Ask Liz Weston

Get smart with your money

estate plan

Q&A: My parents cut my kid out of their will. (Ouch!) Can I give her some cash?

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Dear Liz: My parents wrote my youngest daughter out of their will (my other children were left in). As both parents are now gone, I am in the process of settling the estate. I feel horrible that my parents did this. My daughter is very upset with me and her siblings for not sharing the inheritance. I am under the impression that there is nothing we can do about the will. Having said that, I would like to give my daughter a good amount of money but I believe I can’t give more than $18,000 a year. Am I correct in my two assumptions?

Answer: Yes and no.

Yes, as the executor of the estate, you’re bound to carry out your parents’ wishes as expressed in their estate planning documents.

But no, there’s no limit to how much money you can give someone. Gifts over a certain size — which is $18,000 this year — have to be reported to the IRS. But you won’t owe gift taxes until the amounts you give away over the annual limit exceed your lifetime limit, which is currently $13.61 million.

That said, a large enough gift could have an impact on your own estate. Consider getting advice from your estate planning attorney before you proceed.

Q&A: A sticky inheritance scenario

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Dear Liz: I have an adult daughter by a previous marriage who has no savings or retirement funds. I want to change my living trust to ensure that my daughter only receives a monthly amount similar to my required minimum distribution from my IRA, plus half of our paid-off house after my wife and I pass away. Do I need a trust attorney?

Answer: Restricting access to an inheritance might be necessary, but few adults would be happy about being put on an allowance. Unhappy heirs may be more likely to challenge an estate plan, so you should get expert advice if you want your wishes to prevail.

Even if your daughter is amenable, you still need an estate planning attorney’s help to craft the trust that doles out the money. Understand that inherited IRAs typically must be drained within 10 years. (The exceptions are for surviving spouses, minor children, the disabled or chronically ill or survivors who are not more than 10 years younger than the account owner.) If the beneficiary is a trust, the distributions don’t have to be paid out to your daughter, but any amount retained by the trust will typically be taxed at a higher rate. Plus, you’ll have to find someone to manage the trust, notes Burton Mitchell, a Los Angeles estate planning attorney. Who you select to be the trustee is critically important, as they will have to deal with your daughter for the rest of her life, Mitchell says.

Also, you may need to reconsider how you own your house if you want to ensure half goes to your daughter. Typically couples own property jointly, so that the survivor inherits automatically. If you want to bequeath your half of the property to someone other than your spouse, you may need to change the ownership structure to tenants in common. You’ll need to think this through carefully, since such a change would have legal, tax and practical implications that you’ll want an attorney to thoroughly explain. For example, if your spouse dies before you, she could leave her house to someone other than you, Mitchell notes. The house could be sold and you might need to find somewhere else to live. Conversely, if you die first, your wife could be forced to move if your daughter insisted on selling the house.

In other words, achieving what you want may be a lot more complicated and have more repercussions than you currently imagine. Talking with an experienced estate planning attorney can help you better understand your options.

Q&A: A ‘poor man’s trust’ may be a poor estate plan

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Dear Liz: I am 85 and my wife is 76. We have a house free of mortgage worth about $1 million. We have market investments above $4 million and life insurance of $1 million. We do not have a trust, just a will. Our financial advisor says that we do not need a trust because we have named both of our grown children as beneficiaries on all of our accounts and on the deed to our house. Please advise us if a trust is needed in our situation or if we are fine the way things are set up.

Answer: If your financial advisor is an estate-planning attorney, he or she may be correct. Otherwise, you’d be smart to seek out a lawyer experienced in these matters to review what you’ve done.

Naming beneficiaries on financial accounts, and on deeds in states that allow that, can allow those assets to pass to heirs without going through probate. So-called transfer-on-death accounts and deeds are sometimes called “the poor man’s trust.” You’re far from poor, though, and a living trust may be a better option for distributing your wealth because there are many ways the current arrangement could go wrong.

The surviving spouse, for example, could change the beneficiaries. You both may be of sound mind now, but there’s no guarantee you’ll remain so. Fraud experts can tell story after story of caregivers, relatives, friends, advisors and romantic interests persuading a vulnerable older person to change beneficiaries in favor of the interloper. A living trust that bypasses probate can include language to prevent your children from being completely disinherited.

Another potential problem: paying funeral costs and the expenses of settling the estate. If everything does go to the kids at the survivor’s death, the executor may have to go after them to return some of the money.

This column isn’t long enough to detail all the other ways transfer-on-death arrangements can misfire, so you’ll want to make an appointment with an experienced estate-planning attorney soon.