Ask Liz Weston

Get smart with your money

Estate Planning

Don’t expect surviving spouse to “do the right thing”

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Dear Liz: My parents were married for 50 years. When my mother died, my father didn’t inherit a large monetary fortune, but he did get a houseful of family treasures (photos, knickknacks, mementos, documents) that had been cherished and saved for me and my children (I was an only child). Immediately after my mom died, my father found a lady friend and cut off all ties with me and his past. I tried but could not get through.

I know it would not have been my grandparents’ or my mother’s wishes that 150 years of family memories be lost, but unfortunately that is how it turned out. Please encourage aging parents to plan ahead for many potential outcomes so that their wishes and the wishes of past and future generations are honored. I shudder to think of what has happened to my great-grandmother’s journal that I read aloud as a child.

Answer: The German fairy tale about Hansel and Gretel resonates with many people in your situation. If you remember, in that tale a poor woodcutter acquiesces to his second wife’s demand that he abandon his children to die in the woods.

Of course, that tale ends happily. The children kill the evil witch who imprisons them. They steal her jewels and return to share the wealth with their once-again-widowed father. (Children can be remarkably forgiving.)

It’s sad that you’ve lost access to the heirlooms, but it’s much sadder that you’ve lost access to your father. If he’s still alive, though, so is the possibility of rapprochement. If you keep in touch, he may eventually thaw. If not, you’ll at least know you did all you could.

Your mother may not have been able to imagine your father cutting you off the way he has. But expecting a surviving spouse to “do the right thing” in distributing heirlooms may be expecting too much. Dementia could rob the survivor of good judgment, or he could be influenced by a subsequent relationship, as your father was.

So your point is well taken. Anyone who has heirlooms to pass along should make sure to do so — either in a will or, better yet, while still alive to enjoy the next generation’s appreciation.

Anyone who’s lost access to an heirloom should remember that while precious, it’s still a thing — and a thing that could have been lost in many other ways, from a house fire to negligence. Focusing on the loss won’t bring the thing back or restore a troubled relationship. It will just make you unhappy, and life’s too short for that.

Wealthy families may be missing an opportunity to save

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This post won’t be relevant to the vast majority of you. But if you’re rich or have rich parents, listen up.

There’s a window of opportunity right now to reduce future estate taxes by moving money out of large estates. People who don’t take action could be missing a chance to save their heirs a bundle.

Here’s the deal: Currently, the estate tax exemption limit and the gift tax exemption limit are both $5.12 million. Both are scheduled to revert to $1 million after Dec. 31.

What that means is that wealthy people can give over $5 million away (over $10 million for a married couple) without owing any gift tax on that transfer. Such gifts can reduce the size of the wealthy person’s estate, so that the estate tax bill will be lower when he or she dies.

The money can be given away directly, or put into certain kinds of trusts. Any good estate planning attorney can outline the possibilities. If you’re planning to pass money to your kids, or a business, or real estate, it’s worth reviewing these.

Interestingly, a recent survey from U.S. Trust found two-thirds of the wealthy folks it polled hadn’t taken advantage of this opportunity and didn’t plan to do so. The survey respondents all had a minimum of $3 million in investable assets, with 31% having $5 million to $10 million and 32% having more than $10 million.

Now, it’s possible that Congress with pass some kind of patch or extension of the current exemption limits. It hasn’t been able to agree on much late, of course, but that can always change.

Still, if you’re concerned about estate taxes, it would make sense to meet with both a fee-only financial planner (to see if you can afford to give money away) and an estate planning attorney to see if it makes sense to pass some money along to your heirs now, rather than waiting until death.

Bypass trust can get money to the right heirs, eventually

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Dear Liz: We married late in life and each of us brought separate property to the marriage. One spouse has four children and the other none. We have a marital trust that allows for the spouse upon death to receive the entire estate. Upon the death of both spouses, how would you draft a provision that would allow the remainder of one spouse’s separate property to be allocated to her children and the other spouse’s separate property to be donated to a charitable foundation?

Answer: Instead of allowing each other to inherit everything outright, you might want to consider a bypass trust. These trusts allow the surviving spouse to benefit from the assets during his or her lifetime. Upon the surviving spouse’s death, the assets are bequeathed to the ultimate beneficiaries. The survivor can’t alter the trust to change or prevent that.

Bypass trusts can create family tension, however. If the mother in your example were the first to die, her children would have to wait for “their money” until her spouse died. In the case of much younger or unusually healthy spouses, that can be a long wait, with the kids worrying that the surviving spouse will spend most or all of the money in the meantime.

If that could be an issue in your case, you might consider buying life insurance on the mother, Los Angeles estate planning attorney Burton Mitchell said.

“Some people fund for the children with life insurance on that parent’s life, so that the children don’t have to wait for the second death,” Mitchell said, “and to minimize tension with the children with the surviving spouse.”

You also should consider having a meeting with the children once you’ve decided how to handle this, Mitchell said.

“It is often better for them to understand what is happening and let them ask questions to their parent, before they discover the facts after the funeral,” he said. “At that point, someone is already dead and the survivor’s answers are suspect.”

If your estate is greater than estate tax exemption limits — currently $5.12 million, but scheduled to drop to $1 million in 2013 — you may want to take additional steps to reduce the future tax bite. One option is known as a qualified terminable interest property or QTIP trust. Your estate planning attorney can provide you with details. And yes, you should have an attorney, particularly if you have a large estate or someone may contest the will.

“Anyone can download documents off the Internet or go to a forms service or mill, but to do it right and to minimize problems later, you have to understand each individual’s situation and craft a plan that works best for them,” Burton said. “It’s like snowflakes — estate plans may look similar, but no two should be identical.”

Parents’ estate plan triggers IRA tax bill

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Dear Liz: My sister and I are in the middle of distributing our parents’ estate. The beneficiary of the estate is a trust. Part of the estate consists of a traditional IRA, which will be split between my sister and me. The problem is that because the IRA will be distributed from the trust and is considered a non-spouse distribution, I’m told that we’ll have to pay taxes on the entire distribution. It’s a good chunk of change. I’m almost 60. Is there any way that I can roll the IRA into my own and take minimum distributions? I’d rather not pay the tax all upfront.

Answer: That’s understandable, since it’s typically much better to stretch distributions out as long as possible so that the money can continue to grow (and you can replace one big tax bill with smaller ones as you take distributions).

Unfortunately, the way your parents structured their estate ties your hands, although perhaps not to the extent you’ve been told.

It appears from your question that the IRA either failed to name a beneficiary or named the estate as the beneficiary, said Mark Luscombe, principal federal tax analyst for tax research firm CCH.

“Assuming that is the case, since estates do not have life expectancies, the IRA cannot be distributed over a beneficiary life expectancy as it could have been had an individual been named the IRA beneficiary,” Luscombe said. “Instead, it must be distributed under the terms of the IRA document over a period that cannot exceed five years.”

The exception is if the IRA owner before dying had already reached the age of 701/2 and begun distributions, Luscombe said. In that case, distributions can continue to the estate over the IRA owner’s life expectancy. If the IRA owner was quite elderly when he or she died, this might not give you much time to stretch out the distributions, but it probably would be better than paying all the taxes at once.

Another exception, which doesn’t appear to apply in your case, is if the IRA named the trust as the beneficiary. If that were true, “it is possible that the distributions could be based on the life expectancy of the oldest trust beneficiary,” Luscombe noted.

As you can see, this is a complicated area of estate planning and taxation. Getting good advice about how to name beneficiaries for your accounts can save your heirs a lot of money.

Stepdaughter wants “everything”: what does she deserve?

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Dear Liz: Your column from the person who wanted “heirlooms” from her stepfather is applicable to my situation. My husband’s daughter wants literally everything in my house, even though he and I commingled our assets 23 years ago and have been married more than 10 years. How do I access public records to see if her mother did have a will?

Answer: It’s interesting that your husband can’t clear up this mystery. Presumably he would know whether his late wife had a will and what it said.

You can check with probate court of the county where she died to determine if a will was filed. If she had a living trust, that would be private and probably not filed with the court, but your husband should know what it said.

If she had no will or living trust, then your husband was supposed to follow state law in dividing up her possessions. In community property states, without a will or trust he typically would inherit stuff acquired during their marriage, plus a share of any separately held assets — possessions she brought to the marriage, said Burton Mitchell, an estate planning attorney with Jeffer Mangels Butler & Mitchell in Los Angeles. In other states, your husband might inherit half of her assets, with the other half divided among her children, Burton said.

State laws vary widely and there are all kinds of exceptions to the general rules, so you may need a lawyer’s help in sorting out what belongs to whom.

In any case, you’d be smart to hire an estate-planning attorney at this point. Your stepdaughter may not be able to pursue a legal case after all this time, but she could cause trouble when you or your husband dies. Any time a relative creates a real fuss about an estate division, it’s good to get a qualified attorney’s advice as you craft your own wills or living trusts that spell out who gets what.

As you make your plans, try to be guided by kindness and compassion. Your stepdaughter may not have a legal right to lay claim to every item in your home, but letting her have items of strong sentimental value may be the right thing to do. Just think how you would feel if your father’s second wife gave your mother’s special jewelry or your grandmother’s treasured antiques to your step-siblings. Lifelong rifts and family feuds have started over less.

Then again, all parties need to remember that stuff is just stuff. What’s a precious heirloom to one generation may wind up in the next generation’s garage sale. Resolving to put relationships first, instead of possessions, can really help all sides avoid painful battles.