Second opinion on inheritance tax question

[BYUvol]

A family member recently passed in Oklahoma who had 4 children. The oldest 3 are responsible and capable adults, but the youngest has many legal, emotional, and mental challenges. When the family member passed, their will directed the 3 oldest to each receive 1/3 of the estate and each fund a portion of their inheritance to create an equal spendthrift trust for the youngest child. The 3 eldest are all interested in complying with the deceased wishes. (I personally would have directed 1/4 to be put in a spendthrift trust straight away, but there was a very short window while the deceased was capable of responding and I was not consulted.)

The estate lawyer who drafted the will said if the 3 eldest children transfer the assets in-kind to the spendthrift trust they would have no tax liability. This statement is what I doubt, but have been having difficulty finding direction from the IRS in this circumstance. My understanding is that even though they are operating under the directive of a will, that the 3 are transferring assets that are "theirs" and thus responsible for taxes (at long term capital gains rate) on any appreciation between when the family member died and when the assets are transferred.

Is anyone aware of any direction from the IRS (or Oklahoma law) for similar cases? I don't think it has any bearing, but the estate is well under the $5 mil federal estate tax threshold.

Thank you in advance for any guidance or reading suggested.

[MP123]

Is it possible that the first three could each disclaim a portion of their inheritance (prior to receiving it) that would then fall to the fourth by default? That way it wouldn't ever pass through their estates.

The estate lawyer should be able to provide you with an explanation of how this is going to work though.

[BYUvol]

Is it possible that the first three could each disclaim a portion of their inheritance (prior to receiving it) that would then fall to the fourth by default? That way it wouldn't ever pass through their estates.

This is an interesting idea that I was not aware of as a possibility. Definitely something to check out, thanks!

[bsteiner]

A family member recently passed in Oklahoma who had 4 children. The oldest 3 are responsible and capable adults, but the youngest has many legal, emotional, and mental challenges. When the family member passed, their will directed the 3 oldest to each receive 1/3 of the estate and each fund a portion of their inheritance to create an equal spendthrift trust for the youngest child. The 3 eldest are all interested in complying with the deceased wishes. (I personally would have directed 1/4 to be put in a spendthrift trust straight away, but there was a very short window while the deceased was capable of responding and I was not consulted.)

The estate lawyer who drafted the will said if the 3 eldest children transfer the assets in-kind to the spendthrift trust they would have no tax liability. This statement is what I doubt, but have been having difficulty finding direction from the IRS in this circumstance. My understanding is that even though they are operating under the directive of a will, that the 3 are transferring assets that are "theirs" and thus responsible for taxes (at long term capital gains rate) on any appreciation between when the family member died and when the assets are transferred.

Is anyone aware of any direction from the IRS (or Oklahoma law) for similar cases? I don't think it has any bearing, but the estate is well under the $5 mil federal estate tax threshold. ....

I'm not persuaded by the "short window." It wouldn't have taken any more time to have prepared a Will with a trust for the fourth one (or, better yet, a Will with trusts for each one, just with the first three getting to control their trusts but the fourth one not controlling his/her trust) than to have prepared the Will that they did. Indeed, it probably took more work to prepare the Will that they did, since it's so unusual.

Nevertheless, it' may be worth some effort to see whether the lawyer is on the right track, that the Will effectively directs the creation of the trust but just didn't spell out the details.

[BYUvol]

I'm not persuaded by the "short window." It wouldn't have taken any more time to have prepared a Will with a trust for the fourth one (or, better yet, a Will with trusts for each one, just with the first three getting to control their trusts but the fourth one not controlling his/her trust) than to have prepared the Will that they did. Indeed, it probably took more work to prepare the Will that they did, since it's so unusual.

Well, the deceased person inherited everything less than 6 months ago themselves, and then found out about 4 months ago that they had an extremely rare and fairly aggressive cancer. For most of that 4 months they were in a drug haze with only a couple minutes a day where they were awake and alert. Obviously the applicable lesson is to not put off end-of-life planning, even and especially if it makes us uncomfortable. I know for my wife and I this was a huge wake-up call to the fact that a Will only goes so far, even when there are no disagreements between heirs.

Nevertheless, it' may be worth some effort to see whether the lawyer is on the right track, that the Will effectively directs the creation of the trust but just didn't spell out the details.

So you are suggesting it is possible if the intent was clear, but the implementation was just clumsy, that the intent may be enough? Thanks, that's helpful to know it isn't as black and white as I initially thought.

[Gill]

I think it could be argued the will imposed a constructive trust on the three siblings for the benefit of the fourth. Bounce that concept off the estate attorney.
Gill

[bsteiner]

... the deceased person inherited everything less than 6 months ago themselves ....

In that case, the second decedent's estate will get a credit for the estate tax payable in the first decedent's estate on those assets.

[bsteiner]

One more possibility. If the first decedent's Will contains a more appropriate trust for the fourth child, then the executors of the second decedent's estate may be able to disclaim the second decedent's interest in the first decedent's estate.

They would have to do this within nine months from the first decedent's death for it to be a qualified disclaimer (in other words, not a gift for gift tax purposes). Since the second decedent only survived the first decedent by six months, and the second decedent recently died, it's possible that it's still within nine months from the first decedent's death.

For it to be a qualified disclaimer, the second decedent couldn't have accepted the assets or any benefits from the assets. Since the second decedent only survived the first decedent by six months, it's unlikely that the executors of the first decedent's estate would have made any significant distributions during the second decedent's lifetime.

In some states, an executor needs court approval to disclaim on behalf of a post-deceased beneficiary. If court approval is needed, you should allow sufficient time for that.

With a $5,490,000 estate and gift tax exclusion amount and portability, it may not matter if the disclaimer isn't a qualified disclaimer. Some states allow a disclaimer even after nine months, even though such a disclaimer wouldn't be effective for tax purposes.

This may not be available in this case, but it's worth looking at the first decedent's Will to see if it might be.