King & Wood, P.A.

When Should Children Receive an Inheritance?

“Is it better to help your children when you’re still alive? Or wait until after you die?”

Should an inheritance remain an inheritance, given to children only after their parents die, or should parents use some of the money to help their kids out while they are still living? That’s a question that many families grapple with, reports a recent article “When to Give Inheritance Money to Your Kids,” from The Wall Street Journal.

Not every family can afford to give their children an advance on their inheritance, but for those who can, there are some things to consider:

Some financial advisors believe that “gifting with warm hands” is a better way to go. Parents can enjoy seeing their children and grandchildren benefit from having the help, based on when it is needed. Decoupling an inheritance from parental death is a happier scenario than the alternative.

Others believe that current financial needs, taxes and the tax situations of the parents and children ought to be the deciding factor. First, is there enough money for the parents to live comfortably in retirement? That includes being prepared for the cost of an unexpected health crisis that might lead them to need short- and long-term care. Follow that by understanding the tax situation of both parents and heirs. Once those answers are fully formed, then a discussion about gifting can move forward.

Another school of thought is to stop saving every penny and enjoy life to its fullest right here, right now. Some people are more concerned with maxing out their 401(k) plans than enjoying their lives. A healthy balance between protecting assets for later years, creating wealth for the next generation and having some fun too is the goal for many families.

Regardless of how you see your situation, one thing is sure: if you have any concerns about how your children will handle an inheritance, make a gift while you are living. You’ll get to see how they handle it, responsibility or recklessly. This may inform your planning for the future, including the use of spendthrift trusts.

The pandemic has forced many people to confront their own mortality and consider how they really want to spend the rest of their lives, as well as their assets. Many parents are preparing to make changes in their estate and gifting plans to accommodate needs that have arisen as a result of COVID’s economic impact.

Talk with your children about finances—yours and theirs. Discuss their needs, especially if they have been unemployed for an extended period of time. If they need money for something critical, like paying for health insurance or catching up on student loans, the gift should be made with a clear understanding of its intended purpose.

Your estate planning attorney can help create a plan that works while you are living and after you have passed. Trusts may be a strategic plan for sharing assets while you are alive, with some tax advantages.

Reference: The Wall Street Journal (April 30, 2021) “When to Give Inheritance Money to Your Kids”

Do I Have to Pay Deceased Loved One’s Taxes?

“When someone passes away, their tax headaches don’t die with them. In fact, those obligations can further complicate the lives of survivors: Federal estate taxes may be due and state inheritance taxes could also come into play.”

Sooner or later, someone has to resolve the tax liabilities when a loved one dies. It is usually a family member who faces this task. For one woman, the unexpected passing of her father in early 2018 left her the task of filing his 2017 return and the family’s estate planning attorney filed the 2018 return through the father’s estate. The family is still waiting for the 2017 tax refund from the IRS, and needs to resolve a stimulus check for $1,200 her family received last spring that had to be sent back.

Many families are facing similar situations, as reported in this recent article “Death and taxes: Americans grapple with filing the final tax return for deceased relatives in a pandemic year” from USA Today. Survivors are anxious about complex tax issues at the same time they are in mourning for a loved one.

The final tax return uses IRS Form 1040, the same one that would have been used if the taxpayer were living. The major difference: the word “deceased” is written after the taxpayer’s name.

If the taxpayer was married, the surviving spouse may file a joint return for the year of death. For two years after the taxpayer’s death, the surviving spouse may file as a qualifying widow or widower, which lets them continue to use the same tax brackets that apply to married-filing-jointly returns.

The larger the estate and income for a decedent, the more complicated taxes after death can become. Estate planning attorneys recommend naming an executor in the will and tasking them with taking care of final taxes.

The estate tax is paid on assets owned at the time of death. As of this writing, estates valued at more than $11.7 million (or $23.4 million per married couple), pay a 40% federal tax, in addition to state estate or inheritance taxes, if there are any. It is generally expected that the coming months will see a large reduction in the federal estate tax exemption.

The deadline to file a final return is the tax filing deadline of the year following the taxpayer’s death. The executor or administrator is usually the person who signs the tax return, although a surviving spouse signs the joint return. If there is no executor, whoever is responsible for filing the return signs it and should note that they are signing on behalf of the decedent. For a joint return, the spouse signs the return and writes “filing as surviving spouse” in the space for the other spouse’s signature.

There’s one more step if a return is due. If the deceased is owed money, the IRS Form 1310 should be used. That’s the Statement of a Person Claiming Refund Due a Deceased Taxpayer. The IRS says that surviving spouses signing a joint return don’t have to file this form, but tax experts think it’s a good idea to try to proactively prevent any delays.

If the decedent owes taxes, the tax bill is to be settled by the estate’s executor. If there are insufficient funds to pay the federal income and estate taxes, relatives are not responsible for the remaining balance.

Note that the executor may be held liable if the assets are distributed before paying the taxes, or if the debts of the estate are paid before taxes are paid. The same is true if the executor is aware of the insufficient funds and inability to pay the taxes but spends assets anyway.

Talk with an estate planning attorney about the taxes that will need to be paid from an estate. You don’t want to leave a legacy of tax pain for the family.

Reference: USA Today (April 22, 2021) “Death and taxes: Americans grapple with filing the final tax return for deceased relatives in a pandemic year”

Elder Financial Abuse on the Rise during Pandemic

“The pandemic is isolating many elderly Americans—as family members distance themselves, in an effort to keep everyone safe.”

The same isolation that is keeping seniors safe during the pandemic is also making them easier targets for scammers, reports WKYC in a news report “Northeast Ohio family warns of elder financial exploitation during the pandemic.” While this report concerns a family in Ohio, seniors and families across the country are facing the same challenges.

Two brothers enjoyed spending their time together throughout their lives. However, for the last three years, one of them, Michael Pekar, has been trying to undo a neighbor’s theft of his brother Ronnie’s estate. A few months before Ronnie died from cancer, a neighbor got involved with his finances, gained Power of Attorney and began stealing Ronnie’s life savings.

The money, more than a million dollars, had been saved for the sons by their mother. Pekar went to see an attorney, who helped uncover a sum of about $1.6 million that had been transferred from Ronnie into other accounts. A civil complaint was filed against the woman and $700,000 was eventually recovered, but nearly $1 million will never be recovered.

How can you prevent this from happening to your loved ones, especially those who are isolated during the COVID-19 pandemic?

An elderly person who is isolated is vulnerable. Long stretches of time without family contact make them eager for human connection. If someone new suddenly inserts themselves into your loved one’s life, consider it a red flag. Are new people taking over tasks of bill paying, or driving them to a bank, lawyer, or financial professional’s office? It might start out as a genuine offer of help but may not end that way.

The possible financial abuser does not have to be a stranger. In most cases, family members, like nieces, nephews or other relatives, prey on the isolated elderly person. The red flag is a sudden interest that was never there before.

Changes to legal or financial documents are a warning sign, especially if those documents have gone missing. Unexpected trips to attorneys you don’t know or switching financial advisors without discussing changes with children are another sign that something is happening. So are changes to email addresses and phone numbers. If your elderly aunt who calls every Thursday at 3 pm stops calling, or you can’t reach her, someone may be controlling her communications.

According to the CDC, about one in ten adults over age 60 are abused, neglected, or financially exploited.

Be sure to check in more frequently on elderly family members during the pandemic because increased isolation can lead them to rely on others, making them vulnerable to abuse.

Reference: WKYC (Nov. 19, 2020) “Northeast Ohio family warns of elder financial exploitation during the pandemic.”

Still Procrastinating about Your Estate Plan?

“Without an estate plan in place, clients will be reliant on state laws and probate courts to appoint individuals who will be responsible for financial affairs and health-care decisions, in the case of illness and ultimately the transfer of assets upon death.”

The continuing escalation of the COVID-19 pandemic has forced many people to finalize estate planning documents, even as their estate planning attorneys are working from home. People are coming to terms with the stark reality: they could be struck by the disease and need to have a plan in place, reports the article “Estate Planning In The Age Of Covid” from Financial Advisor.

Everyone should review their estate planning documents, including their wills, trusts and gifting techniques, to ensure that they are in line with their goals and the numerous tax law changes that have occurred in the last six months. The review of these estate planning documents is especially critical during these unpredictable times.

Here are the documents that may need to be updated:

Power of Attorney—This legal document gives a person you name the authority to handle financial affairs and protect property by acting on your behalf, if you become incapacitated.  Some of the typical tasks of your “agent” are paying bills, writing checks, selling or purchasing assets or signing tax returns.

You may name any competent adult you like. However, be certain to choose someone trusted who will put your interests above theirs. This person should possess common sense, ethics and financial acumen. Someone who lives near you, will be able to handle matters more expeditiously. Someone who is far away, may not be as effective. You should also name a back-up or secondary agent.

With no power of attorney, no one will be authorized to act on your behalf and your family will need to have the court appoint a conservator, which will take time and money.

Health-Care Proxy—This legal document gives an agent authority to make health-care decisions on your behalf, if you are unable to do so. Without one, the family of anyone over the age of 18 will need to go to court and have a guardian appointed.

Last Will and Testament—Your last will is the legal document that gives directions to how you want your property to be distributed after you die. It is used to appoint an executor to oversee the distribution of your assets. For parents of minor children, this is the document used to name a guardian to raise your children. If you don’t have a last will, the court will choose who will raise your child, who will distribute your assets and who will oversee your estate. It is much better to handle this in advance, so you are in control of these important decisions.

Living Trust—A revocable trust is a legal contract that creates an entity to hold title to your assets. As the grantor or creator of the trust, you can change it at any time. You can also set it to outlive you. If you become incapacitated, a successor trustee then steps in and manages your affairs without any court intervention. A trust also gives you privacy, since it avoids the probate process.

There are many estate planning tools that may be used to pass wealth to the next generation, minimize taxe, and ensure that your legacy continues, even during these unprecedented times.

Reference: Financial Advisor (June 16, 2020) “Estate Planning In The Age Of Covid”