Short-Cuts to Estate Planning can Lead to Costly Consequences

It seems like a simple way for the children to manage mom’s finances: add the grown children as owners to a bank account, brokerage account or make them joint owners of the home. However, these short-cut methods create all kinds of problems for the parent’s estate and the children themselves, says the article entitled “Estate planning: When you take the lazy way out, someone will pay the price” from Florida Today.

By adding an adult child as owner to the account, the child is being given 50% ownership. The same is true if the child is added to the title for the home as joint owner. If there is more than $30,000 in the account or if the asset is valued at more than $30,000, then the mother needs to file a gift tax return—even if no gift tax is due. If the gift tax return is not filed in a timely manner, there might be a gift tax due in the future.

There is also a carryover basis in the account or property when the adult child is added as an owner. If it’s a bank account, the primary issue is the gift tax return. However, if the asset is a brokerage account or the parent’s primary residence, then the child steps into the parent’s shoes for 50% of the amount they bought the property for originally.

Here is an example: let’s say a parent is in her 80s and you are seeing that she is starting to slow down. You decide to take an easy route and have her add you to her bank account, brokerage account and the deed (or title) to the family home. If she becomes incapacitated or dies, you’ll own everything and you can make all the necessary decisions, including selling the house and using the funds for funeral expenses. It sounds easy and inexpensive, doesn’t it? It may be easy, but it’s not inexpensive.

Sadly, your mom dies. You need some cash to pay her final medical bills, cover the house expenses and maybe a few of your own bills. You sell some stock. After all, you own the account. It’s then time to file a tax return for the year when you sold the stock. When reporting the stock sale, your basis in the stock is 50% step-up in value based on the value of the stock the day that your mom died, plus 50% of what she originally paid for the stock.

If your mom bought the stock for $100 twenty years ago, and the stock is now worth $10,500, when you were added to the account, you now step into her shoes for 50% of the stock—$50. You sold the stock after she died, so your basis in that stock is now $5,050—that’s $5,000 value of stock when she died plus $50: 50% of the original purchase. Your taxable gain is $5,450.

How do you avoid this? If the ownership of the brokerage account remained solely with your mother, but you were a Payable on Death (POD) or Transfer on Death (TOD) beneficiary, you would not have access to the account if your mom became incapacitated and had appointed you as her “attorney in fact” on her general durable power of attorney. What would be the result? You would get a step-up in basis on the asset after she died. The inherited stock would have a basis of $10,000 and the taxable gain would be $500, not $5,450.

A better alternative—talk with an estate planning attorney to create a will, a revocable trust, a general durable power of attorney and the other legal documents used to transfer assets and minimize taxes. The estate planning attorney will be able to create a way for you to get access or transfer the property without negative tax consequences.

Reference: Florida Today (May 20, 2021) , “Estate planning: When you take the lazy way out, someone will pay the price”

Despite Pandemic, Many Still Don’t Have an Estate Plan

It’s true—many people still believe that they don’t have enough assets so they don’t need a will, or that their money will automatically go to a next of kin. Both of these beliefs are wrong. While the title of this CNBC article is “More people are creating wills amid the pandemic,” the story’s focus is on the fact that most Americans don’t have a will. If you belong to this group, here’s what happens when you die.

The state you live in has laws about who will receive your assets if you die without a will, known as intestacy. Let’s say you live in New York. Your surviving spouse and children will receive your assets. However, in Texas, your assets will be entered into the state’s intestacy probate process, and your relatives will divide up your assets. Want to be in charge of who inherits your property? Have a will created with an experienced estate attorney.

Young adults think they don’t need a will, but Covid-19 has taken the lives of many healthy, young people. Every adult over age 18 needs a will. If you don’t have one, your loved ones—even if it’s your parents—will inherit a legal mess that will take time and money to fix.

If you have children and no will, there’s no way to be sure who will raise your children. The court will decide. Choose your guardians, name them in your will and be sure to name additional choices just in case the first guardian can’t or won’t serve. You should also appoint someone to be in charge of your children’s money.

What if you had a will created 10 or twenty years ago? That’s another big mistake. Your life changes, the law changes, and so do relationships. Life insurance policies, retirement plans, and transfer-on-death instruments are all legally binding contracts. The last will you made will be used, and if you haven’t updated your will or other documents, then the old decisions will stand. Remember that contracts supersede wills, so no matter how much you don’t want your ex to receive your life insurance proceeds, failing to change that designation won’t help your second spouse. You should review and update all documents.

Doing it yourself is risky. You won’t know if your will is valid and enforceable, if you do it from an online template. Your heirs will have to fix things, which can be expensive. The cost of an estate plan depends on the complexity of your situation. You may only need a will, power of attorney and advance directive. You may also need trusts to pass property along with minimal taxes. An estate planning attorney will be able to give you an idea of how much your estate plan will cost.

Talking about death and planning for it is a difficult topic for everyone, but a well-planned estate plan is one of the most thoughtful gifts you can give to your loved ones.

Reference: CNBC (Oct. 5, 2020) “More people are creating wills amid the pandemic”