Q. My mother has a trust with stocks that was my father’s. The stocks started as an employee purchase and were touched only two or three times in 50 years. My mother receives a quarterly dividend — half in cash and half to the stock growth. How will any tax consequences be figured when this stock is left upon death and split by three children? Would it be better to start cashing the stock in and put it in a trust account for her needs? She also has $90,000 in a trust savings account being used for her care in assisted living. She has Social Security income and a pension that also go to paying for care, health care insurance and personal care products. Her income don’t cover the cost of the assisted living, the rest comes from the trust. Do we need an attorney or can an accountant do all this?
A. It’s probably time for your mother to meet with an estate planning attorney who can review her existing estate planning documents — her will, power of attorney, health care directive — and if she doesn’t have these, an attorney can create the documents for her.
That’s if your mom is competent.
If your mother is not competent and if you are taking care of her affairs, you may want to speak to an estate planning attorney now rather than to wait until your mom passes, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
“It would be best to seek that advice now, as there may be steps that can be taken, or certain assets that would be better to be used first to pay expenses, which ultimately would benefit the family and/or save taxes,” Romania said.
If additional advisors are necessary, such as an accountant or financial planner, the estate planning attorney will generally recommend that they be included in the process, she said.
Some attorneys provide a free first consultation for estate planning and then bill hourly or at a fixed rate for an agreed upon project, Romania said. Other attorneys charge hourly even for the consultation. It is important that you confirm the attorney’s manner of billing and hourly rate when making an appointment, she said.
The tax consequences with respect to transfer of the stock which your father left in trust for your mother will depend on a number of factors, Romania said.
If your father left the stock in a trust that will be included and taxed in your mother’s estate — sometimes referred to a QTIP or marital trust — and if your mother’s estate together with lifetime taxable gifts is greater than the New Jersey estate tax exemption amount of $675,000, the estate may pay an estate tax on the value of the stock, Romania said.
“However, if the stock is included in your mother’s taxable estate, then the basis of the stock will be adjusted to equal the value as of your mother’s date of death, so if you sell it immediately you will have little gain for income tax recognition,” Romania said.
When deciding whether or not to sell stock, it is important to consider not only the potential estate tax consequences of continuing to hold the stock, but also the income tax consequences of a sale, she said.
If your father left the stock in a trust that is not included and taxed in your mother’s estate — sometimes referred to as an exemption or by-pass trust — the estate tax with respect to your mother’s estate is calculated by not including the value of the stock, Romania said. But in this case, the stock retains its current basis without adjustment at the time of your mother’s death, potentially resulting in more income tax being paid when the stock is sold.
Exactly how that tax is paid will depend on several factors.
“Allocation of estate tax is governed by the decedent’s last will and testament,” Romania said. “The will can provide that tax is allocated pro rata so each person pays the share of tax his or her share of the estate generates, or it can be paid out of the residuary of the estate itself. If nothing is said, each person must pay his or her pro rata share of the tax generated.”
That’s why it’s important you meet with your mom and an estate planning attorney to see if there are steps that can be taken to reduce the tax burden. If you wait, it could be too late.
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