In April, my mom was diagnosed with Stage 4 cancer and told she might not be alive to celebrate the Christmas Holidays. My sister took over the medical advocacy role and I became the financial point person. It gave us a place to focus our attention in this time of grief.
I want to share some of my discoveries to help other families facing this problem.
We started with finding mom’s will, her Durable Power of Attorney and Medical directives, to see if she wanted to make any changes and if the hospital / doctor would honor her current documents.
Her will indicated there would be a list of assets showing what mom wanted to leave to specific people… so we helped her fill in the blanks.
The next thing we did was review how all her assets were titled: Did she have the names of all her children as beneficiaries on her retirement account so that we could stretch the distributions over our life expectancy?
Did she have any life insurance policies? Who are the beneficiaries? Luckily, dad had set up a life insurance trust, so that the proceeds will not be taxed as part of her estate. Where is the policy kept?
Her financial documents were in the safety deposit box. So, we needed to know where the key was, and together, we filled out paperwork at the bank that allowed me access to her safety deposit box and its contents.
When dad died, mom did change the title to the house so it was just in her name. That meant we would have a clean title report when we were faced with selling her home and would not have to locate dad’s death certificate.
I confirmed that mom did not have any assets outside of the State of Washington. We did not want to pay legal fees to go through probate to change the name of the owner or worry about other state estate taxes.
She wanted to make her Christmas gifts early, so I helped her select stocks with a high basis (in case any of the children needed to sell the securities, they wouldn’t have large gains) to use for gifts. Others might want to hold on to the stock as a legacy memento.
In Washington, gifts made during life are not added back to the taxable estate value, so death bed gifts save Washington (WA) estate taxes. In 2016, the first $2,079,000 of estate value is not subject to WA estate taxes, while the Federal exemption amount is $5,450,000. So, if she had $7 million of assets and did nothing, the estate would owe Federal estate taxes of $333,688 and WA estate taxes of $715,780. If she gifted $5,000,000 to the children, she would have no WA estate taxes and Federal estate tax of $620,000. This saved overall estate taxes of $429,468. The savings would be even higher if her will provided for charitable gifts.
My mom had a strong faith and she wanted to take advantage of using her required minimum distributions from her IRA to make charitable gifts. Taxpayers over 70 ½ can request their trustees make direct gifts to charities up to $100,000 per year, thus reducing taxable income and taxes.
Mom was receiving Social Security payments; she did not defer them until she was 70 to take advantage of the 8% inflation increase. If she had deferred payments, we would have requested that the deferred Social Security payments be paid immediately to avoid losing them.
Since the tax basis in assets are revalued at the date of death (fresh start), it makes sense for her to sell any stocks that are underwater (the fair market value is less than the purchase price). By recognizing these losses, she can reduce her income taxes.
Mom has a Grantor Retained Annuity Trusts (GRAT). She might consider swapping out assets in the trust that have large unrecognized gains with personal securities that have high basis with little gain. The assets in the GRAT do not get a fresh start basis adjustment so this will enable the securities with the potential large gains to get a new market basis adjustment and save capital gains tax. I told her that we wanted her to outlive the trust term.
We considered buying a part interest in her real property to create a lower value. Family partnerships or partial interests in real estate create valuation discounts since mom would not own 100% of the asset. However, the cost of an appraiser to determine the value might negate the tax savings. We also decided that we wanted to inherit the assets to get a higher basis since some of the kids would be selling their inherited assets.
Mom has some secrets, including the password and user names to access all those digital family photos and where she keeps her digital financial records. She not only showed me what she had, but shared the magic words to unlock her hidden files so we could download them.
Although someone suggested that we consider a change of residency to avoid the WA estate taxes, it is not easy to leave family, friends and neighbors for the sake of saving taxes.
I hope that you found this article helpful and a guide to focus your last-minute efforts.