Tag Archives: Tax

5 Reasons Parents Should Discuss Their Estate Plans with Children

Gift to Grandchildren“What should I tell my children?,” is a common question I hear after clients execute their estate plans.  Few people enjoy discussing their own mortality.  And few parents speak openly to children about what will unfold financially after the parents die.  Parents may fear that by speaking about their estate planning it could ignite a family fight over who will receive what.  Further, many of my clients worry that children may become entitled and lose motivation to be financially responsible.

However, open communication can benefit both generations.  The parents can explain their decisions and the children can better plan their lives.  Further, children can provide feedback about their needs or lack thereof.  Also, parents and children can discuss tax considerations and develop more efficient plans.

Here are five reasons to tell children what is included in your estate plan before you die:

1. You can calm angered heirs.

Resentment among related heirs runs rampant after discovering Dad and Mom’s final wishes for the distribution of their estate.  Talking over the rationale for making unequal distributions can smooth ruffled feathers.  I have seen clients give more to children who have more children of their own as opposed to a child with no offspring.  I have clients who leave a greater share of their estate to a financially irresponsible child in trust so the child will not deplete the assets but they task a responsible child with making the distributions. Such an arrangement can be doubly painful for the financially prudent child. I have also seen heirs who resent their parents for leaving significant bequests to charities.  Parents can explain these decisions during their lifetimes, in their own words, to alleviate angry or bitter feelings.

2.  You can save hassles and prevent mistakes.

Children will be emotionally spent following the death of a parent.  If they have to search far and wide for estate planning documents and assets, they will be psychologically, physically and financially spent too.  Parents should let children know where to locate estate planning documents and what to expect within those documents.  If children are surprised by the deceased’s wishes, they may not execute those wishes properly.

3.  You may benefit your children’s lives now.

Parents should devote time to listening to and learning from their children about their financial wherewithal and work ethic.  Holding regular meetings or open dialogues would provide a golden opportunity for the parent to share their plans with the children.  Parents may withhold assets from children during financial struggles as part of a “tough love” approach. Yet, this approach can be viewed as stingy and cause children to question why Mom and Dad chose to withhold assets during the child’s difficulties.

4. Children might give you a better idea

Many of my clients hold significant wealth in a home or business.  I have had numerous clients wrongfully assume that their children want to keep the valuable home or operate the business.  I have come to expect that parent business owners do not discuss with their children whether the children want to keep the business.  Placing stipulations on the continued operation of a business or keeping a valuable real property in trust may not be the desire of the heirs.  Recently, I dissuaded a client out from keeping a family cabin in the Sierra Nevada mountains in trust for his children’s lifetimes.  One child resides in another county and the other child works as a very busy professional in another state and has not been to the cabin in six years.  Seek your heirs input.

5. You may save children taxes

You should consider whether children need additional assets.  Also, be mindful of the type of asset you are passing down to a child.  Consider the difference between an IRA account in which future distributions will be taxed and a rental real estate property with an existing mortgage.  A beneficiary working as a school teacher will likely appreciate the additional income from the IRA much more than a beneficiary working as a highly-paid physician.  For even greater tax savings, you may be able to make asset transfers directly to grandchildren and skip the children altogether.

Careful with Deathbed Planning

As death looms, people become much more focused on arranging their affairs.  Even those with few assets will develop a laser-like focus on leaving a suitable legacy.  There are pitfalls to death-bed estate plans or revisions to existing plans.  In a perfect world, an estate plan is constructed carefully after much thought and revisions are made regularly.  However, lawyers and financial advisors are often solicited to make changes when a client fears an imminent demise.

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Recently, I helped clients update their revocable living trust after the wife was diagnosed with terminal cancer.  They created their trust 20 years ago and had not made any updates since that time.  In the intervening years, one of their five children had passed away and numerous grandchildren had been born.  The prior version of their trust provided that if one of their children predeceased them, the surviving children would receive the estate equally.  The clients instead wanted the trust share that would have passed to the deceased child to be held in trust for the deceased child’s children or the clients’ grandchildren.  If nothing had been done, the clients would have disinherited their grandchildren.

When making near-death amendments or creating new estate plans, advisors and clients must consider the income tax ramifications. A common mistake is to transfer a home or real property to children or grandchildren prior to death.  Such a transfer results in loss of the step-up in basis of the property to the date-of-death fair market value.  The child or grandchild receiving the property steps into the shoes of the transferring parent or grandparent and takes the transferor’s basis in the property.  Usually, the basis is much lower than the present day fair market value.  When the child or grandchild sells the property, he or she will incur a much higher capital gains tax than necessary.

Finally, to avoid a contest, a medical or mental competency examination can assure that the client is competent to make the change.  These exams can be administered by the client’s regular physician.  By using their normal physician, the client will feel more at ease and the physician will already have a history with the client and be able to differentiate whether the client lacks capacity.

Death-bed planning can be done effectively but there are numerous considerations and precautions to follow.

Carson City Recluse Leaves $7 Million Fortune in Gold

A Carson City man, Walter Samaszko, passed away in June with apparently no heirs and very little personal wealth.  However, cleaners preparing his house for sale discovered he held over $7 million in gold.  The Mercury News reports that a San Rafael, California woman appears to be the sole heir to the fortune. 

Mr. Samaszko, an anti-government champion, was dead for at least one month before neighbors discovered his corpse. Months later, the vast fortune was uncovered and includes stock accounts valued at over $165,000 and cash of $12,000.  The estimates of the $7 million estate are solely based on the weight of the gold.  However, there are rare, antique coins in the collection which could drive the total value far higher.

While this case is extremely unique for a number of reasons, there are lessons to be learned:

One, never assume the size or extent of anyone’s estate.  Despite appearances to the contrary, there are many wealthy individuals who show no signs of their wealth.

Two, plan now for incapacity and death.  There is no telling what Mr. Samaszko intended to do with his gold collection.  However, some simple estate planning could have assisted him in avoiding over $1 million in taxes.  Likely Mr. Samaszko would be abhorred to think that the government will be the beneficiary of his failure to plan.

Three, keep in contact with relatives, whether distant or remote.  You never know if you might end up becoming the lucky recipient of a gift or bequest from a family member.

Billion Dollar Tax Bill for Facebook CEO Zuckerberg

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Facebook CEO Mark Zuckerberg will soon become a billionaire when the social media giant completes its initial public offering (IPO).   Despite the enormous benefit to his personal wealth, he will face some severe tax consequences from his proposed exercise of millions of stock options.

Zuckerberg currently owns almost 414 million shares of Facebook, but he also holds options to buy another 120 million shares at the bargain price of 6 cents a piece. Facebook said in its IPO paperwork that Zuckerberg plans to exercise those options and will sell some of his shares during Facebook’s initial offering to cover the tax bill.

Zuckerberg will pay ordinary income tax on the spread between the fair market value of Facebook shares when he exercise his options and the price he pays for the shares  – 6 cents.  Private analysts estimate the shares will go for $40 per share during the IPO.  At such an elevated price, Zuckerberg will owe roughly $1.5 to $2 billion in taxes.

Needless to say, Zuckerberg will pay tax at the highest marginal federal income tax rate of 35% .  In addition, as a California resident, Zuckerberg will pay state income tax at a 10.3% rate.  Why is Zuckerberg willing to shell out billions in tax?  Control.  The 27-year old CEO wants to retain as much control as possible over the continually growing Facebook empire.

Only in the twisted world of taxes could one go from paying what many believe to be the largest tax bill ever to paying no tax at all.  Zuckerberg may not pay any federal income taxes in 2013.  The Facebook Board of Directors, at Zuckerberg’s urging, has reduced his salary to $1 for 2012.

Rising Gas Prices Lead to Larger Deductions

Who says rising gas prices hurt everyone?  Office runner and couriers will cheer the increase to their reimbursements for business trips. The IRS has announced that the mileage allowance for vehicles will increase 4.5¢ from 51¢ to 55.5¢ per mile for business travel from July 1, 2011 to December 31, 2011.  The mileage rate varies based on the annual study of the fixed and variable costs of operating an automobile.

Employees who drive their own vehicles for business purposes may receive reimbursement for business mileage whether the autos are owned or leased.  The rate of reimbursement must not exceed the business mileage allowance.  The employee receives the funds as a tax-free reimbursement if they substantiate the time, place, business purpose and mileage of each trip.

Also, the rate for using a car to receive medical care or in connection with a move that qualified for the moving expense deduction increases to 23.5¢ per mile.