Pitfalls of ceding an inheritance

[vested1]

My parents recently died and left a will splitting all assets between myself and my siblings. My brother and I have decided to cede our inheritance to my two sisters, who graciously moved in with my parents four years ago and took care of them until their death. They were both in their 90's and had been married for 71 years. The estate is modest at about 150k - 200k with the sale of the house and the liquidation of other belongings, after expenses. The State is California. I was surprised that the sale of the house had to go through probate, having been named in the will, but then I am no expert on such matters. An estate lawyer is handling the probate at a cost of around 7k depending on how much is realized, with decreasing percentages at certain levels of gain (4% for the 1st $100k, 3% on the 2nd $100k, 2% above that). Only the house is in probate and the profit should be under 100k.

I was wondering if there are tax considerations or other liabilities that I'm not aware of. My sisters are in their 70's and haven't done as well as my brother and I financially, so that is the other reason for not wanting/needing the proceeds. I'd also like to know if my sisters will owe taxes on the probate sale of the house since there is no inheritance tax in California.

[Abe]

I am not a lawyer or a CPA, so anything I say should be considered a laymans opinion. Let me say this first: The laws are different depending on the state. If the house was in your parents name, it probably will have to go through probate. If the other assets pass directly to the heirs, (POD, Life Insurance beneficiary, etc.) you don't need a lawyer for that. Seven thousand dollars sounds like a lot to me just to probate the house. I think I would get another lawyers opinion. Some states have special provisions for small estates. You might want to check into that. As far as tax implications, I believe whoever inherits the house gets the stepped up basis, which means the basis will be the value of the house at the time of death. Please do not consider this as legal or tax advise.

[countdown]

Probate fees in California are statutory. The probate lawyer has no control over them.
They are graduated percentages based on estate value.
This is a good example of why people should have their property in trust. Probate can be expensive.
I doubt there will be estate tax, but the estate lawyer will answer that for you.
(BTW, lawyers are bound by very strict rules of professional conduct.)
You and your brother are doing a very nice thing for your sisters, and I'm sure they earned every penny and more caring for your parents. Nice to see family caring for each other.

[sscritic]

The State is California.

The probate code limit for a small estate affidavit is $50k for real property and $150k total.

"The gross value of all real property in the decedent's estate
located in California, as shown by the inventory and appraisal
attached to this affidavit, excluding the real property described in
Section 13050 of the California Probate Code [jointly held or in trust], does not exceed fifty
thousand dollars ($50,000)."

13100. Excluding the property described in Section 13050, if the
gross value of the decedent's real and personal property in this
state does not exceed one hundred fifty thousand dollars ($150,000)
and if 40 days have elapsed since the death of the decedent, the
successor of the decedent may, without procuring letters of
administration or awaiting probate of the will, do any of the
following with respect to one or more particular items of property:
(a) Collect any particular item of property that is money due the
decedent.
(b) Receive any particular item of property that is tangible
personal property of the decedent.
(c) Have any particular item of property that is evidence of a
debt, obligation, interest, right, security, or chose in action
belonging to the decedent transferred, whether or not secured by a
lien on real property.

The form is DE-305 for the real property. There is no Judicial Council form for the personal property. Just fill out an affidavit like this one.
http://www.saclaw.lib.ca.us/Uploads/fil ... operty.pdf

[sscritic]

Probate fees in California are statutory. The probate lawyer has no control over them.

The lawyer is free to bill by the hour as an alternative. I consider that control. Actually, the control is yours; you have to find a lawyer willing to bill by the hour.

[frugaltype]

(BTW, lawyers are bound by very strict rules of professional conduct.)

I'm sorry to say this, and no offense to the attorneys in here, but there are crooked lawyers. They seem to especially prey on elderly individuals and estates.

Perhaps you can find an attorney who has worked for one of your friends. In any event, keep a close eye on what is going on, and someone from the family should attend any court hearings.

[Peter Foley]

Does ceding an inheritance constitute gifting in the eyes of the IRS? I'm thinking about my wife and I bypassing each other to leave half of our estate to our children.

[WhyNotUs]

I have not heard of liabilities to person rejecting bequest. It happens more than one might think for a variety of reasons. There could be a timing issue though. I would write a letter ASAP to the attorney doing probate informing him of your desire to reject and forward a simple rejection draft asking for him to confirm that it is acceptable form. If so, sign, notarize, and file with him or court as per his/her direction.

[sscritic]

Does ceding an inheritance constitute gifting in the eyes of the IRS? I'm thinking about my wife and I bypassing each other to leave half of our estate to our children.

I think disclaim is the word to use, at least it is in google. Here is my unprofessional answer, followed by the reasons. No.

For inheritance purposes, a disclaiming beneficiary is treated as though he or she predeceased the decedent. The disclaimed assets then pass to whoever is next in line to receive them.

if a beneficiary’s descendants may inherit the beneficiary’s share if he or she predeceases your decedent, an effective disclaimer will pass the assets to that next generation at no estate or inheritance tax cost to the disclaimant. The estate will have a transfer subject to generation-skipping transfer (GST) tax.

Note the second. If you disclaim an inheritance from a parent and the money goes to one of your children, the parent's estate is subject to GST tax. If the money was treated as coming to you and then being a gift from you to your child, the GST tax would not come into play. Since it does, you didn't get it and you didn't give it away. Per the first quote, you didn't exist (you were already dead).

P.S. Why do you need to disclaim? If you want money to go to your children, give money to your children. My father is leaving my share to my children. He is not leaving it to me to disclaim. Why bother with the extra step?

[Peter Foley]

sscritic - thanks for the response, and I might add I'm really happy to see you back.
Not wanting to hijack the initial thread, here are my thoughts about spouses bypassing each other: Minnesota has an inheritance tax that starts at $1M. It also has gift tax with a lookback provision. While these are not issues with the passing of a spouse, the heirs of many surviving spouses will likely be subject to pay the tax. I'll look into the GST. A better option might be to designate a specific asset that will pass to children rather than a spouse. A 401k account could have children as primary beneficiary, for example.

In addition, my wife's parents are both in their mid 90's. Their mental state (acuity) is such that no one should be talking to them about changing their wills at this point. We would love to have my wife's share pass to our children instead of to her. Disclaiming could be an option here.

[countdown]

Sscritic.....the estate is stated to be $150-$200k after all expenses etc. It is likely gross value was higher and it didn't qualify for small estate administration or it likely would have been done.

There are always additional facts which change scenarios.....but the brothers should inquire of several CA estate lawyers to confirm the law and process and THIS case.


Yes, most regrettably, there are crooked lawyers, cpas, engineers, doctors, plumbers, teachers, civil servants.......pick a profession.

[countdown]

Teachable Moment: Again, the family could have avoided probate by seeing an estate lawyer before the fact, creating a simple trust, and passing the property to the sisters, all at far less cost than the stated fees.

Lesson for all of us: maybe good idea to include family members in estate discussions. Depends on family.
90 year old parents, 70 year old kids, 2 financially independent.....intended/best estate plan probably clear 10-20 years ago.

We can all be penny-wise and pound foolish.

[expat]

Teachable Moment: Again, the family could have avoided probate by seeing an estate lawyer before the fact, creating a simple trust, and passing the property to the sisters, all at far less cost than the stated/fees.

Not necessarily.

The trust document could allow the trustee to take a fee. The trustee will most likely need assistance from a lawyer, CPA etc which will add to the cost.

And you could end up with a dishonest trustee.

[countdown]

One assumes you choose a trustee you trust, hence the term 'trustee'

Wow, lots of cynics on New Years Day! Everyone else must be watching sports

[stan1]

OP, please buy this book even if you have retained an attorney.

"How to Probate an Estate in California", Julia Nissley, Nolo Press
http://www.nolo.com/products/how-to-pro ... a-pae.html

Nolo Press books are top notch. They explain the law in laymans terms and include many examples.

[manwithnoname]

Does ceding an inheritance constitute gifting in the eyes of the IRS? I'm thinking about my wife and I bypassing each other to leave half of our estate to our children.

I think disclaim is the word to use, at least it is in google. Here is my unprofessional answer, followed by the reasons. No.

For inheritance purposes, a disclaiming beneficiary is treated as though he or she predeceased the decedent. The disclaimed assets then pass to whoever is next in line to receive them.

if a beneficiary’s descendants may inherit the beneficiary’s share if he or she predeceases your decedent, an effective disclaimer will pass the assets to that next generation at no estate or inheritance tax cost to the disclaimant. The estate will have a transfer subject to generation-skipping transfer (GST) tax.

Note the second. If you disclaim an inheritance from a parent and the money goes to one of your children, the parent's estate is subject to GST tax. If the money was treated as coming to you and then being a gift from you to your child, the GST tax would not come into play. Since it does, you didn't get it and you didn't give it away. Per the first quote, you didn't exist (you were already dead).

P.S. Why do you need to disclaim? If you want money to go to your children, give money to your children. My father is leaving my share to my children. He is not leaving it to me to disclaim. Why bother with the extra step?

Federal GST tax exempts $5.25 million which excludes 99.8% of all estates from the GST tax.

[sscritic]

Federal GST tax exempts $5.25 million which excludes 99.8% of all estates from the GST tax.

Which is irrelevant to the logic of whether the $10 million from the grandparent disclaimed by the child is a gift from the child to the grandchild. The logic is exactly the same if the amount disclaimed is $10.

[manwithnoname]

sscritic - thanks for the response, and I might add I'm really happy to see you back.
Not wanting to hijack the initial thread, here are my thoughts about spouses bypassing each other: Minnesota has an inheritance tax that starts at $1M. It also has gift tax with a lookback provision. While these are not issues with the passing of a spouse, the heirs of many surviving spouses will likely be subject to pay the tax. I'll look into the GST. A better option might be to designate a specific asset that will pass to children rather than a spouse. A 401k account could have children as primary beneficiary, for example.

In addition, my wife's parents are both in their mid 90's. Their mental state (acuity) is such that no one should be talking to them about changing their wills at this point. We would love to have my wife's share pass to our children instead of to her. Disclaiming could be an option here.

MN gift tax exempts first $1M from gift tax. Out of state gifts are exempt as are transfers to spouse or charities.

http://www.revenue.state.mn.us/Document ... erview.pdf

MN gift tax rate is 10% which is pretty steep. Only other state with gift tax is CT.

[sscritic]

Sscritic.....the estate is stated to be $150-$200k after all expenses etc. It is likely gross value was higher and it didn't qualify for small estate administration or it likely would have been done.

Agreed. Another poster mentioned small estate administration. The OP mentioned CA. I was just laying out some of the rules for CA.

[vested1]

Thank you for all of your replies, and yes, I agree that a trust would have been more efficient and less costly. Thank you too for the reading recommendations which I will surely take advantage of.

My parents were never wise with money, didn't ask for and wouldn't take any advice. Ironically, they never blended their finances with each other and kept the amount of reserves that each had a complete mystery from each other. The passing of my father at 92, a year before my mother at 90, left her somewhat at sea as to what she would be left with from him to survive, which other than the house amounted to nothing. Their example helped teach me what not to do.

They gave far more to charity and their church than they ever did to their children, which is probably as it should be, and was after all their choice. Since I never expected an inheritance it was even easier to cede my portion to my sisters, which is their due in my opinion. Apparently there is a form that I need to sign to make it legal.

My wife and I set up a trust many years ago to spare our children the problems inherent with probate. My brother and my wife's brother are the trustees of our Family Trust, and we have faith in their integrity while dealing with the distribution of our assets without personal gain. As a side note my wife and her brother care for their 90 year old mother so dedication to family runs deep on both sides.

As for the lawyer, my eldest sister retained her, and although she came highly recommended the fee did seem a bit high for dealing solely with the house and the matter of probate. This of course coming from a position of (almost) complete ignorance. I am the youngest, and feel somewhat beholden to tradition when bowing to the judgement of my older siblings, while voicing my opinion when necessary. Death, and the disposition of worldly goods can bring out greed even in the closest of families, which thankfully hasn't been a factor in our case.

I will consider all of the responses here to make sure there are no surprises.

[vested1]

As another side note, the house has been on the market for one week and there are two offers at near the asking price. Personally, if I would have bought the place I would have remodeled with a bulldozer. It seems the real estate frenzy is back on in California.

[vested1]

Probate fees in California are statutory. The probate lawyer has no control over them.
They are graduated percentages based on estate value.
This is a good example of why people should have their property in trust. Probate can be expensive.
I doubt there will be estate tax, but the estate lawyer will answer that for you.
(BTW, lawyers are bound by very strict rules of professional conduct.)
You and your brother are doing a very nice thing for your sisters, and I'm sure they earned every penny and more caring for your parents. Nice to see family caring for each other.

We were told that the probate fees would be around 1.5k, which doesn't include the 7k lawyer fees.

[bsteiner]

If you disclaim (waive) some or all of your share, it's not considered a gift, assuming you disclaim within 9 months of death, and before accepting any benefits from the disclaimed property. However, if you disclaim, you can't specify how the disclaimed property passes. Unless the Will provides otherwise, it passes as if you predeceased the decedent. If that's not practical, and you instead take your share and give it to your sisters, some of it (or all of it if you're married and your spouse consents to gift-splitting or you spread the gifts over two years) will be covered by the $14,000 per donee gift tax annual exclusion.

You probate the Will, not the assets.

California has a statutory schedule of attorneys' fees for estates. Court approval is needed to charge more. We've been able to find lawyers in California who will handle estates on a time basis, which usually comes out to less than the statutory schedule. However, in this case, the estate is so small that it might be difficult to get someone to handle it on a time basis who could do it for less than the statutory schedule. It's as much work to probate a Will for $150,000 estate as for a $150 million estate, and it's almost as much work to handle the sale of a $150,000 house as for a $1.5 million house. We wouldn't take on a $150,000 estate either on a time basis or for a fee equal to the California statutory schedule absent an important relationship with the client or the client's family.

A revocable trust wouldn't have saved much. The work involved in creating the revocable trust and transferring the assets to the trust is often about the same as the work to probate the Will; and the work involved in selling the house is the same regardless of whether it's in a trust.

[dm200]

I believe the term for what you want/plan to do is "disclaim". I also understand that there are (or may be) some important things to do (or not do) if you plan to disclaim - so I would check out the details. I believe that if you disclaim an inheritance, that is identical to not every having been named in the will.

As to attorney fees and probate - I do not know (or have any experience with) California estates/probate. However, there were two estate situations of family members in NY State where my brother was the executor (both deceased had wills). In both cases (one had real estate holdings), the costs of probate were low because my brother did most of the work himself and only engaged an attorney for those things that either he could not do or that actually required an attorney to do. He paid the attorneys only for what the attorneys actually did (NOT a percentage of assets or the 'estate', etc.)

[Steelersfan]

Be sure the will doesn't state that if one of the children is deceased then that child's share goes to their children. Look for the words "per stirpes". If it does, then if you or your brother cede (disclaim) your share, it will go to you or your brother's children, if you have any.

[vested1]

If you disclaim (waive) some or all of your share, it's not considered a gift, assuming you disclaim within 9 months of death, and before accepting any benefits from the disclaimed property. However, if you disclaim, you can't specify how the disclaimed property passes. Unless the Will provides otherwise, it passes as if you predeceased the decedent. If that's not practical, and you instead take your share and give it to your sisters, some of it (or all of it if you're married and your spouse consents to gift-splitting or you spread the gifts over two years) will be covered by the $14,000 per donee gift tax annual exclusion.

You probate the Will, not the assets.

California has a statutory schedule of attorneys' fees for estates. Court approval is needed to charge more. We've been able to find lawyers in California who will handle estates on a time basis, which usually comes out to less than the statutory schedule. However, in this case, the estate is so small that it might be difficult to get someone to handle it on a time basis who could do it for less than the statutory schedule. It's as much work to probate a Will for $150,000 estate as for a $150 million estate, and it's almost as much work to handle the sale of a $150,000 house as for a $1.5 million house. We wouldn't take on a $150,000 estate either on a time basis or for a fee equal to the California statutory schedule absent an important relationship with the client or the client's family.

A revocable trust wouldn't have saved much. The work involved in creating the revocable trust and transferring the assets to the trust is often about the same as the work to probate the Will; and the work involved in selling the house is the same regardless of whether it's in a trust.

I always value your input and advice. I will make sure that my brother knows this and that there is a 9 month time limit on disclaiming an inheritance.

[dm200]

I always value your input and advice. I will make sure that my brother knows this and that there is a 9 month time limit on disclaiming an inheritance.

While there may be a 9 month window to "disclaim", I believe there are (or may be) other restrictions - such as certain actions being taken related to the assets in the estate. So, if "disclaiming" is an important option for you, I suggest making sure that nothing would block such an option.

[dickenjb]

If your disclaimer would result in your share going to your children and not your sisters, another option is to not disclaim and you and your wife write checks to your sisters up to $14K per year.

[KyleAAA]

If your disclaimer would result in your share going to your children and not your sisters, another option is to not disclaim and you and your wife write checks to your sisters up to $14K per year.

This is probably what I would do in this situation. Since the amount you would be disclaiming is relatively small, you could take care of it in just a few years' worth of "Christmas presents." Seems simplest for all involved.

[dratkinson]

I've done this twice. The first time well before the event by letter, the second time by handwritten note at the funeral. No problems noted. Think I said something like, "... I renounce any inheritance from the estate of...".