Intestacy:
Consequences and Alternatives
ISSUE: A
husband with a multi-million dollar net worth died in his 60’s without a
will, a situation known in legal circles as dying intestate. His failure
to plan ahead for the unexpected resulted in all of his assets passing
to his heirs through probate and split according to his state’s
intestacy laws rather than his wishes. What might he have done
differently had he created a plan? What do his widow and children do
now?
Alternatives
to intestacy:
· Create a will, right now! In the above case,
a will would have at least made his intentions known although it would
not have allowed his widow and heirs to avoid probate.
· Own assets jointly, or hold them in an IRA,
both of which would bypass probate.
· Create a trust to hold assets and avoid
probate.
What
happens to his assets now that he died intestate?
Probate will take place and assets
are divided among his wife and three children according to the laws of
intestacy for their resident state. In this case, each heir received an
equal share, so the widow gets 25%, the same amount as each of her
children. His wife did not get it all! With a life expectancy of over
20 years and the widow’s plans to not work during that time, this amount
may not be enough. And his children may not be responsible enough to
handle their portions.
One way to provide the widow with
more assets is for the children to “disclaim” their portion and let
their mother have inherit a larger portion. The family should take into
account the financial implications of this decision beyond the obvious
inheritances in each heir’s pockets. Disclaiming assets has its
advantages and disadvantages:
· Advantage - The widow has more money to live
on until she passes when her children get the inheritance they had
originally disclaimed.
·
Advantage – There is no estate tax due on
any asset that goes to the wife due to the marital exemption. If all the
children inherit a combined total of more than $1.5 million in 2005, the
estate will pay federal estate tax (the top tax rate is 47%) on the
overage.
· Disadvantage - Adult children may not like
disclaiming assets simply because they inherit less now.
·
Disadvantage - The amount disclaimed may
constitute a waste of their father’s lifetime estate tax exemption
unless the disclaimed assets go into a credit shelter trust. In 2005,
this would be of concern if the parents have an estate greater than $1.5
million.
What is the value of his
estate exemption?
The value of the husband’s estate
exemption is the marginal estate tax rate multiplied by the amount going
to the children. For example, if the above husband has a gross estate
of of $3 million (generally speaking, the gross estate includes all
assets held solely in his name plus any death benefits paid out by his
life insurance policy), each child would receive 25%, or $750,000. The
total going to his children would be $2,250,000, and the husband’s
estate tax exemption would cover $1,500,000. Therefore, $750,000 would
be subject to federal estate tax, yielding a tax bill of roughly
$350,000.
Conclusion:
Can the widow’s finances be structured in a way
that protects her from running out of money before she dies while at the
same time minimizing income and estate taxes? The answer is yes, but it
will require a sophisticated financial blueprint to design the
appropriate structure. The Monitor Group can perform a stochastic
modeling analysis to provide the widow with probable financial
implications of her decisions during this difficult time.
For more information about the process of stochastic modeling, also called “Monte Carlo” analysis, click here to read:
Stochastic Modeling – the Basics.
*****
Cal Brown is Vice-President of The Monitor Group, Inc., a fee-only financial planning firm located in the Tyson's Corner area of McLean, Virginia. As a nationally recognized wealth management firm, The Monitor Group provides investment and financial planning services to more than 190 high net worth client families in Northern Virginia, Maryland, Washington, DC and across the country. Click
here for more information about Cal and The Monitor Group, Inc.
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