What’s keeping you up at night? I hope it’s not thinking about taxes. Or death. Or worse, death and taxes. While none of us want to think about death, and very few of us live our lives thinking about taxes, someone has to. And that’s where we can help you.
I’d like to tell the story about a tragic and significant incident that happened recently. One of our valued clients, Celeste (not her real name), had an undiagnosed heart condition and passed away unexpectedly in June. Celeste had substantial assets when she passed away. When her personal investments, rental properties, and retirement accounts are all added up, Celeste’s total estate is valued at over $8 million. Great, right? Unfortunately, Celeste had no estate plan, not even a will.
Celeste should have done her own personal estate planning at the same time she was helping her mother with her own estate plans.
Celeste was conscientious about helping her mother with estate planning. With Celeste’s help, her mom had the entire package—a will, living trust, and an irrevocable defective grantor trust (IDGT). Celeste was designated as her mother’s executrix, successor Trustee, and beneficiary. Celeste managed her family’s rental properties during the day and was her mother’s caregiver at night. Her mother’s estate plan was so well-crafted that had the sequence of deaths unfolded as expected, Celeste’s mom would have paid very little, if any, estate tax on an estate valued at over $5 million. Celeste has no children and was not married when she died. Her mom is her heir. Celeste’s death caused her mom’s estate to shoot up to $13 million.
Now here are some good news and bad news consequences from Celeste’s death:
Celeste’s Estate
Good news: Celeste has never made a taxable gift during her lifetime. So she can use the full $5,450,000 exemption available in 2016 to reduce her taxable estate for estate tax purposes.
Bad news: Celeste has no Trust and no will. Her boyfriend of over 10 years stands to inherit nothing because they live in California which is not a common-law state. Even though they had verbally agreed to share the proceeds from the sale of her home, nothing was in writing to validate his claim. In addition, her estate is well above California’s small estate probate exemption of $150,000, so her estate has to go through probate. The entire case is expected to take around 2 years to close.
More bad news: Celeste has to pay estate tax of 40% on at least $2.55 million. Celeste was a very generous individual and made significant charitable donations during her lifetime. Celeste could have avoided estate tax entirely with a proper estate plan that included bequests to charitable organizations. More bad news, Celeste’s heir is her mom. Celeste’s estate will become part of her mom’s estate. Her mom now has a $13 million estate.
Celeste’s Retirement Accounts
Good news: Celeste’s retirement accounts had designated beneficiaries. These accounts do not have to be probated and can be distributed based on the beneficiary’s life expectancy.
Bad news: Celeste’s mother is the designated beneficiary of Celeste’s retirement accounts. At her advanced age, her life expectancy is 4.6 for 2017, the first year she is required to take minimum distributions from the inherited retirement plans.
Good news: Since Celeste had not yet started her required minimum distributions (RMDs), we have the option of waiting 5 years before withdrawing anything from Celeste’s retirement accounts. To avoid raising her mom’s income tax rates, we elected the 5 year distribution period. If her mom passes away before the 5 years, the retirement accounts will escape income tax because the proceeds will be distributed to her mom’s private foundation.
Celeste’s Mom
Bad news: Celeste was the beneficiary of her mom’s living trust. Her death creates a gaping void in her mom’s estate plan. Celeste’s mom had transferred around $3 million to her IDGT in the anticipation that Celeste would inherit it. The IDGT had a provision that permitted Celeste to designate another beneficiary upon her death—provided it was in writing. Since Celeste had no written will, the IDGT beneficiaries default to Celeste’s distant cousins.
Good news: Celeste’s mother has an excellent legal and financial advisory team working for her. Her mom called us after Celeste’s passing and we immediately flew into action helping her revise her estate plan to accomplish her wishes in light of the current situation. We are in the process of not only revising her living
trust, but also of establishing a private foundation which can serve as both a legacy and a source of annual income tax deduction.
The moral of this story is that the best time to do your own estate planning is now. If you are helping your mom and dad with their estate plan, make it a family affair. Get yours in order too. If you get nothing else done, make sure all your IRA and life insurance beneficiary designations are correct. If you already have a Trust, get it updated to reflect current laws. If your Trust was drafted over 5 years ago, it’s time to give it another brush-up. The tax laws have changed. You could be missing on valuable estate exemptions because your Trust has not been updated.
You never know what will happen or when. If you don’t have an accountant or lawyer right now, contact us. We know what to do. In addition to our financial and accounting expertise, we have an excellent referral network of legal experts who can help you.
