Death and Taxes

You can’t take it with you, but you can bring some much-needed certainty, rationality and control to your estate’s final resting place

By Jean Chatzky
Photograph: Illustrated by Thomas Fuchs

“THE LAST CHECK you write should be to the undertaker—and it should bounce,” my mother’s new husband, Bob, often says, quoting Stephen Pollan, author of the 1997 personal-finance book Die Broke. Pollan—father of Michael Pollan (author of the best seller The Omnivore’s Dilemma) and the actress Tracy Pollan, and father-in-law of Michael J. Fox—was writing in a different economy, and besides, his kids don’t need the money (and neither do Bob’s).

Looking down the road, -however, I’m not sure that mine won’t. My -children—like many of yours—will probably be entering the workforce in a financially stressful environment, with higher taxes and stagnant wages. “Also, these kids are going to live even longer than we are,” says Boston University economist Laurence Kotlikoff. “Some of them aren’t going to make it without financial help.”

But if we leave them money, how should we do it? And when? With my own kids and yours in mind, I set about trying to answer some of the most pressing inheritance questions.


How do you keep estate taxes as low as possible?
Most people who make at least $72,000 a year won’t run out of money in retirement, according to a 2010 study by the Employee Benefits Research Institute. They’ll have money or other assets to pass along—which is why they need to think about estate planning. The goal of estate planning is to shelter as much of your money from taxes as is legally possible. The latest iteration of the estate tax law allows each person to pass along $5 million in assets tax free to anyone during life or at death. This exemption is transferable between spouses: For example, when your husband dies, his $5 million estate tax exemption passes to you. Then you can combine your exemption with his, passing along a total of $10 million estate tax free to your heirs.

Now, that probably sounds like more money than you ever expect to have. But my sources say that we can’t bank on the exemption’s remaining so high. Congress will revisit these limits in two years and may reduce them, perhaps drastically. That means we all need to think about how to protect our money for our heirs.

One popular vehicle for sheltering money is a life insurance trust. Rather than buying the policy on your life yourself, you set up a trust that then makes the purchase. When you die, the proceeds are therefore not part of your taxable estate, and the money automatically moves to your heirs estate tax free, without counting toward the $5 million exemption. If you already own a life insurance policy, you can transfer the ownership to a trust. Just know that you have to remain alive for three years before the transfer becomes effective. If you die during the three-year “look back” period, the policy reverts to your estate.

Or you might consider either a bypass trust or a marital trust, both of which protect your assets for your children if your husband remarries after you die. Here’s how they work: If you pass away, your assets are funneled into a previously established trust. Your surviving husband can use the income from this trust (and the principal, in certain cases), and then when he dies, the assets in the trust pass to your kids. If you didn’t have the trust in place, your assets would pass to your husband outright. If he remarried, then died, those assets could go to the new wife and her kids, not yours. Lawyers typically charge between $2,000 and $6,000 to set up a trust of this kind.


Should you give your kids their inheritance now?
If I die at 90, my kids will be 60 and 57, well on their way to retirement themselves. Wouldn’t it be better to give them some of their money earlier? Sure, if I can afford it.

Since every person is allowed to give a maximum of $13,000 a year to anybody without incurring gift taxes, Colleen Barney, coauthor of Best Intentions, a book on estate planning, suggests these guidelines: If you’re 40 or older and you have more than $10 million in assets, think about giving away more than that $13,000 a year (once you exceed your $5 million exemption, you’ll have to pay taxes, currently 35 percent, on anything above that amount). If you have less than $10 million but at least a few million (or if you’re sure you have enough money to sustain you and a spouse even in the case of a long-term illness), then you can consider making a few annual $13,000 gifts. (If your assets don’t add up to millions, you’re probably better off focusing on your own retirement rather than on gifts to your heirs.)

You have a lot of freedom in how to bestow your gift. You could help your -children start a business or buy a house. You could put money into a grandchild’s 529 account for college. You could use the money to build a bigger inheritance by buying one of the permanent life insurance policies discussed earlier. But be careful: If you’re not sure you can afford to give a $13,000 gift every year, don’t lock yourself into a regular payment, like a life insurance premium or school tuition. Instead, give the money as a onetime event.


Are there some assets that are better to give away now?
Yes. If you own real estate or stocks that you expect will go way up in value, you can save your heirs a lot of tax pain by passing along those assets now. Let’s say you own a house that’s worth $1 million today. If you died tomorrow, your kids would inherit a million-dollar asset, which would eat up one fifth of their $5 million tax exemption. If that house appreciates and is worth $3 million by the time you die, it could eat up three fifths of the exemption. So giving it away today would make sense. But since you still need a house to live in, you can’t just sign over the deed to your kids. Instead, Barney says, you could set up a qualified personal residence trust that holds the deed and allows you to live in the house for a certain number of years. Similar trusts can protect other assets. For instance, Barney puts shares of stock in companies that are about to go public into grantor retained annuity trusts; those trusts allow her clients to give away the investment at its current, low value rather than at the higher value that it will presumably reach later.

Read more on how to handle inheritance in this web extra.

Check out more of Jean Chatzky's columns here.

First Published Tue, 2011-05-10 14:11

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