Estate Planning 101: Penny Wise And Pound Foolish
By ZARAH WALPOLE
Clients who come to me to prepare a Will are often very focused on reducing or avoiding the payment of probate fees after their death. Probate is an “estate administration tax” the estate pays when applying for a Certificate of Appointment of Estate Trustee with a Will, a usual part of the process of administering an estate. The tax is equal to $5.00 for each $1,000.00 of the value of the estate up to $50,000.00 and $15.00 for each $1,000.00 of value over $50,000.00.
It is certainly a sensible part of estate planning to consider whether probate can be reduced and there are many perfectly legal steps people can take, such as holding assets jointly, creating corporate wills, or providing gifts while alive. Any, or all, of these techniques may be appropriate for any particular individual. My concern is that people can get fixated on saving probate to the extent of ignoring other important considerations.
I’m going to share a cautionary tale of what can happen when you make plans based on a too narrow understanding of the purposes of estate planning. It is a true story.
In 1978 parents transferred title in the family home to their adult children. The parents indicated that they had taken care of their children’s “inheritance”. The parents continued to reside in the home until the death of the mother in 1997 (the father died in 1983). Between 1978 and the sale of the home by the children in 1998, the property gained in value by approximately $800,000.
The children did not have to pay probate on the value of the home because they already owned it. They saved $12,000. The parents accomplished what they set out to do.
However, the children were assessed income tax on a capital gain of $800,000, resulting in a tax bill in the range of $185,000. Though the children owned the home, they had not lived in it, so could not take advantage of the “principal residence” exemption. This exemption provides that the income tax ordinarily payable is reduced or eliminated for the capital gain on your primary home. The parents had lived in the home but hadn’t owned it, so the estate could not take advantage of the principal residence exemption. The court found it had no ability to provide relief, even if the result was harsh and not what anyone had intended. Unfortunately, with a little planning this result could have been avoided.
My point is that a little time and expense at the beginning, can save a lot of time and expense at the end. A wills & estates lawyer can assist you in considering not only ways to minimize probate fees, but also your legal, familial and moral obligations, and methods to minimize income tax at death, and beyond.
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The above is not intended to constitute
legal advice. Please contact a lawyer to clarify your
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