Why Can’t I Wait 2 Years After Dad Died to Settle His Estate?

Introduction
Keeping Things Less Expensive and Simple(r)
Deadlines & Annuities
IRA’s
Death Tax Exemption
Disclaimer
A-B Trust Divisions
Valuations
Conclusion
A Survival Guide for Those Left Behind: The Price of a Loved One’s Dying Done Right…

Dear Mr. Miller:

Introduction: My Dad died last month. I really don’t want to go through the bother of settling his estate now. It’s just too painful. The house ($1 million) is rented out and the stocks and bonds ($3 million) can stay in the brokerage account. What’s the big deal?

My CPA suggested that I should see an attorney immediately. Is she right or is she just trying to cover her rear end? And my brother supports what the CPA said.

Daughter In Charge

Dear Daughter:

Keeping Things Less Expensive and Simple(r): I suspect your CPA’s motives are pure. In my mind both she and your brother are correct. The easy reason is you never want to make an easy job difficult (or a difficult job more difficult). And the longer you wait the more difficult, possibly expensive, and tax risky it becomes.

Deadlines & Annuities: As with everything in the law, there are deadlines. If your Dad owned any annuities, there could be a very short (60 day) deadline to make various tax elections. When the owner of an annuity dies, the beneficiaries often have the option to take everything in a lump sum, receive monthly payments over specified time periods, or leave the annuity as is. Each option would have different income tax ramifications to the beneficiaries (presumably, you and your brother). Depending on the terms of the annuity, how much was used to purchase it, etc. etc, the difference on a $100,000 annuity with a combined Federal and State income tax rate of 35% could be $28,000 or more. That’s a lot of money just because you wanted to wait.

IRA’s: What about IRA’s? As most of our readers know, IRA’s are tax deferred vehicles. The longer you can keep the money in the IRA and not take a distribution the better from an income tax perspective. In many cases each beneficiary can receive distributions over their own respective life expectancies. But if there are two beneficiaries (you and your brother) and your ages are considerably different, those life expectancies are going to be considerably different, too. Unless certain actions take place within the deadline period (sometimes as short as one year) the younger beneficiary can be stuck with the older one’s life expectancy. That means that the younger one is going to be taking out more each year than would otherwise be necessary and, thereby, paying more tax–not a good thing!

Death Tax Exemption: Since 2011, the death tax exemption has had a deadline. Since that year, a surviving spouse has been able to roll over (oftentimes called “porting”) the unused portion of the other spouse’s death tax exemption into her own exemption. In many cases that action can double the exemption. For example, let’s assume that John died before Mary and that together they were worth $7 million. Because John left everything to Mary, there is no death tax due and no exemption that must be used (i.e. everything going to Mary goes tax free). John has a $5 million unused exemption. Mary can roll that to herself and double her exemption to $10 million. Assuming no estate growth, when Mary dies that roll over can save the children $800,000 in taxes. (Ok, for the technically minded, there are some inflation factors going on here since 2011 so the numbers are really a little bit different, but I wanted to keep things simple.) However, in order to claim this roll over, a death tax return must be filed within the first 9 months or a valid extension. Once that time period passes, the roll over is no longer available.

Disclaimer: Then there’s the disclaimer. Sometimes it is advantageous for beneficiaries to disclaim (renounce) all or a portion of their inheritance. To do so might seem ridiculous to some readers, but there can be tax advantages to doing this in the right situation. Generally, any disclaimer must be done within the first 9 months after the death of the decedent.

A-B Trust Divisions: For those with A-B Trusts, when the first spouse dies, the estate has to be split into the A (Survivor’s Side) and B (Decedent’s Side). The longer things go without the division, the more complex it becomes. Wait long enough and we may have to call in a forensic accountant to help us figure everything out. And, yes, that costs more money.

Valuations: The same can be said for determining the value of the individual assets on the date of death–the longer you wait, the more difficult it is to figure that out. Why do we care? The value (on the date of death) of that house and the stocks and bonds you mentioned is what determines the individual asset’s income tax basis. And that basis is how we calculate the capital gain or loss for income tax purposes once the asset is sold or for depreciation purposes in order to get a higher tax deduction.

Conclusion: And this is just a partial list! But don’t get me wrong; I am not saying immediately means the day after someone dies. We usually tell clients to schedule a meeting with us after they take care of the funeral/memorial service. Just don’t do anything other than that until you talk to us. That way, mistakes (some of which cannot be corrected) won’t be made.

A Survival Guide for Those Left Behind: The Price of a Loved One’s Dying Done Right…
FREE REPORT: This complimentary report, focused on what do you do when you find your husband expired on the floor, is comprised of many of Mr. Miller’s articles from his long running column for the largest regional newspaper in San Diego County. This report is written in easy to understand, plain English, and will guide you through the questions surrounding the death of a loved one.

7/26/2015