What Do I Need to Do to Prepare My Personal Estate for the Future?
Answered by Shelly J. Meyers, chairwoman and chief executive officer of Meyers Capital Management, L.L.C., in association with John Robert Mathena, financial adviser with Zurich Scudder's Private Investment Counsel, in Los Angeles. May 2, 2001
Personal estate planning
Q: Hi, Shelly,
We live in California and have two children and a number of questions. First, we already have wills, powers of attorney and life insurance, and the main asset (our house) is in both of our names. Do we still have to worry about inheritance taxes? When I die, will my partner inherit my basis in the house or a stepped-up basis? Is there tax on that?
Second, as far as the estate tax goes, as long as half of the estate is under the $675,000 limit, are we OK? (And this has nothing to do with inheritance tax, does it?)
Finally, as a stay-at-home mom, I may be able to be listed as a dependent on my partner's tax return. Do you know of any income or other requirements?
Thank you very much.
Ann
A: Dear Ann,
You have a great question regarding inheritance taxes. Quite often, I hear from people who are confused by this term. But whether one calls it an inheritance, estate or death tax, it is all the same tax. Simply put, when an individual dies, the assets that are left to his or her beneficiary may be subject to taxation by both the state and federal governments.
From what you say, it sounds like you have done a good job by obtaining wills, powers of attorney and life insurance. Since there are children involved, I also trust that adequate guardianship provisions have been made for their care should both you and your partner become incapacitated or die.
Without knowing what your other assets look like, I'm going to assume that you own your house as joint tenants with right of survivorship. If that is true, then should one partner die, the surviving partner will inherit the house without going through the probate process. However, gay and lesbian couples do not get that magic "step up" in cost basis that heterosexual couples do. The original cost basis will carry over to the surviving partner. As long as the gross valuation of the total estate is less than the current $675,000 threshold, there would be no estate tax owed if either you or your partner were to die today.
To further help tighten up your personal estate planning, you may both want to give serious thought to creating living trusts. The benefit of a living trust, which can be revoked or amended any time during your lives, is that it provides one more document that proves your intent that the surviving partner be the economic beneficiary upon the other partner's death.
A trust also avoids probate, which can be a costly and time-consuming way to settle an estate. The probate process typically takes nine months to a year and has expenses involved that sometimes equal about 6 percent of the estate. Probate fees are set by the court and cannot be waived or negotiated (even if you make your best friend the executor) so I encourage you to consider a trust.
A trust is a private document. No one other than the named beneficiary is entitled to a copy. It is never published as a public record, unlike a will. Therefore, the creators of a trust can rest assured that their assets will be passed at death in a private manner, not subject to court review and unnecessary expense.
I am glad to learn that two women have had the foresight to acquire life insurance. Often, I see this overlooked in lesbian relationships. My question to you is: Is the life insurance only on the income-earner? If it is, you should also consider life insurance on the stay-at-home mom. The stay-at-home mom provides a huge economic gift to the family, one that would be very costly to replace. Life insurance could help ease this burden by allowing payment for child care, or allowing the surviving parent to stay at home to care for the children. I also urge you both to look into disability and long-term care insurance.
You should also be diligent to ensure that the beneficiary designation(s) on all life insurance, annuities, 401(k) plans and IRAs has the other partner listed as the primary beneficiary with the children listed as secondary beneficiaries.
As the stay-at-home mother, you should definitely consult a tax professional to find out what is involved in becoming listed as a dependent on the tax return of the income-earning parent. There are all kinds of funny nuances that change annually, and it really is best to get a professional's guidance here.
Finally, if you stay with a structure using two wills, you need to be diligent about holding everything beyond the house in joint tenancy as well. This includes cars, investments and bank accounts.
I hope these answers have helped but I know that each situation is different. Please use my comments as a guideline and engage a professional planner to help design a plan for your specific needs.
All the best to you.
Sincerely,
Shelly J. Meyers
Chairwoman and chief executive officer of Meyers Capital Management, L.L.C., in association with John Robert Mathena, financial adviser with Zurich Scudder's Private Investment Counsel, in Los Angeles.
May 2, 2001