Patinelli & Chang, LLP

Who Will Inherit the Family Home?

“You should go to an estate planning attorney to sort things out and make sure both of you are on the same page about who owns what, who gets to stay where and for how long into the future.”

Here’s a scenario that happens often. A man receives an inheritance, and he decides to use it to purchase the family home outright. His wife has signed a quitclaim deed to put the property into her husband’s trust. The understanding was that if the husband died before the wife, she would be permitted to stay in the home until her own death. The problem, says The Washington Post in this recent article “Make sure you and your spouse are on same page on who will inherit your home,” is that the husband never signed the living trust.

Making matters more complicated: this is a second marriage for both husband and wife, and they both have adult children from their prior marriages.

A few questions must be raised. First, is he the sole owner on the deed, or is the living trust the owner on the deed? If the wife quitclaimed their home to her husband personally, then the husband owns her share of the home, subject to any marital interests she may have in the home.

However, if she quitclaimed the home to his living trust and the trust was never created—which happens far more often than it should—then the deed might be an invalid deed. The wife may still own her interest in the home.

Failing to finalize documents can undo the best estate plans.

There is more. At one point, it’s likely that the wife and husband owned the home as joint tenants with right of survivorship. If the wife died, the husband would own the entire property, and the same would happen if he died—she would own the entire property.

The first thing that needs to happen is to find out if the deed was ever filed or recorded. If the deed was never recorded or filed, the quitclaim can be destroyed, and the status of the title remains as it was. However, if the deed was recorded and ownership was transferred to the husband, he is the sole owner of the home, subject to the wife’s marital rights, in this case under California law.

If the trust was not signed, it does not exist, and a quitclaim deed transfer to a legal entity that does not exist, creates a situation where the wife could claim that she still owns her interest in the house, but the house may be owned by the husband and wife as tenants in common, and not joint tenants with right of survivorship.

It could become even more complex. If the husband now owns the home and the wife has marital rights, upon his death, she may be entitled to a share of the home under her husband’s will, if he has one, or by the laws of their state. However, his children would also own a share of the home, so she would end up owning a home with his children. Depending upon the relationship with the step-children, that could work out, or it could be a disaster.

Instead, the couple needs to sit down with an estate planning attorney to clarify how the home is presently owned, what they want to have happen and how to document it, so upon either of their deaths, their wishes are fulfilled.

Reference: The Washington Post (August 19, 2019) “Make sure you and your spouse are on same page on who will inherit your home”

You’ve Received an Inheritance. Now What?

“Are you inheriting money from a relative? Or receiving funds from a lawsuit? Or planning to be a lucky lottery winner?

Inheriting money puts a whole new spin on your outlook on money, says The Kansas City Star in its article “Coming into some money? Be wise with it.”

Should you pay off your debts first, if you have any? Make a list of your debt balances and their interest rates. If the interest rate is high, pay it off. If it’s low, you may be better off investing the funds.

Next, check on your emergency fund. If you don’t have three to six months’ worth of living expenses on hand, use your inheritance to ramp up that fund. Yes, you can use credit cards sometimes. However, having at least two months’ worth of living expenses in cash is worthwhile.

The third step is to contribute the most you can to a health savings account (HSA), if your employer does not contribute to it and if you have a qualifying health plan. That’s $3,500 if you are single, $7,000 for families and add $1,000, if you are over 55. This gets you a nice tax deduction and withdrawals are tax-free, as long as they are used for qualified medical expenses.

If you’re still working, and depending upon the size of the inheritance, it might be time to “tax-shift” your portfolio.

Let’s say you regularly contribute $3,000 to a 401(k). If you can, increase that amount by $22,000, to the maximum, if you’re 50 and older. Since your paycheck decreases, so does your tax. If your tax rate is currently 22%, you’ll only need to add $17,160 from your inherited account to reach the same spendable dollars. The tax-deferred account in your portfolio will grow faster, while the taxable account shrinks.

Think about whether to commingle funds with your significant other or not. Let’s say you and your spouse have a retirement portfolio. You both can spend it now, maybe on your house. The inheritance may also help you to retire earlier. If you save the inheritance, keeping it in a separate account with only your name on it, it remains your asset, in case of a divorce. Most states will consider this money a non-marital asset, and not subject to division between divorcing parties.

Consider using the inheritance as a way to avoiding tapping into retirement accounts. Withdrawals from IRAs are taxable. If you’re not worried about commingling funds or investment gains, then use the inherited account to minimize the tax losses from retirement accounts.

Most people don’t have enough saved to keep spending during retirement as they did while working. Skip the spending spree that often follows an inheritance and enjoy the money over an extended period of time.

Receiving an inheritance is one of the times when a review of your estate plan becomes a wise move. A new financial position may require more tax planning and more legacy planning.

Reference: The Kansas City Star (June 27, 2019) “Coming into some money? Be wise with it”

Want to Give Away All of Your Money?

“Even if you’re not a millionaire, you may have reached a stage where you think, It’s enough. It could even be a bit too much. A second car may sit mostly in your garage. A beloved vacation home may have transformed from a place to relax to a place to maintain.”

You don’t have to be a millionaire to feel like you’ve got enough. How many cars, vacations or houses does anyone really need? If you’ve reached that point, congratulations. Now, what do you do about it? How do you share your resources in a way that is carefully thought out and doesn’t create a battle among family members? An article from AARP, “How to Give Your Money Away,” provides some good points.

A grandchild needs a college education. Use a 529 college tuition plan to help your grandchild, by contributing to a plan created by the child’s parent. Financial aid formulas look at contributions from a grandparent’s plan but not a parent’s plan as student income. To allow your grandchild to be eligible for student aid or grants, make sure that the funds you contribute go to his or her parent’s 529. Many states permit you to switch ownership to the parent,  if the beneficiary remains the same.

You want to be philanthropic, even if you’re not Warren Buffet. You can use what’s called a DAF—donor advised fund. They are like charitable savings accounts. The tax deduction for any cash or investments placed in the fund is immediate, so you can front-load two or three years’ worth of giving into one year. You can also claim a charitable deduction for a year, when you intend to itemize instead of taking the new standard deduction. You can direct grants from the fund to any non-profit organization you choose and whatever timeframe you like.

One child is a smashing success, the other is a starving artist. Sometimes the disparity of incomes between children, can be a result of choice or abilities. Nevertheless, you may not wish to leave the exact same amount to both kids. One of your children might have a disability and needs special planning. It’s your call and it’s also your call whether to share all the details with your kids. Logic prevails in some families and there’s no drama over these kinds of decisions. Less information about their inheritance is better for others. You could insert a no-contest clause in the will to forestall any litigation.

You have visions of generations enjoying your summer cottage. Sometime this works out.  However, sometimes the kids have no interest in the property and just want to sell it. Have that conversation first. If no one wants it, sell it when the timing works for you. If one kid loves the house and the others don’t care, work out the numbers so the house stays in the family, but the child receives a smaller percentage of assets. If the family wants to keep the house, work with an estate planning attorney to create an LLC (Limited Liability Company) and give shares to the kids. You’ll need an operating agreement, including how the cost of maintaining the property will be handled and what happens, if someone wants to sell their share. Define the universe of eligible owners as lineal descendants and not spouses, to forestall an ownership battle in the case of a divorce.

Talk with an experienced estate planning attorney about how to give away your assets in a way that will make sense for your family and gain useful tax benefits for your estate.

Reference: AARP (May 1, 2018) “How to Give Your Money Away” 

What Is the Fascination with Anthony Bourdain’s Estate Plan?

“Ever since his untimely death, the press and the public hasn't been able to get enough of Anthony Bourdain. His name caused another commotion this week, when his will was probated in New York.”

There’s something about a rebel who lives life on his own terms that is like a magnet: it’s sometimes hard to turn away and that’s how many are responding to celebrity Anthony Bourdain’s passing, according to the Forbes’ article “How Anthony Bourdain’s Estate Plan Reflected the Two Most Important Parts of His Life.”

Reports that his net worth was only $1.2 million grabbed a lot of attention. It shouldn’t have surprised anyone, because Bourdain regularly said that until his 40s, he lived paycheck-to-paycheck. What’s really interesting from the estate planning perspective, is how he expressed his wishes in his will. The details became public because it was probated.

Bourdain made provisions for his only child, who will inherit the bulk of his wealth. He also seemed to have been influenced by the enormous amount of travel his career required. What is interesting is that he passed his frequent flyer miles to his estranged wife “to dispose of, in accordance to what she believes to be his wishes.”

Those who travel often and have large frequent flier miles, award points and perks, often overlook them as part of their estate plan. They are often valuable and should be addressed in estate planning.

 However, passing along airline points is not as easy as filling out a beneficiary form. Each airline has their own policies, so you may have to fill out a form for each one. Loyalty programs are basically contracts with a company and you’ll need to read the fine print, since not all airlines allow their points to be assigned. The selection of beneficiaries also may be limited by the airline.

Bourdain’s very public profile makes it unlikely any airline would refuse to honor his request to transfer those points. Because he carefully documented his desire to leave his frequent flier miles to a specific beneficiary, it’s even more likely his points will transfer without too much fuss.

Bourdain is proof that even rebels make sure to put estate plans in place.

His will reflects his personality of authenticity and relentless curiously about the world around him. The final message he leaves us with, is to take care of those we love, even as we travel the globe.

Forbes (July 6, 2018) , “How Anthony Bourdain’s Estate Plan Reflected The Two Most Important Parts of His Life.”

How Will Today's Young People Retire?

Many young Americans are expecting that their retirements will be funded by receiving inheritances from other people.

It is one of the biggest fears wealthy people have: if they leave a large inheritance to younger family members, they will not be motivated to make their own money and will instead live off their inheritances. In light of that fear, a recent survey of affluent 18-22-year-olds seems troubling at first glance.

A large percentage of them are expecting that their retirements will be funded by the inheritances they receive. This could mean they are spending all their own money and not saving any of it as Bloomberg discusses in "Rich Kids Are Counting On Inheritance to Pay for Retirement."

While the common fear actually happens in real life, which is why the fear developed in the first place, it is not likely that is what is happening here. When one looks deeper into the situation, the young people in the survey are not wasting all their money.

They have a lot more expenses at their age than older generations did. This is in part due to student loan debt. House prices are also continuing to rise in urban areas and incomes for those just starting out have remained mostly stagnant for many years. For now, the kids cannot afford to save. That might change in a few years, as they grow into their careers.

If you do want to know how to best leave an inheritance for a younger family member, then visit with an estate planning attorney who can help structure it in a way that is unlikely to lead to wasteful spending.

Reference: Bloomberg (June 7, 2018) "Rich Kids Are Counting On Inheritance to Pay for Retirement."

Dealing with Foreign Property

Americans who have foreign property or who inherit it need to plan carefully.

Foreign real estate can cause issues in two separate ways, when it comes to estates. It can be difficult for people who own it, when they are planning their estates. It can also be difficult for Americans who inherit it. For the first problem, people need to understand that any real estate owned in a foreign country, is subject to the laws of that foreign country.

Many countries have strict rules about who may inherit property. These rules are unlike anything in the U.S. Attorneys who practice in the foreign country need to be consulted, so any estate plan can take the foreign laws into account when dealing with that property. Inheritors face other issues, as the Washington Post discusses in "Inheriting property overseas can be a dream come true, but it comes with challenges."

The first thing to understand is that individuals who inherit property worth more than $100,000 or corporations that inherit property worth more than $16,000, must report that information to the IRS. There is usually no tax associated with the inheritance.  However, failure to report it can be penalized.

Income generated from the property in the foreign country must be reported to the IRS. Whether any tax is due, depends on whether taxes on that income are paid to the foreign country and how much those taxes are. Finally, the use and sale of the land might be restricted by the foreign country, so local attorneys should be consulted on those issues.

Reference: Washington Post (May 29, 2018) "Inheriting property overseas can be a dream come true, but it comes with challenges."

The Inheritance Scam

Sometimes estate attorneys do contact people unexpectedly to inform them that they might have inherited something.  However, you should be aware of scammers.

It would be great to receive a letter in the mail or a phone call, informing you that you have received a valuable inheritance from someone who recently passed away and who was a distant relation of yours that you did not know about. This does happen.

In popular culture, it is known as the long-lost uncle. When it happens in real life, someone administering the estate will contact heirs and let them know. This always comes as a very welcome surprise for the heirs. However, this rare occurrence is also the subject of a very common scam that might be increasing, as the Gazette Extra reported in "Police warn of IRS, inheritance scams."

The scam is not a sophisticated one. It usually consists of someone receiving a letter in the mail informing them of an inheritance, but with a catch. To make sure the person receiving the letter is the appropriate heir, the “heir” is required to provide some personal details and send cash back to help facilitate the process.

This should raise alarm bells, but people want the inheritance so badly to be legitimate, that they are often taken in by the scam. They not only lose the cash they sent, but they are often then the victims of identity theft. How? It is because they have given the scammers too many personal details.

A real estate attorney might someday contact you about an inheritance. That attorney will never ask you for money up front to tell you about any inheritance that you might receive. If you have any questions about whether an inheritance might be legitimate, you can contact the court directly.

Reference: Gazette Extra (April 19, 2018) "Police warn of IRS, inheritance scams."

What Your Children Need to Know

Before your children receive an inheritance from you, some information might be helpful.

Without the right knowledge or plans, many children who inherit money make some big mistakes. That means that you need to make sure your children have some necessary information, as Nasdaq discusses in "5 Things Your Kids Should Know Before They Inherit Your Money."

Much of what your children will need to know depends on how they are receiving your wealth. If you are leaving them the money in your IRA by designating them as beneficiaries, they will need to know the best way to handle that IRA, when they have to make withdrawals and what they are not allowed to do without facing severe tax consequences.

If the money is being left to them through a will or a trust, they will need to be informed about what to do with that.

The best thing to do is to sit down with your children and talk to them about what they might receive and how they should handle it. It is also a good idea to let them know who to trust for financial advice, should they have questions after receiving their inheritances.

Reference: Nasdaq (Jan. 29, 2018) "5 Things Your Kids Should Know Before They Inherit Your Money."

What to Do When You Do Not Trust Your Relatives

When family members do not get along with each other, they often suspect that one them will steal an inheritance from the other one. They might seek to avoid this problem.  However, there is not much that can be done ahead of time.

It is common for children to distrust their step-parents. It is not always the case, but it happens often enough that it is a cliché to say step-parents and children do not get along.

The children often worry that the step-parent will seek to steal what they view as their rightful inheritance from their parent.

That is the case with someone who wrote into a Market Watch advice column titled "My mother-in-law is deceitful -- can we stop her from stealing my wife's inheritance?"

In this particular case, a man and his wife believe that his mother-in-law is evil and deceitful. They are convinced she will hide assets and fraudulently transfer accounts to herself, as soon as the wife's father passes away.

The father will not say much about it, other than stating that his children will be taken care of. They wonder what they can do to prevent this from happening and whether they should hire an attorney.

As the advice columnist points out, there is not much that can be done before the father passes away.

Hiring an attorney might just make the problem worse, especially if it angers the father.

They might also be viewing the mother-in-law incorrectly and she might have no plans to steal anyone's inheritance.

After the father passes away, there are things that can be done, if the mother-in-law is as awful as they think she is.

Reference: Market Watch (Jan. 8, 2018) "My mother-in-law is deceitful -- can we stop her from stealing my wife's inheritance?"

Will Inheritances Become a Thing of the Past?

In wealthy countries aging populations and the increasing costs of caring for the elderly are putting in jeopardy the entire idea of inheritances for large percentages of the population.

One of the key ways that people in the U.S. have been able to stay in the middle class and slowly build up some wealth between generations is through inheritances. Receiving even a small inheritance from parents, especially if it includes real estate, allows families to build up some wealth. That wealth can, in turn, be left as inheritances for their children.

Even if people are not consciously aware of this, they seem to know it intuitively judging by their actions and their estate planning. In wealthy countries, that idea is in jeopardy of becoming a distant memory for middle class families as the Financial Times explains in "Opinion Today: The end of inheritance."

The article is about the situation in the U.K., but the issues in the U.S. are the same.

The overall population is aging. The elderly are living much longer than in previous years. This increases the cost of providing care for the elderly population. There are not enough younger people paying taxes to make up for the increasing costs.

When political leaders have proposed addressing the issue, they have been punished by voters, who do not want changes to the elder benefits they have been promised.

At some point, the issue does need to be addressed.

If governments cannot afford to meet elder care expenses, then the costs will fall on individual families.  It is likely that there is nothing left over for many middle-class parents to bequeath to their children.

Reference: Financial Times (Dec. 23, 2017) "Opinion Today: The end of inheritance."