Organizing Your Parents’ Affairs
March 15, 2010
One of the more difficult responsibilities of adult children is assisting parents when they are no longer confident in handling their own financial affairs. Not wanting to be seen as questioning their abilities, adult children sometimes overlook the obvious signs. But if they need your assistance, where do you start?
One of the challenging tasks facing the Baby Boom generation is dealing with aging parents. As the Boomers age, so do their parents and assisting with organizing their affairs becomes an important role.
Where to Start?
You start by determining the value of your parents’ estate. This requires gathering information about the assets your parents own and the liabilities they owe. If both of your parents are still living, you should create a separate listing of ownership values for each. By organizing this information, you can quickly determine whether property can be passed onto heirs without paying a federal estate tax. If ownership can be passed tax-free, their estate situation is less complicated. If the value of their estates is such that an estate tax will be incurred at the time of distribution, you will want to ensure that provisions are in place to take advantage of tax reducing measures.
What to Include as Assets
Any property that is owned by your parent is included in his/her estate. Ownership is determined by who has control of the asset. The ability to buy, sell, or give away an asset indicates control.
Your parent is the owner of any assets titled in his/her name alone or those titled jointly with each other, another person, or a separate entity. In the case of owning property jointly with a spouse, fifty percent of the value is assumed to be owned by each of them and, therefore, one-half of the value is included in each of their individual estates. The value of any share of property owned jointly with a non-spouse will be based on the original contribution to purchasing the property and, therefore, may be more or less than fifty percent.
If your parents have an ownership interest in a business or partnership, whether or not either of them is actively working in the entity, the value of their share will be included in their estate. It may be necessary to have an evaluation or appraisal of the business entity performed to provide an accurate value.
Assets with Beneficiaries Listed
An owner is also the person who has the ability to change provisions regarding the handling of an asset. Changing the beneficiary is an example of a right of ownership. Therefore, retirement accounts, accounts with “paid on death” designations, annuities, and life insurance policies are included in the value of the estate even though a beneficiary has been named.
Insurance Death Benefit Included in the Estate
The owner of a life insurance policy has the right to decide whether to pay the premium to continue the policy, terminate and take any cash value, or change the beneficiary or other provisions. Therefore, at the death of a policy owner, the death benefit will be included in his/her estate. If a policy is owned on the life of another individual, such as a spouse or child, at the death of the owner, the cash value, not the death benefit, is included in the owner’s estate.
Assets Owned in Trust
You also need to include on the listing of your parents’ estate any assets that they own through a revocable trust. If your parent is the creator of a revocable trust, he/she has the right to add or remove property from the trust, request the distribution of income or principal, change provisions of the trust, or even terminate the trust. The ability to change the provisions or terminate the revocable trust is a right of ownership. This is the case whether your parent serves as trustee or whether you or someone else has been appointed to serve in that capacity.
If your parents have created an irrevocable trust, the value is excluded from their estate even if they are receiving income or other benefits from the trust. An irrevocable trust can not have its original provisions changed and can not be terminated by the creator of the trust. An example would be a charitable remainder trust or a qualified personal residence trust. Again, the value of an irrevocable trust is not included in your parents’ estate.
Liabilities Reduce the Estate Value
Any personal loans, mortgages, credit card balances, or the owner’s portion of any business debt would reduce the value of the estate. At the time of death, the estate may be required to pay off some of these debts. However, the other owners of the property or asset can assume some liabilities, such as the mortgage and business debt.
Is the Estate Taxable?
Because Congress has not taken action to revise the current estate tax law, there is no federal estate tax on the assets of persons dying in 2010. However, Congress has indicated their intention to pass provisions that reinstate the federal estate tax retroactively to January, 1, 2010 for estates over $3,500,000. If this occurs, it means that with proper planning, a husband and wife can pass a total of $7,000,000 to their children, grandchildren, or other heirs without incurring a federal estate tax.
If your parents’ estate is greater than the exemption amount for one person, e.g. $3,500,000, then planning may be required to minimize or eliminate the tax impact.
Summary
Assisting your parents with these tasks now can greatly reduce the time required to organize their information when they are no longer able to do so. Likewise, if there is the possibility that the estate of your parent(s) may be subject to federal estate tax, you will want to ensure that a qualified estate planning attorney has assisted with their planning. Having the appropriate documents in place and implementing steps during their lifetimes to reduce the impact of taxes will allow them to accomplish their distribution desires in the most tax efficient manner.
