Here’s a common situation that’s faced by adult children: Dad is in his 90s and has informed his four sons that they’ll receive an inheritance of roughly $250,000 each. Dad was a blue-collar worker who saved his entire life—just to benefit his boys. However, and this is the real common part, he doesn't want anyone to know he’s “rich.” Because of this, he’s never worked with an estate planning attorney.
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.
It’s best to speak with an attorney, who specializes in estate planning, to prepare a will and other documents, such as a trust, power of attorney and advance healthcare directive. However, none of these strategies will help, unless the dad in our scenario agrees to see a qualified estate planning attorney to help him accomplish his goals.
Reference: nj.com (February 28, 2019) “My dad refuses to create an estate plan. Can I save my inheritance from taxes?”