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Estate Taxes, Planning and Inheriting Property

by | 52 tax Tips and Weekly Financial Blog for 2023

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Once you are done dealing with a behemoth of paperwork, and tax season is over, it is time to
look ahead to ensure a better tax year in the future. With the tax season behind us, now is the
perfect time to consider your estate plan.

I read this article in a legal journal and HAD to share it.

What Do You Have in Common with Tony Soprano?
By Michael L. Ferrin | April 17, 2014

James Gandolfini, the actor who played Tony Soprano in the popular television series ‘The
Sopranos’, died of a heart attack while on vacation in Italy. Since then, countless articles have
been written by estate planning attorneys and others analyzing, criticizing, and dissecting the
lessons to be learned from his estate plan. Most people do not have a potential $30 million estate
tax bill due to poor estate planning (which could be seen by some as a nice problem to have), but
many of the other problems with Mr. Gandolfini’s estate plan are common in most estate plans.
Mr. Gandolfini’s personal choices, as well as his estate and tax planning choices have been
widely criticized. For example, it is reported that he left the bulk of his estate to his children,
sisters and friends rather than his spouse. By holding the assets in trust for the benefit of his wife
under an ascertainable standard and then having the balance go to the children on her death, he
could have saved significant estate taxes. Perhaps even more problematic is that the children
receive their inheritance at age 21. His 9-month-old daughter will receive 20% of what is
estimated to be a $70 million estate outright at age 21. Using a simple trust, this inheritance
could have been protected and managed for her throughout her lifetime, where it would be
protected from creditors, shysters, con-men, divorce, and from poor choices that are inevitable
when a young person is handed a pile of money before she is adequately prepared to handle it.
Mr. Gandolfini owned real property in Italy. Real property in multiple states and foreign
countries can result in multiple costly probates if not properly addressed in an estate plan. Some
of his property was vacation property. Vacation properties such as condominiums and family
cabins have unique issues that need to be addressed before they are passed to the next generation.
Failure to plan can result in loss of property or hard feelings between family members.

How does the world know so much about Mr. Gandolfini’s estate plan? It really isn’t any of our
business, is it? The answer is simple. Mr. Gandolfini chose to use a Will rather than a trust. A
prominent estate planning attorney said it this way; “But, the hardest choice to understand is
Gandolfini’s choice to use a Will rather than a trust as his primary estate planning vehicle. By
using a Will, he subjected his estate to the process of probate. Probate delays and expense vary
by jurisdiction. But, in all jurisdictions, probate is a public proceeding. It is difficult to
understand why he would choose to air his finances and personal choices in public. It is even
more difficult to understand why he would expose his family to this. If he had used a trust rather
than a Will, we would not know to whom he had left his fortune.” Steven Hartnett, Associate
Director, American Academy of Estate Planning Attorneys.

This type of bombshell happens all the time because people tend to put off important matters
until later. This also happened to Prince, Aretha Franklin, Michael Jackson, Bob Marley, Sonny
Bono, and many more!

Perhaps the most important lesson to learn from this is applicable to all of us – don’t
procrastinate. Mr. Gandolfini died at age 51 while on vacation. He probably assumed he had
many good years ahead of him to get his planning in place. It is human nature to put off setting
up a trust or updating an estate plan, but this can result in unfortunate situations and problems for
the loved ones we leave behind.

Now is the time to consider your estate plans:

No estate plans? Establish one ASAP!

If you do not create an estate plan, the State where you live decides allocation of inheritance.
This can be a problem if there are children from a current or prior marriage. A Will or Trust
sets the rules of who will inherit what, and who will take of whom in case of a death or disaster.

Do not ignore estate planning just because your estate is under the estate tax threshold.
The rules for estate exemption vary year to year, and depend on the state you live in. Many
people feel that if they don’t have many assets, there is no need to set up an estate plan. But
that is FAR from true! Have a plan in place and review and update annually. Things such as
financial situation or heirs could change.

 Create Will or Trust.
This document can specify heirs, allocation of assets, denote representative or guardian of
you and/or your minor children. Each one has advantages and disadvantages. There is NOT a
one size fits all answer to which is best for each person or family. There are many reasons to
consider which works best: Privacy, timing or inheritances, costs, maintaining family
harmony, financial position for minors, protecting stepfamily members, asset protection,
probate avoidance are but a few of the many issues that can be addressed by choosing the
appropriate estate planning vehicle (Will or Trust).

Medical POA and/or Living Will
Supports your wishes to be carried out if you cannot communicate them at the time.

Legal and Financial POA’s
Gives permission to those you trust to carry out your desires if you cannot communicate with
them at the time.

Updated Beneficiary designation for Insurance and Retirement Assets
Ensures heirs receive monies quickly, without hassle or delay. (Must change after divorce)

Here are a few things to keep in mind when discussing a Trust:
1. Some Trusts state that upon the death of either one of you, your assets are to be placed into
two separate Trusts. This is typical of most A/B Trusts, Living Trusts, Revocable Trusts, and
Family Trusts. This means that when one of you passes on, there is an A Trust and a B Trust
set up.

Some Trusts state that upon the death of either one of you, your assets are to be placed into
two separate Trusts. This is typical of most A/B Trusts, Living Trusts, Revocable Trusts, and
Family Trusts. This means that when one of you passes on, there is an A Trust and a B Trust
set up. The A Trust is the Survivor’s Trust, and the B Trust is the Decedent’s Trust.
Frequently people believe if they have a small estate and if there are children or
grandchildren involved, they do not have to worry about creating two separate trusts upon the
death of their spouse; even though the Trust documents state this should be done. It is my
advice and recommendation that you DO create two separate trusts if your trust language tells you to do so.

Especially so with second marriages and blended families.

2. There is a federal estate tax exemption in place if a Trust currently exceeds $12.92 million.
(The amount may change each year, contact our office for current exemption amounts).
When a person passes, they can shift their unused estate exemption to their spouse. That
spouse will have the ability to shelter over $25.84 million (be sure to find out the current
exemption amount for this year by calling our office), to not pay taxes for their estate or by
allowing their heirs to inherit money tax free. We encourage that an Estate Tax Return be
prepared when a spouse passes, regardless of the size of their estate. Wealthy clients
understand the need for preparing these returns while the “average” family does not feel that
since they do not have a large estate, they do not need to file the return. This omission can
affect tax issues with a subsequent marriage, if that results in marrying into a large estate.

3. Make sure your Trust review is less than 5 years old. If you do not have a Trust in place, I
strongly recommend having one created, especially if you are married, own a home, or have
children. A trust document is a terrific way to keep the transfer of assets private, to prevent
family feuds, and to allow for assets to be transferred quickly at no cost, among other
reasons. The cost of preparing a Trust may also be a tax deduction.

Property and Assets
Some taxpayers believe that when they are older it is safer to have their beneficiaries or heirs
listed as joint owners on their property, checking accounts, savings accounts, automobiles and
houses. The parents think they are doing the children a favor and making things easier by having
their children titled as joint owners. In fact, this could cause problems when the parent passes on.
If a gift is made prior to the death of a parent, the basis of the inheritance, is what the parent paid
for it. For instance, if the parent paid $100,000 for a home and the child was put on the deed with
the parent, when the parent passes away the child’s basis for the house is $100,000. This means
if they sell the house for $200,000, they will have a gain to pay tax on.

Consider not putting the children on the accounts or deeds. Instead, use a Power of Attorney that
allows them authority to manage the property in case of incapacity.

Then prepare a Will or Trust and appoint who will inherit the assets upon the parent’s death. This
would allow the children to receive the property at a stepped-up basis (fair market value or what
it can sell for); which means little, or no tax would be paid once the child sells the inherited
property.

Finally, if you put children’s names on property and those children go through a divorce or
lawsuit, it is possible that your property could also be lost or disposed of because the courts will
assume the property is owned jointly by the parent and the child. Not only does putting the
children’s names on property hurt the children tax-wise, but it could also hurt the parent both
financially and legally, if there is any action taken against the children before the parent passes
away.

Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.

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Mr. Hockensmith has been a guest newscaster for national and local TV stations in Phoenix since 1995, broadcasting financial and tax topics to the general pubic. He has written tax and accounting articles for both national and local newspapers and professional journals. He has been a public speaker nationally and locally on tax, accounting, financial planning and economics since 1992. He was a Disaster Reservist at the Federal Emergency Management Agency, for many years after his military service. He served as a Colonel with the US Army, retiring from military service after 36 years in 2008. Early in his accounting career, he was a Accountant and Consultant with Arthur Andersen CPA’s and Ernst & Young CPA’s.

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