Some parents are just set in their ways, and it often seems like the older they get, the more cantankerous they get. In one family, a father has told his four sons that they are going to receive an inheritance, and even told them exactly how much they can expect—$250,000 each. They know that their father has worked and saved throughout his entire life to amass that money for their benefit, and they are very appreciative. However, he doesn’t want anyone to think he’s rich, so he refuses to have an estate plan created.
With their mom already passed away, how can the four sons protect themselves from unnecessary taxes?
nj.com’s recent article asks simply, “My dad refuses to create an estate plan. Can I save my inheritance from taxes?” The article suggests that maybe the father in this scenario will change his mind, when he understands that estate planning will actually protect his privacy, although he’ll have to share his information with an attorney.
The reason is probate, the court-supervised legal process that gives the personal representative—typically the surviving spouse or another close family member—the authority to collect the deceased person's assets, pay debts, pay taxes and then transfer assets to the people who inherit them.
The process can be more complicated, if the deceased person didn't have a valid will but is otherwise similar. The probate process is part of the public record, and so is the father’s will. However, a person would have to proactively search for the records.
In light of this, the best way to keep financial information private is to make certain that the assets are transferred outside of the probate process. One way to transfer assets outside of the probate process is by using transfer-on-death accounts. A senior completes forms at his bank or brokerage firm, so that his assets will automatically (and privately) transfer to the children when he passes away. Likewise, life insurance, IRAs, and 401(k)s will also pass outside of probate, provided the beneficiary designations are not payable to his estate or left incomplete. This is not a perfect solution to the problem however. If the beneficiary named predeceases you, then that assets may still have to be probated. Thus, transfer-on-death designations are better than doing nothing, but there are potentially problematic situations that can arise.
Joint tenancy with the right of survivorship accounts are also useful to avoid probate. However, they are typically only used between spouses, which means that a probate could still occur at the passing of the surviving spouse.
As far as estate taxes, any inheritance left to a spouse can qualify as exempt from estate tax if left to the surviving spouse in the right way. However, an inheritance left to a non-spouse could be subject to estate tax, when it exceeds a threshold called the life-time federal estate tax exemption. The current lifetime federal estate tax exemption amount is now $11.4 million per person.
A living trust is one of the best options to keep assets out of probate, especially if the parent owns any real estate. Assets owned by or titled in the name of a trust avoid probate proceedings at the death of the individuals who created the trust. A well drafted trust can also avoid many of the "what if" scenarios that aren't able to be addressed by a will or transfer on death provisions, such as: Who is in charge of my assets if I am alive but incapacitated? What happens to my assets if my spouse and I pass away at the same time? How do I protect my beneficiaries from creditors, predators, or divorcing spouses? What is the best way to utilize both spouses lifetime federal estate tax exemption?
The four sons would do well to speak with an estate planning attorney to figure out how to explain to their father how his refusal to have an estate plan might impact them. At the end of the day, that’s all anyone can do. If you find your loved ones in this situation, contact the Soto Law Firm today to discuss possible solutions that can help your family.
Reference: nj.com (February 28, 2019) “My dad refuses to create an estate plan. Can I save my inheritance from taxes?”