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 an executor—typically the surviving spouse or another close family member—the authority to collect the deceased person's assets, pay debts and 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 very simple 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.
Joint tenancy with the right of survivorship accounts are also useful to avoid probate. However, they are typically only used between spouses. A living trust is another option to keep assets out of probate, especially if the parent owns any real estate.
As far as estate taxes, any inheritance left to a spouse is exempt from estate tax. However, an inheritance left to a non-spouse could be subject to estate tax, when it exceeds a threshold called an "exemption.” The federal exemption is now $11.4 million.
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.
Reference: nj.com (February 28, 2019) “My dad refuses to create an estate plan. Can I save my inheritance from taxes?”