A comprehensive estate plan includes understanding what steps will be required when you or your spouse dies. Tax planning advantages and the intended distribution of wealth to your loved ones takes place in stages and certain opportunities will be lost unless the proper plan is in effect when the first spouse passes away. This posting describes what steps are necessary after the first death. Next week’s posting will describe how a comprehensive plan works through the life of a couple, the death of a spouse, and finally the death of the surviving spouse.
The estates of the first spouse to die often avoid probate. Unless properly planned, the ease of the first transition may lull loved ones into a false sense of comfort that may surprise them upon the second death. This may be especially true since 1/1/2011 when the new concept of “portability” was introduced allowing properly administered estates less than 10 million dollars to avoid estate taxes altogether.
Even with lack of proper planning many spouses may avoid an estate administration if the value of their estate is less than 10 million dollars. Real property and accounts may be in joint tenancy or community property with rights of survivorship and life insurance, annuities, and retirement accounts may designate the surviving spouse as the death beneficiary and the surviving spouse may do nothing because there just doesn’t seem to be a need for it – the surviving spouse has complete access to everything and may not appreciate the need to administer those assets.
The recording of a death certificate and notification of the custodians of any policies, contracts, or accounts may be sufficient for the surviving spouse to gain control over all those assets. Yet a gaping hole has been created unless the surviving spouse takes care to name new beneficiaries of retirement accounts that are retitled in the surviving spouse’s name (a “spousal rollover”) and have a Will or Trust which designates who inherits upon the death of the surviving spouse. If the decedent has begun taking minimum required distributions, a minimum required distribution must be taken in the year the decedent dies, if none has already been taken. There are substantial penalties for failing to take that minimum required distribution. Taxes must be paid on the distributions taken either by the decedent or the beneficiary.
Failing to record a death certificate may cause delay later when trying to sell or transfer the property after a second death.
Accessing accounts after the second death when the first decedent’s name has not been removed may also cause delay and unnecessary expense.
In order to claim the benefits of “portability,” a timely estate tax return must be filed even if no tax is due. This will be particularly important if the estate tax exemption amount returns to $1,000,000 on 1/1/2013 as is presently projected.
Failing to establish the credit shelter trust provided for in most good estate plans may be an expensive mistake. It is a mistake of good faith if only estate taxation is considered, but other considerations such as how the children of blended families are treated or how the assets are protected from creditors are non-tax reasons to be concerned about the AB division in addition to the lawful avoidance of estate tax.
I recommend a legal checkup after any death just to be sure loved ones have good advice and guidance about how to proceed. I like to create a customized checklist for the family of every decedent so they know when the administration of the estate is complete.
If you or a friend wants help understanding the legal process either before or after death, please call me.