org.
Chances are good he’ll leave the money alone once it leaves his white-knuckled grasp. Meanwhile, you can always give gifts from your half of any jointly owned accounts and from any separately owned property you have.
Q: You recently answered a woman whose husband was resisting her efforts to give their children money by suggesting that he had a control problem. In fact, there are excellent philosophical reasons for not giving money to adult children. Just to name one: Making one’s own way in life is more fun, rewarding and fulfilling than just having the way paved. Thus, if parents give kids money, they may well destroy the kids’ initiative and self-reliance, which in my mind is a terrible thing to do. When thinking about estate planning, tax reduction is not the first thing to consider--the most important thing is family success.
A: Yours is an interesting point. I assumed that both parents had agreed on the basic philosophy that they wanted to help their children financially; the husband was, in fact, doling out money to the kids in small amounts but not enough to help them buy a house or start a business, which was the wife’s goal.
I also assumed that adult children would be that--adults, with personalities and money styles pretty well set.
Someone who is chronically in debt probably won’t be helped much by a financial gift; the relief will be temporary and last only until he or she racks up more credit card charges. Someone who handles money well, on the other hand, probably won’t be corrupted into a directionless loser by a cash infusion. Those are broad assumptions, of course, and might not always be true, but I think that for every trust fund delinquent there are many more hard-working people grateful for parental help in getting an education, buying a home or starting a business. What might actually be more destructive is the habit of turning to Mom and Dad for every small financial crisis. I do agree that as adults we have a responsibility to pay for the necessities and to save for the inevitable rainy days on our own.
In previous columns, I discussed how different families have different money philosophies. Some feel nothing short of an obligation to share the wealth with the next generation, while others have your sink-or-swim attitude. Many are somewhere in between, trying to decide when to give, how to give and on what basis (financial need, equal shares, etc.). What’s right for one family might not be right for another. Parents are under no obligation to help their adult children, but many choose to do so, and the results are as varied as the families themselves.
Long term careQ: While my husband and I are working to ensure a comfortable retirement for ourselves, I’m worried about how to help my 82-year-old father enjoy his final years. I’m scared about what will happen if he requires assisted living or, worse yet, nursing-home care. My mother’s lingering death from Alzheimer’s years ago took much of my father’s retirement savings. Should I consider borrowing against my retirement accounts if money is needed for Dad’s care, then hope the sale of his home could reimburse me? Is borrowing against such accounts ever wise? I want to keep my father safe and well-cared for, but I’m trying to find legal, ethical ways to preserve financial security for my husband’s and my later years.
A: You are a good daughter and your father is lucky that you care so much about his well-being. But please think carefully before you put your retirement savings at risk.
Ideally, all of us would have either enough money or long-term care insurance to provide in-home care so that we would never have to go to a nursing home. But many of us will not be in that fortunate position. Your father’s resources already have been depleted and he is probably too old for long-term care insurance to make much sense; the premiums would be prohibitively high at his age.
Many families in your situation decide that their parents’ resources will be used to provide either in-home care or placement in a good nursing home for as long as possible. Once those resources are exhausted, the parent would qualify for Medicaid, the government health program for the poor. (In California, the program is known as Medi-Cal.) The program does not cover in-home care, so your father would need to already be in or be transferred to a facility that accepts Medicaid/Medi-Cal.
If your father does need government help, the state could make a claim against his house, which would probably require that it be sold after his death to reimburse the government for his care.
No one wants to be indigent and in a nursing home. If your father needs such care, however, you can help ensure that he gets quality attention by carefully researching available facilities and then--once your father is admitted--by being a constant and cheerful presence in his life. Elder-care experts will tell you there’s nothing like an attentive family to keep a nursing home on its toes.
A book that can help you is “Beat the Nursing Home Trap: A Consumer’s Guide to Assisted Living & Long-Term Care” by Joseph L. Matthews ($21.95, Nolo.com). In addition to the alternative-care strategies referred to in its title, this book offers great advice about selecting a nursing home. Nolo.com’s Web site (https://www.nolo.com) also offers information about Medicare, Medicaid and long-term care.
You could cash in your retirement savings, rather than use the resources that are available and designed for people in your father’s position. You generally would have to take out about twice as much as you actually need, because taxes and penalties will whittle down the total available to give.
If you did tap your funds, you would risk someday being in exactly the same spot as your father--broke and needing care. You understand how difficult it is to worry about a parent, and you probably wouldn’t want to pass on that particular burden to your own children.
Q: I’m trying to find out more information about annuities that allow you to qualify for Medicaid or Medi-Cal. My tax preparer is no help, and even my insurance agent doesn’t seem to know what I’m talking about. Can you help?
A: Indeedy. Here’s the help: Proceed with caution.
Be particularly suspicious of anyone who touts annuities as a sure-fire way to qualify for government-paid nursing home care. It’s not that easy.
You first should do some soul-searching. Medicaid, known as Medi-Cal in California, is designed to help the truly indigent. Artificially impoverishing yourself to qualify for help means that you are using resources meant for someone else. Some states, including New York and New Jersey, have sharply limited Medicaid planning schemes, and other states may follow suit.
And if you have enough money to pay for a nursing home or to purchase a long-term care policy, why in the world would you want to wind up on the government rolls? You’ll get better care paying your own way.
As financial planner Errold F. Moody so bluntly puts it, people who deliberately try to qualify for indigent help had better be absolutely sure they want “to die in a Medicaid ward with a bunch of other screaming Alzheimer’s patients.”
That may be overstating the case a bit--and apologies to the many hardworking and qualified nursing home employees who work with Medicaid patients--but think long and hard before you volunteer to be poor.
You may be trying to shelter some of your assets should your spouse need to be confined to a nursing home--an understandable goal. Know that Medicaid and Medi-Cal have policies to protect at least some of your assets in this event.
Certain kinds of carefully structured annuities can indeed help you shift your assets so that you or a spouse would qualify for Medi-Cal. But the annuities must pay out at a fixed rate, which means you’d be vulnerable to inflation. Furthermore, the income could be tapped to pay some of the nursing home fees, because Medi-Cal may require you to share some of the costs.
Another pitfall is that in selling assets to buy the annuity, you may have to pay a capital-gains tax.
Meanwhile, the person trying to get you to buy the annuity may well stand to collect a nice, fat commission, making for a pretty hefty deterrent to your being told the full story.
Sometimes annuity sellers will operate free “informational” seminars designed to make them seem like disinterested parties. But if they stand to make money from the advice, they’re far from disinterested.
If you still want to pursue this path, get objective advice, either from an elder-law attorney or from a financial planner who specializes in elder care (preferably one who doesn’t sell annuities).
Visit https://www.latimes.com/finplan for more information about finding a financial planner; call your local bar association or the National Academy of Elder Law Attorneys at (520) 881-4005 for referrals to elder-law attorneys.
Q: I am an elder-law attorney who choked on your suggestion that people do some “soul-searching” before attempting to qualify for Medi-Cal to pay the high costs of nursing home care. Before you pass judgment on people who shift their assets to annuities in order to qualify, consider that in America we discriminate against people based upon the type of illness they suffer.
Someone over 65 who suffers from an acute illness such as coronary artery disease or cancer can get his or her bills paid by Medicare and supplemental health insurance. Those with dementia or another chronic disease are essentially on their own. The cost of long-term care in a nursing home is not covered by Medicare or most insurance. In the 10 years that I have discussed Medi-Cal planning with nearly 5,000 attorneys, CPAs and financial planners, I have yet to see one of them take this “moral high ground” when it is their mom or dad facing near-bankruptcy because of nursing home costs.
A: The situation does seem unfair. But I’m not sure that artificially impoverishing oneself to qualify for Medi-Cal (or Medicaid, as it’s known in the rest of the country) is necessarily the answer.
Medi-Cal and Medicaid are not, to paraphrase the New York Supreme Court that cracked down on some Medicaid planning schemes, a middle-class inheritance-guarantee program. No, our elders should not face bankruptcy in their last years after a lifetime of saving and frugal living just because they have a chronic condition such as Alzheimer’s, Lou Gehrig’s or Parkinson’s. But neither should people who can pay their own way be free to have taxpayers pick up the tab, especially if the only goal is to pass on an inheritance to their kids.
Part of the answer may be more widespread use of long-term care insurance, which can cover the nursing home costs that other insurance doesn’t. Another part would be education, so people understand that Medicaid and Medi-Cal allow them to keep certain assets. As an elder-law attorney, you and your colleagues could do a great service by offering free advice and seminars to such people, who might not otherwise be able to afford an attorney to educate them.
You could also work to change the laws, if you believe them to be unfair. Our legislators have made the decision to cover some kinds of treatment and not others, probably because they believe taxpayers would balk at the cost of paying for everything. If you think those priorities should be changed, contact your legislators.
In the meantime, it is up to us to plan for our futures based on current law. It’s appropriate that we consider the moral dilemmas along with the financial ones. All of us should know our options, but we also have to search our hearts.
Estate planning for couplesQ: My domestic partner and I are in a long-term relationship. Our real estate is held in joint tenancy, as are our investment accounts. Each of us is listed as the beneficiary on the other’s bank savings account, 401(k) and company life insurance. Our individual wills name the other as sole beneficiary. Are we properly protecting the one from excessive taxes and other such problems upon the death or incapacitation of the other?
A: You’ve covered most of your bases. Here are a few more things to consider, and these really apply to all couples:
* Durable powers of attorney, for health care and for finances. These documents will give you the legal right to direct your partner’s medical care and finances in case of incapacitation. You may have heard horror stories of family members’ barring a partner from a companion’s sick room or taking over the finances without consent; durable powers of attorney will make it clear whom you want making decisions for you.
* Disability insurance. This applies to any couple. You are far more likely to become disabled than to die during your working years. Even if the two of you can get by on one income, you both should still look for disability insurance that could replace 60% of your pay. I hate to bring this up, but any relationship can falter, and you don’t want to be both alone and without any income.
* Living trusts. You might consider a living trust, a device that allows your estate to avoid the probate court process after death and that can ease handling some of the other matters that could come up if one of you becomes incapacitated or if the two of you die at the same time.
* Estate tax planning. Because you are not legally married, you don’t have access to one big estate tax break: the marital deduction. The marital deduction allows property to pass tax-free to a spouse after death; estate taxes are postponed until the second spouse dies. Obviously, the break can only be claimed by married couples, and any property not passing to the spouse can be subject to estate taxes.
But another popular method of avoiding estate taxes--bypass trusts--can be used by anyone, and should be considered by people who have substantial estates. (‘Substantial” being anything greater than the current estate tax exemption amount, which for the 1999 tax year is $650,000.) You and your partner could leave your property to the other in a bypass trust rather than outright, with each of you naming “final’ beneficiaries who will inherit the money when you are both dead. This gives the surviving partner some access to the money while avoiding estate tax on a significant portion of the assets. It’s also a way to allow each person to leave his or her part of the estate to different beneficiaries after both partners are dead. Typically, the surviving partner would live off the income, with the principal eventually passing to the final beneficiaries.
If you have enough money that estate taxes are a concern, then use some of it to consult with an estate planning attorney familiar with the needs of unmarried couples. It’s a good investment in your peace of mind.
Q: My husband, 70, and I, 53, have been married six years and have two grown children each from previous marriages. We brought about equal assets into our marriage, and--thanks to a relatively modest lifestyle, prudent investing and the long-running bull market--we now find ourselves amid the ranks of the “semi-affluent” with $1.5 million invested.
My concern: Barring a freak accident or illness, I am likely to outlive my husband by many years and may even outlive one or both of his children. I do not wish to deprive them of an inheritance, yet I also want to be sure that I have a comfortable retirement (and I know the stock market could take away much of what it has given us). The thought of them waiting around for me to die is not pleasant, nor does it seem fair.
Is there a way we could set things up so that if my husband dies first, I could then, if there are sufficient funds, distribute part of the trust to them immediately? If not, is there some other structure that would make more sense for people in our situation?
A: You’ve put your finger on the flaw in many estate plans. Too many people focus only on avoiding estate taxes, not realizing that the trusts they’re setting up can rob them of later flexibility.
Typically, parents set up a bypass trust so that when the first spouse dies a portion of the estate escapes estate taxes; the surviving spouse can live off income from the trust, and the money goes to the children at the surviving parent’s death. But that, as you note, could be a long way off.
The situation is perhaps most acute for much-younger second spouses who conceivably could outlive the stepchildren, depriving them of the inheritance their parent wanted them to have.
Of course, without the trusts, the surviving spouse could remarry a wastrel and blow the inheritance the deceased parent had planned to pass along. With a trust, however, the children’s and the surviving parent’s interests are always at odds. The children, typically, want the money invested for growth; the parent might want the money invested for income. Fights over trusts have sundered many family relationships.
Some surviving spouses deal with this issue by disclaiming all or part of the inheritance. A disclaimer simply means you refuse the money, and it passes to the alternate beneficiaries--the people your husband named to receive your share should you die before him. You’re not allowed to direct where the money goes--the will or trust must specify who gets it if you don’t survive or don’t choose to claim it.
Disclaimers can work instead of or in addition to trusts. But once you give the money away with a disclaimer, it’s gone forever. If you run low on cash in later years, you’re unlikely to persuade the stepkids to return the money. It makes sense to have sound financial and estate planning advice before taking this step; it’s not a do-it-yourself situation.
Call the California Bar Assn. or visit its Web site at https://www.calbar.org to get a list of certified estate specialists. The money you spend setting up a workable, flexible estate plan will pay off in dividends of family harmony and peace of mind.
Retirement accountsQ: If someone dies before taking out all the money from an individual retirement account, who pays the taxes? The person’s estate or the person who inherits the IRA?
A: Both do, although the heir can get a tax break.
The amount in an IRA is included as part of a dead person’s estate for estate tax purposes. This year, the first $675,000 of an estate is exempt from federal estate taxes. (The exemption is scheduled to rise to $1 million by 2006.) Anything more than that exemption amount is subject to tax rates that quickly climb to 55%. The estate pays the bill.
Once the estate taxes are paid and the IRA passes to the heirs, the heirs are entitled to a tax deduction to offset some of the income taxes that come due when money is withdrawn from the account. The deduction is equal to the amount of the marginal estate tax paid on the IRA.
Here’s how it works. Say an IRA owner dies in 2006 with a $2-million estate when the exemption is $1 million. The estate will owe taxes on the remaining $1 million, which includes a $600,000 IRA, at about a 50% rate, for a total estate tax bill of about $500,000.
In the year or over the years the heirs withdraw money from that IRA, they will be able to use a tax deduction of about $300,000--the 50% rate times the $600,000 IRA.
The IRA can be assumed to be entirely in the taxable part of the estate. Another way to think about it is that the deduction equals how much the IRA increases the estate tax bill, compared with what the bill would have been without the IRA.
The deduction for estate taxes on an IRA is taken on Schedule A of an heir’s income tax returns as money is withdrawn from the IRA, but it is not subject to the 2% floor that normally applies to miscellaneous deductions.
The problem is that sometimes nobody tells the heirs that they’re entitled to this deduction, which means the heirs pay more tax than necessary. However, you don’t get the deduction if no estate tax is paid on the IRA in the first place. Uncle Sam wants his due, after all.
Settling an estateQ: My wife and I established a living trust at a cost of about $1,500. We did not mind paying this for a professionally prepared trust. However, now I find that upon my wife’s death, although I will not have probate costs, there will be a charge of 1.5% to file her federal estate tax return and “finalize” her legal obligations. On a $1 million estate, the cost would be $15,000.
Is this an exorbitant charge or is it par for the course? It seems a shame to save on probate yet have to pay so much just to file the federal estate tax return.
A: An informal poll of my estate-planning sources reveals that 1% to 2% is about right for settling an estate of that size. If you think that’s exorbitant, try tackling a tax return for a big, complicated estate sometime. It’ll make your head spin.
And because every estate tax return is actually reviewed by an IRS employee--in contrast to personal tax returns, which stand less than a 1 in 100 chance of being audited--you have a much-better-than-average shot at winning a cozy chat with the feds should you make a mistake.
Still, that doesn’t prevent you from shopping around. You have no obligation to use the same law firm that prepared your trust, although it can be more convenient, because it’s already familiar with your estate.
You may not realize how much you’re saving in probate costs by having a living trust. Probate in California typically costs between 3% to 4% of the gross estate, or $30,000 to $40,000 on a $1-million estate.
Notice that the fee is figured on the gross estate--in other words, on the value of the property rather than on the dead person’s net worth. So if you have a $1-million house and a $900,000 mortgage, the house adds $1 million to your gross estate.
You also might not realize that your living trust by itself does not save on estate taxes--and that could be an issue with an estate that big. Many people confuse probate--the court process that living trusts are designed to avoid--with estate taxes, which are taxes the federal government levies on estates worth more than a certain size, currently $650,000.
To avoid or reduce estate taxes, your living trust needs to include language to set up other trusts upon your deaths. If you’re still unclear on this issue, Denis Clifford’s “Plan Your Estate” ($24.95, Nolo.com) is an excellent primer on dealing with the financial side of death.
Q: You recently wrote about the cost of filing estate tax forms being 1% to 2% of the value of the estate when you use a professional. My question is: Why doesn’t the individual file the forms himself? With today’s computer programs and the availability of help on the Internet, plus what the IRS offers free, I can’t imagine why any ordinary person with a modicum of intelligence would pay $15,000 to have this done. My husband and I took care of the estate forms when our parents died, all without problem. We also avoided probate by using quitclaims to pass huge amounts of land and a business from my parents’ estates before they died.
A: Actually, the 1% to 2% figure was the cost for settling a large estate, not just for preparing the final income and estate tax returns.
As to why you shouldn’t do it yourself: Some people do, especially if the estate is simple and no estate or gift taxes are involved.
But the fact you thought the process was easy, particularly with large estates, suggests that you might have missed a few things.
When your parents signed those quitclaims, for example, did they file gift-tax returns with the Internal Revenue Service? Those are required when anyone makes a gift worth more than $10,000 per recipient--and those “huge amounts of land and a business” would certainly qualify.
Was the amount of those gifts then subtracted from your parents’ lifetime estate tax exemption? If the value of the gifts and the residual estate was more than the exemption at the time of your parents’ death, was the proper estate tax paid to the IRS?
And how did you value the land and the business? Did you hire an independent appraiser? Are you comfortable that the appraiser’s valuation will stand up under scrutiny? Family businesses tend to be tricky to appraise, and the IRS is aware that there is a strong incentive to undervalue them--which gives the IRS a strong incentive to audit.
Then again, could it be that you and your parents ignored the law, didn’t file the proper returns and failed to pay the tax due, and that the IRS didn’t catch it? It’s certainly possible to fly under the IRS’ radar, particularly now that the agency is spending much of its time rehabilitating its image rather than cracking down on scofflaws.
But as executors of the estate, you can be held personally liable for any taxes that should have been paid but weren’t. That should be incentive enough to do it right--and to have a professional at least review your work before shipping it off to the IRS.
Your family also gave up some valuable tax breaks by transferring the assets before your parents’ deaths rather than after. Instead of getting a new basis for tax purposes when your parents died--which would have “stepped up” the value of the property to the then-current fair market value--whoever got the land and businesses also got your parents’ much lower basis.
If you don’t understand how this works, read any tax or estate planning book. You’ll be kicking yourself for blowing it.
As for relying on free IRS advice, bless your heart. Although its Web site is great and its telephone help line is getting better, I’m not sure I would rely on the IRS to help me through a 1040EZ, let alone an estate tax form.
Q: Three years ago my mother wrote a rough draft of her will that she wanted my aunt to have notarized. Unfortunately Mom died before my aunt did so, but the rough draft still exists and is in my mother’s handwriting.
It is a small estate that contained a house and two cars. My brother and sister already own homes and I was the only one living in an apartment, so she left the house to me. My brother had no problem with turning over his one-third ownership of the house, but my sister is forcing me to buy her out. This doesn’t seem fair, seeing that my mom did have a will, it just was not notarized. Is there any way I can stop my sister from making a profit off my mother’s death?
A: Handwritten wills are legal in some states, including California. They don’t have to be notarized, but they do have to be signed and usually dated as well. Assuming your mother signed and dated the will and that no other wills are in existence, the normal answer would be that you would only have to submit the will in probate court to have your mother’s wishes carried out. (Probate is the court process whereby the deceased person’s debts are paid and his or her property distributed.)
It’s not clear from your letter, however, how long ago your mother died or if her estate has already gone through probate. If someone dies intestate--that is, without a will--the state will determine how that person’s property is to be divided. Typically, someone in your situation would expect the court to give the house to you and your siblings in equal shares, assuming your mother was not married at the time of her death. If the estate has already been probated, getting the case reopened again could be quite difficult, if not impossible.
You might think your sister is being unfair, but cool the rhetoric about her trying to “make a profit” from your mother’s death. She might very well think your mother was unfair in leaving the house to you. Distributing an estate in unequal shares is almost guaranteed to cause bad feelings among heirs, which is one of the reasons the state requires a probated will or a living trust to authorize such arrangements. In your sister’s eyes, it may be that the state’s solution is a more just deal than her own mother would have given her.
Leaving a Legacy
Q: I’ve done considerable research on living trusts in the last few months, but every example I’ve found contemplates the trust ending with a distribution to children or grandchildren. Is it possible to structure a trust that continues indefinitely, with periodic changes of trustees and beneficiaries? It seems to me this would be a good way to preserve and grow an estate for future generations, who could tap it for emergencies (with the trustee’s consent) and allow continued growth in years when trust income isn’t needed.
A: A few states, including Delaware and Alaska, have made such perpetual trusts possible. But you have to ask yourself why you’d want to do this. Consider all the costs and hassles involved. Even the most carefully selected trustees can get into fights with beneficiaries that drain the trust. Imagine a few generations from now when you’d have little or no control over who the trustee turns out to be. Which leads to another issue: You won’t know who’s getting the money years down the road, because you’ll be dead and many of your future beneficiaries won’t have been born until after you’re gone. Although they will be your descendants, they will also be the descendants of a lot of other people as well. Most parents who want to leave inheritances would prefer that the money go to people they know. Then there’s the question of how you would define ‘emergencies.’ Would one family’s refusal to set aside money for a rainy day give them priority over another family’s inability to pay for a child’s college education? If you make the definition too narrow, you could be cutting out people you would want to benefit. If you make the definition too broad, the money would soon be spread so thin it would be of little use. A perpetual trust might sound like a grand idea, but most likely it would be an ego trip for you, a limited benefit for your descendants and a huge cash cow for trust companies and lawyers. Given the costs involved, you probably shouldn’t even think of it if your estate is worth less than $5 million. If you’re set on creating one, contact an experienced estate-planning attorney. This, like most estate planning, is no place for do-it-yourselfers.