There are many factors to consider when deciding how to divide inheritance among children. While many people’s first instinct is to divide the estate equally, that may not be the best alternative. This question was addressed in a recent article in nj.com titled “What’s the best way to split my estate for my kids?”.
The article provides this scenario to illustrate some of the issues. A widowed father owns a home, has a healthy $300,000 IRA, and 300 shares of stock worth about $72,000. He has two adult children. The older son is married with five children, has a lucrative career, and regularly contributes to an IRA. The younger son is single, and has been unable to work regularly due to a medical disability. The younger son lives with the father, helps with the upkeep of the home, and provides care to the father. He does not have a regular income or any savings.
Before the father makes any kind of gift or bequest to his younger son, he needs to consider whether the son will be eligible for governmental assistance based on his disability. If so, or if the son is already receiving SSI or Medicaid, any kind of gift or inheritance could make him ineligible for those benefits. The father could establish a Third-Party Special Needs Trust for his younger son, or any disabled grandchildren. The trust would provide financial resources for the younger son, while maintaining his eligibility for Medicaid health insurance and other benefits.
The family may want to recognize that the younger son is providing personal care assistance and home maintenance for the father in exchange for living in his home. The father should determine whether the home is suitable for the younger son to live in alone, or if the home should be sold and the inheritance divided.
Guarding Against Risk
The father may consider creating a living trust to manage his assets while he’s alive. A trust could also ensure that any inheritance remained separate property for his married son, in case he later divorces. Another benefit of a trust would be to protect assets from creditors, lawsuits, financial exploitation, or even addictive behavior.
Stock or Assets
Assets and stocks (not IRAs or annuities) inherited by the sons receive a step-up in basis. The gain on the stock from the time it was purchased and the value at the time of the father’s death will not be taxed. If, however, the stock is gifted to a grandchild, the grandchild would take the grandfather’s basis and upon the sale of the stock, they’ll have to pay the tax on the difference between the sales price and the original price.
IRA or Annuities
An IRA must be initially funded with cash. Once funded, stocks held in one IRA may be transferred to another IRA owned by the same person, and upon death they can go to an inherited IRA for a beneficiary. However, in this case, if the younger son doesn’t have any earned income and doesn’t have an IRA, the stock can’t be moved into an IRA.
Cash gifting may be an option. A person may give up to $15,000 per year, per person, without having to file a gift tax return with the IRS. Larger amounts may also be given but a gift tax return must be filed. Each taxpayer has a $11.7 million total over the course of their lifetime to gift with no tax or to leave at death. (Either way, it is a total of $11.7 million.)
Medical & Educational Gifts
Medical expenses and educational expenses may be paid for another person, as long as they are paid directly to the educational institution or health care provider. This is not considered a taxable gift. Many grandparents choose to fund 529 Educational Plans for their grandchildren. These investment accounts offer tax benefits when used to pay for qualified education expenses.
The father in this scenario would benefit from sitting down with an experienced estate planning attorney and explore how to best prepare for his own financial needs, how to provide for his younger son’s future, and how to divide inheritance between his family members. Contact our office today for a free consultation.
Reference: nj.com (June 24, 2021) “What’s the best way to split my estate for my kids?”