Dear Mr. Miller:
Introduction: Ok, my Dad just died. I’m in charge of taking care of everything and getting my brother and sister their shares, everyone shares equally and everyone gets along. This does not appear to be a very difficult situation and I don’t see why I need an attorney. It is only your self serving suggestions on your website that imply that I should. I know, you’re going to ask me what assets were in the estate. He had a house worth $1 million (Mom and Dad bought it 20 years ago for $200,000), securities portfolio of $600,000, and bank accounts of another $400,000. Everything was held in the A-B Trust that he and my Mom, who died a number of years ago, created.
We will sell the house. No sweat, the real estate broker and escrow company will take care of all of that. We will sell the securities and the stock broker will handle that end. The bank accounts I will just go in and combine into one, put the house sale proceeds and securities proceeds into it, and distribute.
And you think I should pay an attorney for that? We went through that when my Mom died. With all due respect, Mr. Miller, I don’t see why!
Trying to Save Money Son
It certainly sounds like you have it all figured out. There will be some forms that need to be created, signed, and filed. These will allow you to be recognized as the current manager (trustee) so that you can access and control the bank and securities accounts as well as have authority to sign the deed for the sale of the house. But that’s the easy stuff. You may want to take a look at my previous column Why Is It So Involved to Settle an Estate?
Let’s break it down. You have a number of potential problems here that you, as the manager, are responsible for handling. You have not told us what occurred when your Mom passed or whether the A-B Trust was ever funded. Since you had an attorney then, I am going to assume that things were handled correctly at that time.
Capital Gains and the QTip Election: Let’s assume that the house was worth $500,000 and the securities $300,000 when she died and that half of each were in the B Trust (probably not the case but easy for discussion purposes). That would mean that there is a $500,000 capital gain on the house and a $300,000 gain on the securities, a total of $800,000. Since half is in the A Trust (Survivor’s side, i.e. your Dad), the IRS will forgive all of the pre-death appreciation (i.e. those assets will get a step up in basis to the fair market value as of the date of your Dad’s demise). However, that is not typically the case with assets in the B Trust (Decedent’s side, i.e. your Mom). So there is a $400,000 (one-half of the total $800,000) capital gain on your Mom’s side that will potentially be hit with income tax at a combined Federal and State rate of perhaps 25% or higher. That’s a tax of $100,000. A sharp attorney may be able to avoid this significant charge by using the QTip election approach. Here’s an article that I wrote on that;Avoiding Capital Gains Tax with A-B Trusts.
House Sold for Less Than Fair Market Value: Still don’t think an attorney is worth it? I’ve dealt with estates where the house was sold and one of the beneficiaries was upset that the manger sold the house for so much less that what the beneficiary thought (validly or not) the house was worth. Disputes in trust cases can get quite ugly. How’s $150,000 in litigation fees sounding? Does that happen–absolutely, could it be higher–probably. Often an attorney can help avoid that litigation by giving the beneficiary advance notice of the sale and the sale price and obtaining the beneficiary’s written consent. There are formal and informal ways of doing this.
County Property Tax Increase and Non Pro Rata Distribution: Or what about the increase in county property tax when a transfer of ownership takes place? An inheritance is a transfer of ownership. There are exceptions for transfers to children, but the correct procedures have to be followed and there are deadlines. Maybe one of the three siblings wants to take the whole house and offset the extra amount by not taking a portion of the other assets (Non Pro Rata Distribution). If not done correctly, that can result in an increase in the county property tax on the two-thirds interest that the one sibling is acquiring from the other two. That’s an over $5000/year difference in the county property tax that can be avoided.
Distribution Disputes and Liability: And then there is the all important point at which distribution takes place. If the estate was worth $2 million, when you are ready to distribute there will be either more of less than that number, due to expenses going out and interest coming in. Let’s assume its $1,950,000 on hand at that point. Are you going to give each of your siblings a check for $650,000 or are you going to keep a closing reserve for final expenses? And how do your siblings know that $650,000 is the correct amount they should receive, maybe they think that there should have be $2 million available, not $1,950,000. How do you make them feel comfortable that they have received the correct amount? And how do you cut off your liability to them, or are you potentially liable for mistakes that they allege you made forever?
Conclusion: These are just some of the areas (and yours is a somewhat simple estate where everyone gets along) in which a competent attorney can help you settle the estate with a minimum probability of disputes. And after all, that is most likely your goal!