Dear Quentin,
My 75-year-old father is an eccentric hoarder who is thrifty to a fault.
He retired a multimillionaire after a celebrated business career, but still wears worn-through shoes, and “shops” at the county dump. He is cantankerous and argumentative, and doesn’t always make good decisions for himself.
My sister and I worked together to manage him for many years, but they had a falling out that doesn’t look like it can be repaired. Dad threw a huge fit and made a big, public, deal of disowning her, and writing her out of his will.
This treatment was undeserved. She was trying to help him when they argued and she’s still helping me plan for his care and dealing with his hoarding. When he does pass, assuming I stay in his good graces, his sizable fortune is going to come to me.
I still think it would be best to split it with my sister. Assuming we’re not going to get any help from Dad in setting something up, how can I best make that happen without him? Thank you.
The Favorite Daughter
Dear Favorite,
Sometimes it’s difficult to avoid such conflict, even when acting in a person’s best interest. Sooner or later, each family member will become the target of that person’s ire. Often, it goes all the way back to childhood and has precious little relevance to the moment. Still, it must be hard for your sister not to take the broken relationship with your father personally.
Gifting assets to your sister would not entitle her to the “step-up” income-tax basis. If, for example, you gave her a property that was purchased for $400,000 and it is worth $500,000 when you gifted it to your sister, it would be taxed on the total fair market value of the property. Heirs, on the other hand, are typically granted a “step-up” in basis, and only owe tax on the appreciation.
You could allow your sister to contest the will, assuming your father has not expressly said he does not wish to leave her anything in his will, and obviously choose to not fight any legal challenge. This would be the most straightforward and tax-efficient approach. If she is not mentioned in the will, she could make a legal case for being “forgotten” by your father in his will.
In the state of New York, those with legal standing to contest a will include “individuals who would have inherited a greater sum if there had been no will and the estate was distributed under New York’s intestacy laws” and/or “individuals who would have inherited more under a previous will,” according to the law firm Landskind and Ricaforte.
According to the law firm, reasons to contest a will also include: “The omission was accidental [assuming your father does not mention your sister]. The will is not a valid legal document. The descendant lacked the mental capacity to sign the document. The will was signed under duress or undue influence from another party. A subsequent will has been discovered.” Granted, the latter is unlikely.
“Transferring millions of dollars to family members during your lifetime is a complicated and treacherous process.”
Gifting a vast amount of money is best done with the aid of a tax adviser, especially when dealing with many millions of dollars. You can give $11.7 million over your lifetime, exempt from federal estate taxes. You may gift up to $15,000 as a single person or $30,000 as a couple annually to multiple parties without paying gift taxes or the receiver having to pay gift tax.
The Internal Revenue’s lifetime gift tax allowance does not include most educational expenses, and you can also contribute directly to a person’s medical expenses without that qualifying as a gift. Turbotax has more details on gifts that are subject to tax. They would include checks, adding your sister as a joint tenant to real estate, canceling her indebtedness or paying your sister’s debt.
As MarketWatch’s Tax Guy Bill Bischoff points out, transferring millions of dollars to family members during your lifetime is a complicated and treacherous process. One of many options is a Grantor Retained Annuity Trust, an irrevocable trust that discounts the value of the assets to fund the trust because the annuity payments are subtracted from the overall value.
“The trust then pays you an annuity equal to an IRS-specified interest rate multiplied by the value of the gift at the time you set up the trust,” Bischoff writes. “When the trust expires, the beneficiary of the trust (the object of your generosity) receives the remaining trust assets free of any gift or estate tax.” The typical duration of a GRAT is approximately two to five years.
Sometimes, people’s best qualities in business — directness, single-mindedness — are the same that come a cropper in personal relationships. Try telling your father that your sister loves him and misses him — assuming that she feels the loss of his presence in her life, despite his many emotional ups and downs — and it’s better to leave this world as we enter it, with an open heart and a clean slate.
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More from Quentin Fottrell:
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