Estate Tax (unfair question?)

[Midpack]

I probably shouldn't ask here, but we've moved to a new area and don't know anyone here to ask. I'm not sure I understand a point our estate attorney made yesterday, working him to iron it out, seeking a second opinion here?

We plan to leave 50% of our estate to DW's BIL. His estate exceeds the estate tax threshold and probably always will, so he doesn't need the money. We were planning to leave it to him and giving him discretion to give all or part of it to our 9 nieces & nephews.

Our attorney is suggesting it might be better to give it directly to our nieces & nephews, to avoid additional estate tax on the money we leave BIL, reducing what the nieces & nephews receive (vs giving it to them directly).

The way I understand it, that's only true if BIL doesn't pass the money on to nieces & nephews before he passes away. If we leave him money, estate taxes aren't a factor while he is alive.

And it's my understanding he could give any amount to each niece/nephew without triggering taxes above the $15,000 gift exemption. As I understand it each niece/nephew would have to report the income but there would be no taxes levied then. "[FONT=&quot]If a person exceeds the $15,000 exclusion limit, they must file Form 709 to report the excess gift to the IRS. That doesn't mean a person will have to pay taxes though.[/FONT][FONT=&quot]

That's because in addition to the $15,000 annual exclusion, there is an $11.4 million lifetime exclusion for the 2019 tax year. The lifetime exclusion rises to 11.58 million for the 2020 tax year. Anything reported on Form 709 is applied toward the lifetime exclusion and only amounts exceeding that are subject to gift tax."

[/FONT][FONT=&quot]Again I apologize for seeking an opinion here, if I get no replies I understand.[/FONT]

 

[Onward]

I understand the situation exactly as you do.

The only thing I would quibble with is: I don't think your nephews and nieces need to report the gifts from your BIL. To my knowledge, give-ees don't report gifts.

And I think your attorney is right about tax-reduction via giving directly to your nephews and nieces.

 

[pacergal]

Are the 9 nieces and nephews all his kids? Then that may make sense.
If not, you would have no way of knowing that everyone got what you desired.
I would specify in my will exactly who I wanted the money to go too.

 

[OldShooter]

IANAL, but this seems tailor made for a testamentary trust. Fund the trust from your estate, designate BIL as trustee, and write into the trust whatever rules you want him to follow in giving the money away. This solves the problem that might arise on his death, as you can designate a successor trustee -- probably a professional -- to step in. BIL never has ownership of the assets and any taxes, state or federal, are dealt with when the trust is set up. BIL never has an ownership interest in the trust's assets so his tax situation is irrelevant.

 

[Midpack]

Are the 9 nieces and nephews all his kids? Then that may make sense.
If not, you would have no way of knowing that everyone got what you desired.
I would specify in my will exactly who I wanted the money to go too.

IANAL, but this seems tailor made for a testamentary trust. Fund the trust from your estate, designate BIL as trustee, and write into the trust whatever rules you want him to follow in giving the money away. This solves the problem that might arise on his death, as you can designate a successor trustee -- probably a professional -- to step in. BIL never has ownership of the assets and any taxes, state or federal, are dealt with when the trust is set up. BIL never has an ownership interest in the trust's assets so his tax situation is irrelevant.

The 9 nieces & nephews are not all BIL's children, only 3 are. But BIL is far and away the most trustworthy of DW's siblings, so we choose to use BIL as the successor trustee.

We have full faith and trust in BIL, and we're fully comfortable with leaving it to his sole discretion. We will tell him we'd like the funds to be split equally among all the surviving nieces & nephews but if he chooses otherwise - we're fine with that. His 3 children will be well taken care of by his own estate, he has no reason to favor them with the money we leave. We're closer to his children than the other nieces & nephews anyway, but we're not asking them to be favored, all 9 equal is our wish.

We are writing the trust in case of an untimely early death to DW and I, not trying to anticipate 20-30 years from now. The will/trust will probably have to be amended at least once in the decades ahead.

I am mistaken in thinking his estate taxes don't make any difference while he is alive? We are taking steps to reduce our estate taxes when we pass away, a separate issue.

 

[cathy63]

I probably shouldn't ask here, but we've moved to a new area and don't know anyone here to ask. I'm not sure I understand a point our estate attorney made yesterday, working him to iron it out, seeking a second opinion here?

We plan to leave 50% of our estate to DW's BIL. His estate exceeds the estate tax threshold and probably always will, so he doesn't need the money. We were planning to leave it to him and giving him discretion to give all or part of it to our 9 nieces & nephews.

Our attorney is suggesting it might be better to give it directly to our nieces & nephews, to avoid additional estate tax on the money we leave BIL, reducing what the nieces & nephews receive (vs giving it to them directly).

The way I understand it, that's only true if BIL doesn't pass the money on to nieces & nephews before he passes away. If we leave him money, estate taxes aren't a factor while he is alive.

And it's my understanding he could give any amount to each niece/nephew without triggering taxes above the $15,000 gift exemption. As I understand it each niece/nephew would have to report the income but there would be no taxes levied then. "[FONT=&quot]If a person exceeds the $15,000 exclusion limit, they must file Form 709 to report the excess gift to the IRS. That doesn't mean a person will have to pay taxes though.[/FONT][FONT=&quot]

That's because in addition to the $15,000 annual exclusion, there is an $11.4 million lifetime exclusion for the 2019 tax year. The lifetime exclusion rises to 11.58 million for the 2020 tax year. Anything reported on Form 709 is applied toward the lifetime exclusion and only amounts exceeding that are subject to gift tax."

[/FONT][FONT=&quot]Again I apologize for seeking an opinion here, if I get no replies I understand.[/FONT]

Well, first of all I don't know why you are apologizing for asking for our opinions. You should know very well that we are always happy to opine, even when backed up by absolutely no experience or expertise, and you definitely don't have to apologize for asking!

Yes, the money you leave to BIL would be subject to estate taxes if he fails to give it all away before he dies and his estate exceeds the exemption in place at that time. Currently the exemption is $11.58M, but per the Tax Cuts & Jobs Act, it is scheduled to go back to ~$6M in 2026 (the exact number will be calculated in the future.)

It's true that he can give any amount to the nieces and nephews (hererafter "n/n"), but that doesn't eliminate the estate tax. Everything he gives that's over the exemption, which is currently $15K per person per year, gets subtracted from his own estate tax exemption when he dies. So if he gives each n/n $100K per year, then his own estate's tax exemption is reduced by $765K/yr.

The n/n never have to report the gifts as income and they don't owe any taxes on them. The giver is the one who does the reporting.

So, the amount your BIL can give to the n/n each year without affecting his own estate's future tax is currently $15K x 9 = $135K. If you leave him $1M to distribute at $15K/yr and the money never grows, then it will take him 8 years to complete the distribution. Are you sure he'll outlive you by long enough to complete it? If not, that money is in his estate and will be taxed and then distributed according to his own will.

I'm with the lawyer. If you want the money to go to the n/n eventually, then either name them directly in your will or leave it to trust(s) of which they are the beneficiaries.

 

[OldShooter]

The 9 nieces & nephews are not all BIL's children, only 3 are. But BIL is far and away the most trustworthy of DW's siblings, so we choose to use BIL as the successor trustee.

It really doesn't matter what the relationship between the trustee and the beneficiaries is. In our state the beneficiary can even be a dog or cat. I don't know about gerbils.

We have full faith and trust in BIL, and we're fully comfortable with leaving it to his sole discretion. We will tell him we'd like the funds to be split equally among all the surviving nieces & nephews but if he chooses otherwise - we're fine with that. His 3 children will be well taken care of by his own estate, he has no reason to favor them with the money we leave. We're closer to his children than the other nieces & nephews anyway, but we're not asking them to be favored, all 9 equal is our wish.

You would want to include some guidance for the case where a successor trustee is doing the administration. BIL may be unable to serve, dead, etc. In our state there is a new thing called a "Trust Protector" with some specific powers to do exactly that. We have named a close, younger, friend of DW's as Trust Protector for our estate. You might want to look into that, too.

We are writing the trust in case of an untimely early death to DW and I, not trying to anticipate 20-30 years from now. The will/trust will probably have to be amended at least once in the decades ahead.

Yup It seems like every three or four years we end up with a few $K of tune-up. Family circumstances change, minor children grow up, assets change, laws change, ...

(I am assuming here that the trust will not immediately give all its assets to the children and go out of existence. That it will disburse over time. If that is not the case a trust is probably overkill.)

 

[Midpack]

It's true that he can give any amount to the nieces and nephews (hererafter "n/n"), but that doesn't eliminate the estate tax. Everything he gives that's over the exemption, which is currently $15K per person per year, gets subtracted from his own estate tax exemption when he dies. So if he gives each n/n $100K per year, then his own estate's tax exemption is reduced by $765K/yr.

The n/n never have to report the gifts as income and they don't owe any taxes on them. The giver is the one who does the reporting.

So, the amount your BIL can give to the n/n each year without affecting his own estate's future tax is currently $15K x 9 = $135K. If you leave him $1M to distribute at $15K/yr and the money never grows, then it will take him 8 years to complete the distribution. Are you sure he'll outlive you by long enough to complete it? If not, that money is in his estate and will be taxed and then distributed according to his own will.

I'm with the lawyer. If you want the money to go to the n/n eventually, then either name them directly in your will or leave it to trust(s) of which they are the beneficiaries.

You would want to include some guidance for the case where a successor trustee is doing the administration. BIL may be unable to serve, dead, etc. In our state there is a new thing called a "Trust Protector" with some specific powers to do exactly that. We have named a close, younger, friend of DW's as Trust Protector for our estate. You might want to look into that, too.

All these posts have been helpful, especially the two above. It appears the attorney is right, but not for the reason he seemed to give us. He never mentioned how passing our money to the kids would reduce his eventual estate tax exemption when he dies.

 

[Sunset]

My unasked view is since the BIL is already quite rich, and above the exemption amount.
Give at least some to all the n&n so that they at least get something even if it's just a relatively small amount to each.

Then BIL can dole out the cash or not as he sees fit.

 

[pb4uski]

I think the easiest solution is to either fund a trust or leave the money to a trust in your will... appoint BIL trustee and make the 9 n/n the beneficiaries and make it clear that the trustee has full discretion on distribution of the trust's assets to the beneficiaries... and appoint a successor trustee if BIL dies before the trust is fully distributed.

That way the assets that you are leaving to n/n don't queer BIL's estate plans or go to the feds in the form of estate taxes if BIL dies before the money is fully distributed. Alternatively, you could just set up the trust so each n/n gets their "share" over a certain number of years so it creates a cash flow stream that they can rely on.

 

[SecondCor521]

Agree with @pb4uski and @cathy63 (as usual).

I think it'd be important to ensure that the terms of the trust indicate that the trustee has discretion to distribute any or all income of the trust to the trustees. Income retained in trusts gets taxed rather heavily.

Also, as a nitpick, it is possible, depending on which state the n/n live in and the amount of money you're talking about (it'd have to be a lot), they might have inheritance taxes to deal with. Some states assess inheritance taxes, although I think the exemption amounts are typically $1M and up.

 

[ivinsfan]

Have you talked to the BIL about this and/or asked his opinion about what he is comfortable doing and how he prefers it to be done? If the guy is good with money he probably has some ideas of his own.

SIA if I missed the answer to the question.

 

[cathy63]

Also, as a nitpick, it is possible, depending on which state the n/n live in and the amount of money you're talking about (it'd have to be a lot), they might have inheritance taxes to deal with. Some states assess inheritance taxes, although I think the exemption amounts are typically $1M and up.

Doesn't it depend more on where the decedent lives, whether that be Midpack or his BIL?

I'm trying to figure out how it would work to tax inheritances from out-of-state relatives, since they'd have to rely on the heir to report it, and that would probably be about as effective as states trying to collect use tax.

 

[Scratchy]

If you decide to leave the funds in a trust with your nieces/nephews as beneficiaries (which I agree would be the better than leaving the funds directly to your BIL), consider appointing your BIL a "trust protector" with the responsibility to appoint a successor trustee, with discretion to appoint a corporate trustee or individual, including himself, and replace trustees at his discretion.

I think the advantage of this arrangement is that your BIL will have discretion to serve as successor trustee but alternatively could decide he doesn't want to be successor trustee and appoint a corporate trustee. This costs a bit of money, but is often well worth it as the trust administration will be done professionally, and sometimes it is even less expensive after legal fees that an individual trustee may incur are considered.

I think a corporate trustee (selected by your BIL if the time comes) in this case would be a wise arrangement. If your BIL was trustee, especially with nine beneficiaries some of which are his children, there is a good chance disagreement or resentment will arise. What if one of the beneficiaries develops a drug problem or disability and wants more funds? What if a group of the beneficiaries decides the trustee is acting in a way that favors the needs of another group of beneficiaries? Even your BIL is on solid legal grounds for whatever he decides, it could cause rifts in the family. I think it's less likely this will happen if there is a corporate trustee.

If you go this route, consider naming successor trust protectors in the event your BIL is unable to continue to serve during the lifefime of the trust.

 

[pb4uski]

^^^ Great points... I'm not sure that I would want BIL's job as trustee and the inherent risk that my good decisions might spoil my relationships with my kids and n/n... if it is put to a corporate trustee then that problem goes away... or perhaps make BIL and the corp trustee co-trustees so BIL can use the corporate trustee as political cover if the need arises.

 

[RetireBy90]

You (or BIL) can give up to $15K per year to an individual without an impact on your lifetime exemption for estate taxes. When admistering mom’s affairs her last 10 or so years, we did $15K to each child and another $15K to the child’s spouse, or $30K per year, or the limit that year. 9 n/n if they are married at $30K per year is $270K without any estate tax implications. You could start now with smaller numbers and be able to get some satisfaction from seeing the money put to hopefully good use.

 

[SecondCor521]

Doesn't it depend more on where the decedent lives, whether that be Midpack or his BIL?

I'm trying to figure out how it would work to tax inheritances from out-of-state relatives, since they'd have to rely on the heir to report it, and that would probably be about as effective as states trying to collect use tax.

My understanding: Estate taxes are assessed on the decedent's estate and depend on where the decedent lived. Inheritance taxes are assessed on the inheritor and depend on where the inheritor lives.

Never thought about whether an inheritor wouldn't properly report if they knew about the inheritance tax. Were I in that situation I'd probably be too afraid not to report. But I can easily imagine an inheritor not being aware of it and not bothering to check, or being told otherwise by non-authoritative sources and choosing to believe them.

I don't know if there are any reporting mechanisms where the states could catch this sort of thing. I don't think so.

 

[pb4uski]

Interesting reading on inheritance taxes: https://www.thebalance.com/inherita...s With an Inheritance Tax,they'll have to pay.

... The U.S. states that collect an inheritance tax as of 2020 are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Each has its own laws dictating who is exempt from the tax, who will have to pay it, and how much they'll have to pay. ...

 

[ivinsfan]

Interesting reading on inheritance taxes: https://www.thebalance.com/inherita...s With an Inheritance Tax,they'll have to pay.

Oh yes, PA they are special, had to pay an IT on money from my departed cousin. They tax you pay is figured by brackets depending on the relationship to the deceased party. As a cousin I paid the highest "in family" rate and if you are not related at all, you pay an even higher rates.. so all inheritance taxes are not created equally.

 

[Midpack]

Have you talked to the BIL about this and/or asked his opinion about what he is comfortable doing and how he prefers it to be done? If the guy is good with money he probably has some ideas of his own.

SIA if I missed the answer to the question.

Yes we talked to BIL before we talked to our estate attorney. But neither of us knew much about estate tax and gift tax limits, we both have more money than brains.

Now we understand thanks to several posts here, and a follow up talk with attorney. We’ll talk to BIL tonight and see what he wants. We may split the 50% going to DW’a side of the family with some to BIL and the rest split equally between (surviving) n/n.

Thanks again everyone, too soon old, too late smart.

 

[Midpack]

^^^ Great points... I'm not sure that I would want BIL's job as trustee and the inherent risk that my good decisions might spoil my relationships with my kids and n/n... if it is put to a corporate trustee then that problem goes away... or perhaps make BIL and the corp trustee co-trustees so BIL can use the corporate trustee as political cover if the need arises.

Something we’ll talk over with BIL tonight. If we leave directly to n/n, as now expected, we’ll spell out all equal, so they can be mad at us not him, we’ll be dead so who cares.

 

[Dash man]

Something we’ll talk over with BIL tonight. If we leave directly to n/n, as now expected, we’ll spell out all equal, so they can be mad at us not him, we’ll be dead so who cares.

I agree you don’t ever want these funds to be part of BILs estate. Keep in mind the current estate tax exemptions revert to the old limit of $5M each plus inflation adjustments in 2026. So estate taxes will be even more onerous. There is also the possibility of a change before then. We don’t know what the midterm elections will bring us.
You can have a corporate trustee manage the trust and also make BIL a co-trustee with the power to adjust the giving.

 

[Midpack]

So we’re going to leave 50% to my sister, 10-20% to BIL, and 30-40% equally between the n/n’s. Our attorney talked about an irrevocable trust for the n/n’s as an option, but we’d both rather give it to them outright if we both pass unexpectedly and let them enjoy the surprise windfall from their aunt & uncle. It’s solid six figures each so it’ll help them a lot I assume, but it’s not so much they can retire early. Today the n/n’s range in age from about 18 to 40.

Thanks again to those who posted, I learned what I needed to know!

 

[pb4uski]

... I learned what I needed to know!

Yep, we're just a fountain of wisdom.... overflowing.

 

[audreyh1]

So we’re going to leave 50% to my sister, 10-20% to BIL, and 30-40% equally between the n/n’s. Our attorney talked about an irrevocable trust for the n/n’s as an option, but we’d both rather give it to them outright if we both pass unexpectedly and let them enjoy the surprise windfall from their aunt & uncle. It’s solid six figures each so it’ll help them a lot I assume, but it’s not so much they can retire early. Today the n/n’s range in age from about 18 to 40.

Thanks again to those who posted, I learned what I needed to know!

What if the two of you don’t pass away at the same time?