Author Topic: Most Efficient Way to Transfer Wealth after Death to Spouse/Children?  (Read 1443 times)

amodoko

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I apologize if this isn't the best place to post this topic, but I thought since a large amount of my concerns were regarding transferring finances/assets in a more tax efficient manner to loved ones after death, that this may be the best place to post this question. 

(The TLDR version is that I need advice on how to make sure my Dad's finances are transferred to my Mom in the most safe and efficient manner in case he passes away since I will be taking over the finances for my Mom since my Mom doesn't know anything about money and is depending on me to handle it for her.  My specific questions are at the very bottom of this post)

My Dad is getting older now, and I realize now that he isn't the best at planning things out properly nor has he ever been.  He just hates planning.  Luckily he is still in good health and I hope he can stay that way, but I thought this would be a good time to work with him and his finances to plan in advance if his health ever deteriorates.  My Mom doesn't know anything about money so I am trying to plan in advance since I will have to take care of all her bills, taxes, basically all of her finances if something were to happen to my Dad. She doesn't even pay her credit card bills, my Dad does that for her.  So I really need to learn about this stuff so I can handle all her bills/finances for her.  The main thing I want to make sure of is that my Mom is taken care of financially, and luckily my Dad has enough money for that.  He has most of his money tied up in mutual funds with Fidelity.  To my knowledge he has a few retirement accounts, a few checking accounts, a few vehicles, I believe he has one safety deposit box, and a couple of properties in his name. 

I'm no expert in money, so I thought I could get some help here.  I have a few questions if you have the time:

1) Is there a book, post, website, or other resources on this subject that you can recommend so I can prepare in advance to handle the finances for my Mom?  Specifically on what one should do to prepare to transfer their assets upon death in the most tax-efficient and overall most efficient manner to their spouse?

2) Any suggestions on what I should do to make sure that my Mom doesn't have any issues with the transfer of finances/assets as well as me having to handle all of her bills/taxes/etc?

3) Any suggestions on what I should do to plan for the transferring of their assets between me and my sibling in case both of my parents pass away?

It's an uncomfortable subject for me to kind of have to seek information out for, but I know it will be so stressful dealing with all of this stuff last minute so I'd rather just prepare for it.  Thanks for any advice in advance



reeshau

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Part of your question is easy:  if your parents have less than $22 million, then taxes won't be an issue--if you do it right.  But a lot of your questions seem to be about the process, as much as the outcome.  A few probing questions, before advice can be given:

You say your Dad doesn't like planning.  Does he have a will?  Does your Mom?  A lot of these questions can and should be answered when sitting down with an estate attorney.

You say your Mom doesn't know anything about money.  But does she want to?  One of the best things for her is some basic education; helping her with investment choices is fine, but if she hands her credit card over the phone or signs up with the man who gave her the invitation to a free lunch, she will have problems you can't avoid for her.  Educating her is one of the best things you can do.  (OK, so some advice)

In the logistics of transferring, how they have their accounts set up (in whose name, and what form) can matter.  If their primary bill-paying, income-receiving account is in his name only, or not set up as joint tenants with rights of survivorship, then access to the account could be frozen for a time, adding a difficulty to the time immediately after his passing.  (again, something to talk with the estate attorney about: highly variable among states)

There are a number of estate attorneys on the board, so I am sure some of them will weigh in.

secondcor521

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I am not a lawyer.  Inheritance laws exist at both the federal and state levels.  You should seek actual competent advice from an attorney familiar with estate law in your jurisdiction.  The following are general comments.

1a.  I like the Nolo stuff.  Easy to read, reasonably comprehensive.  http://www.nolo.com.

1b.  Generally speaking, for each asset, your Dad could:

i.  Name your Mom as beneficiary or as TOD (transfer on death),
ii.  Change the ownership from him to him and your Mom as joint tenants with rights of survivorship, or
iii.  Have a simple will written up that transfers all of his assets to your Mom.

With the first two options, all that needs to be done is to provide a death certificate.  With the third option, the assets will have to pass through probate, which takes time, may cost some money, and may be some hassle - it largely depends on the state your Dad lives in.

Taxes are complicated, but in general there are zero tax consequences when one spouse inherits from the other.

2.  It sounds like with both of these things you will want a durable general power of attorney.  This is a legal document which allows you to take care of your Mom's affairs.  The "durable" word means that it remains in effect even if your Mom becomes mentally incompetent.

3.  If you do nothing, your parents' assets will pass according to their state's intestacy laws.  Basically, these laws provide a default will for people who don't write their own.  If they don't like what their state's intestacy laws say, or if they want to avoid relying on them to stay the way they currently are, then your parents each need to write a will saying how they want their assets distributed when they die.

As the above poster notes, there is a rather high federal estate tax exemption currently.  Each state has varying estate and inheritance taxes and related exemption amounts.  You can research your state's laws and taxes.

It might also be a good idea to get a durable power of attorney for your Dad.  When getting one, the person needs to be mentally competent; once they are not then you have to get a conservatorship, which is the same thing but costs a lot more money and takes more time and you have to basically have a hearing and get the court to agree to give it to you.

It would also be smart for you to sit down with your Dad and as tactfully as you can, ask him to at least make a basic list of his assets.  Even if it is just "Checking account at Bank A, piece of property in county X, some mutual funds at Fidelity", you'll at least have a good place to start, rather than sorting through his mail or papers to try to figure it out later.

And all of this stuff applies to your Mom too.  We all expected my Dad to pass away first and my Mom to live for 30 years after that.  My Mom died three years ago and my Dad is still going strong.  What I mean to say is don't make assumptions about who is going to die first and who is going to have worse health problems; you might be surprised.

twe

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Echo @secondcor521. Having been through this with my grandparents, having each spouse as beneficiary or TOD for every account makes it so much easier. I would also go ahead and list secondary beneficiaries for everything, per what they say in the will. TOD allows things to skip probate and go straight to the future beneficiary.

Also, it is hard to figure out where all the accounts are after death. Ask where they all are now (I had to go through about 40,000 pieces of paper to find deeds, account information, POA's, safe deposit box info, etc). Not everyone is like this, but most people at some point in the aging process lose the ability to track and understand what is going on with their affairs. Once it's too late, then it's really too late.

I did have a durable springing general power of attorney for them which was the only saving grace. It still took about 18 months to get everything transferred over to my grandmother. I also recommend a health care POA.

Then, when the time comes, automate all payments and consolidate everything into one brokerage and one bank. Since you say your mom has never made financial decisions, don't try and make her. That will, most likely, not work.

MustacheAndaHalf

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You should look into keeping their assets in a "living trust".
https://store.nolo.com/products/online-living-trust-nntrus.html

Your parents might be incapacitated by illness, and unable to make decisions or handle finances.  A trust can specify when you take control of their assets, acting on their behalf.  You could pay their bills using assets in the trust.

A trust is created while parents are alive, and involves their participation to set it up.  So the assets inside it don't need to go through probate (which costs ~4%?), and can be directly transferred to you and your siblings.

A will must involve probate, which will cause annoying delays and costs as the will is processed by the courts.  Which will is the most recent?  With a trust, there's no debate about that - your parents must sign for assets to be moved under the trust's name.  So I'd avoid using a will, and go with a trust.  They are common and cheap to set up - especially compared to the costs of probate.

GizmoTX

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A trust is overkill unless the estate is large, i.e. multiple millions. A trust should be accompanied by a will that basically says the trust exists and that all assets not in the trust are to be 'poured into' or considered part of the trust. Wills, trusts, and POAs should be relatively recent, i.e. updated within 5 years, & each parent's documents should mirror the other's. As others have said, you don't know who will die first, & they may die together.

You need to check if your state is probate friendly -- not all are onerous or expensive. 

Do not attempt to get around probate or avoid a will by getting a beneficiary on deeds or bank accounts -- you lose the step up in basis upon death.

Catbert

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You've gotten good advice above.  I agree with GizmoTX that a trust is unnecessary in such a simple situation (i.e.,estate goes to spouse and then children and no wish to control money beyond the grave).

I've been through this twice (father and first spouse) and agree that having joint/TOD/beneficiaries is the most important thing.  If possible try to get  you parents to consolidate accounts to as few institutions as reasonable.  My father was chasing CD yield and had CDs in at least 6 banks.  While he had good records, it was still more work to jump through (slightly different) hoops multiple places.  If things are spread out it's also easier to forget to making one joint or with proper TOD/beneficiaries.    I believe some states allow a TOD on real estate and others don't so check that out

Babybalrog

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I only skimmed the replies, but I will strongly urge you to act quickly. Some parts of the tax code can only be handled yearly, like the ~18k annual gift limit. This lets you whittle down the estate, and shift future earnings to kids, and grand kids. There are also some 5 year look back rules you should brush up on. Take action sooner so they don't get caught up in it.

GreenEggs

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I only skimmed the replies, but I will strongly urge you to act quickly. Some parts of the tax code can only be handled yearly, like the ~18k annual gift limit. This lets you whittle down the estate, and shift future earnings to kids, and grand kids. There are also some 5 year look back rules you should brush up on. Take action sooner so they don't get caught up in it.


The annual gift limit is currently $15K.

One

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For tax purposes you might be better off leaving the accounts in dads name only and making mom the primary beneficiary and you and your siblings the secondary beneficiaries. I believe mom would get a stepped up tax basis on the full amount invested vs only one half the stepped up basis if the accounts were in both their names?  You could have your dad give you limited account authorization which would allow you to help him pay bills if he becomes incapacitated. I think pay on death beneficiaries supersede a will?

One

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I only skimmed the replies, but I will strongly urge you to act quickly. Some parts of the tax code can only be handled yearly, like the ~18k annual gift limit. This lets you whittle down the estate, and shift future earnings to kids, and grand kids. There are also some 5 year look back rules you should brush up on. Take action sooner so they don't get caught up in it.
I think you can give a gift up to 11 million lifetime so unless you're above that amount the annual thing doesn't really matter? I think you just have to fill out a form.

https://smartasset.com/retirement/lifetime-gift-tax-exemption
« Last Edit: May 13, 2019, 09:22:10 PM by One »

amodoko

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Just wanted to thank you all for your replies.  This was really what I was looking for since I didn't even know where to start and you all have given me a solid amount quality information.  Looks like I have a bit of work to sort through before I fully understand the whole process.  I will look at the Nolo site mentioned, and maybe I'll try to find some additional books on the subject.  If anyone has the name of a specific book on this subject, feel free to let me know and I'll purchase it ( I found a NOLO book titled "The Executors Guide:  Settling a Loved One's Estate or Trust" that may be what I need).  Correct me if I'm wrong, but here is what it sounds like I should do once I sit down and talk to my parents about all of this:

1) I should make sure my Mom and Dad are each beneficiaries on all of their accounts
2) That they each have TODs on every account
3) That my sibling and I are secondary beneficiaries on each account
4) That both my Mom and Dad have written wills ( I don't think my Mom has much to her name though)
5) I should potentially seek durable power of attorney for my Mom since I'll have to take over her finances
6) Go over all of their accounts, safety deposit boxes, and other assets to simply know where they are and that they exist, and try to consolidate them into as few accounts as possible for simplicity
7) Potentially get a trust setup if my Dad has multiple millions of dollars in assets
8) Seek an inheritance lawyer to make sure everything is done properly and to finalize it all

Does that basically sum up what needs to be done you think?  Thanks again, this has been very helpful to me

« Last Edit: May 14, 2019, 02:27:07 AM by amodoko »

reeshau

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Do not attempt to get around probate or avoid a will by getting a beneficiary on deeds or bank accounts -- you lose the step up in basis upon death.

Don't forget @GizmoTX 's caution, above.  Beneficiary designation is good on things like life insurance, IRA's (which are pre- or post-tax, anyway, so cost basis isn't relevant) or checking accounts, which you will need access to immediately to take care of day-to-day business.  But the convenience could come at a high cost for long-held, appreciated, taxable assets.

GizmoTX

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Caution: TOD & named beneficiaries on accounts take precedence over a will. Providing for inheritance in a will (instead of at the account) allows for passing to descendants of a beneficiary, if this is desired. For example, if siblings are co-beneficiaries, and one of them dies before the inheritance, then any remaining siblings inherit that account, NOT the descendants of the deceased sibling. You can't assume that all children will outlive the parents.

OP, have you drawn up a will & POAs for yourself (and spouse if you have one)? By your questions, it doesn't sound as if you have. You should absolutely do this yourself ASAP, and use your journey as a discussion topic with your parents. Be sure to designate at least 3 executors & POAs (& trustees if applicable) in series in case the first cannot serve. For example, if you only name one & that person dies, you are immediately left without a will & POA yourself -- this recently happened to one of my brothers.

A great resource: Get It Together, by Melanie Cullen, published by Nolo. This has a detailed, step by step process for gathering key documents for an executor to use, and includes worksheets, manual & downloadable. Finding all the details is the hardest part of the transfer process.

SimpleCycle

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My parents didn't plan at all until my dad was diagnosed with terminal cancer.  It only took a few weeks to get their (very straightforward) affairs in order, and it helped immensely upon my dad's death.

In my dad's case (only assets were life insurance and IRAs, had some consumer debt, co-owned a house with my mom) making sure all the accounts and assets were owned correctly with the correct beneficiaries was sufficient.  Mom was beneficiary of his life insurance and retirement accounts, their checking and savings accounts were joint, and we retitled all their cars into both their names.  This was sufficient to avoid probate, and the estate was small enough that taxes weren't even on the radar.  Dad's consumer debt (in his name only) was canceled upon death when we furnished the death certificate.

This is the basic formula for most people, but there are some extra considerations if you have taxable investment accounts, substantial property, or businesses that must change hands.  The easiest way to handle all this is to talk to an estate planning attorney, who can guide you through each step of the process.  It costs money, but it is money well spent if it saves you from an expensive probate process or having assets you have trouble transferring because they are held wrong.  We spent $500 in LCOL for my parents' estate plan, and $1200 in MCOL for our own estate plan (which includes taxable investments and minor children).

One thing to make sure you take care of is the safety deposit box.  I am signatory on my mom's, which required me to physically go to the bank to be put on the signatory card.  Apparently it is a difficult process to get access upon death of a sole signatory.

secondcor521

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Do not attempt to get around probate or avoid a will by getting a beneficiary on deeds or bank accounts -- you lose the step up in basis upon death.

Don't forget @GizmoTX 's caution, above.  Beneficiary designation is good on things like life insurance, IRA's (which are pre- or post-tax, anyway, so cost basis isn't relevant) or checking accounts, which you will need access to immediately to take care of day-to-day business.  But the convenience could come at a high cost for long-held, appreciated, taxable assets.

I would forget about it, because I'm pretty sure it's not true.

At the very least, for taxable accounts (where step-up in basis is probably most important), it isn't true.  See the instructions for Schedule D and IRS Pub 551, where it states that the basis of inherited assets is stepped up to the FMV as of the date of death (usually, there are some other options).  There is no mention about the mechanism of inheritance - whether it is through a will or a beneficiary designation.

Catbert

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Do not attempt to get around probate or avoid a will by getting a beneficiary on deeds or bank accounts -- you lose the step up in basis upon death.

Don't forget @GizmoTX 's caution, above.  Beneficiary designation is good on things like life insurance, IRA's (which are pre- or post-tax, anyway, so cost basis isn't relevant) or checking accounts, which you will need access to immediately to take care of day-to-day business.  But the convenience could come at a high cost for long-held, appreciated, taxable assets.

I would forget about it, because I'm pretty sure it's not true.

At the very least, for taxable accounts (where step-up in basis is probably most important), it isn't true.  See the instructions for Schedule D and IRS Pub 551, where it states that the basis of inherited assets is stepped up to the FMV as of the date of death (usually, there are some other options).  There is no mention about the mechanism of inheritance - whether it is through a will or a beneficiary designation.

secondcor is correct.  Beneficiary or TOD won't affect getting stepped up basis.  Adding someone as a joint owner prior to death can screw up getting a full step up in basis (i.e., don't have you parents add you as a joint owner on their house).

GizmoTX

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Basis isn't the only concern. If it's important that descendants inherit in the place of their relative who is the primary beneficiary, then this must be so directed in a will, not in an account designation.

secondcor521

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Basis isn't the only concern. If it's important that descendants inherit in the place of their relative who is the primary beneficiary, then this must be so directed in a will, not in an account designation.

Also incorrect.  Beneficiary designations can use "per stirpes" to ensure that kind of inheritance pattern.

Estate taxes and estate law can get complicated and can vary by location.  And as demonstrated on this thread not everyone's statements are accurate.  (I'm wrong on stuff sometimes too.)  This is why the best general advice is to consult a qualified expert (attorney and CPA) in one's jurisdiction as I wrote in my first post on this thread.
« Last Edit: May 14, 2019, 02:44:25 PM by secondcor521 »

GizmoTX

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Also incorrect.  Beneficiary designations can use "per stirpes" to ensure that kind of inheritance pattern.

Are you sure this is allowable in account beneficiary designations?
Per Stirpes is exactly what I was talking about in a will.

secondcor521

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Also incorrect.  Beneficiary designations can use "per stirpes" to ensure that kind of inheritance pattern.

Are you sure this is allowable in account beneficiary designations?
Per Stirpes is exactly what I was talking about in a will.

It is allowed at Vanguard for IRAs:

https://investor.vanguard.com/beneficiaries/iras

And at Fidelity:

https://scs.fidelity.com/accounts/services/content/faq.shtml#q11

Based on the above, I think it is commonly allowed in beneficiary designations at investment firms.  One should always check, though, with the institution involved.  I've never heard of it being used on real estate, for example.  And I don't know if it applies for TOD designations.