28 Feb My father refuses to create an estate plan

Q. My father is in his 90s, and he has told his four children they will receive an inheritance of approximately $250,000 each. He was a blue collar worker who saved his entire life just to do this for us, but he doesn’t want anyone to know he has $1 million so he’s never sought professional help. I’ve even offered to pay but he refuses. My mother already passed. How can we kids protect ourselves from unnecessary taxes?
— Trying to help

A. Maybe your dad will change his mind when he realizes that estate planning will actually protect his privacy, even though he may have to share his information with an attorney.

It’s all because of probate.

Probate is a court-supervised legal process that gives someone – usually a surviving spouse or other close family member – authority to gather the deceased person’s assets, pay debts and taxes, and then transfer assets to the people who inherit them, said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.

He said probate in New Jersey is handled by the surrogate court in the county in which the deceased person lived.

“The process is a bit more complicated if the deceased person didn’t have a valid will but is otherwise similar,” Novick said. “Importantly, the probate process is part of the public record so your father’s financial information will no longer be private.”

Of course, your father’s probate information won’t be broadcast anywhere – someone has to proactively look for it, he said.

Therefore, Novick said, the best way to keep financial information private is to make sure the assets are transferred outside of the probate process.

The simplest way to transfer assets outside of the probate process is by using transfer-on-death accounts.

“If your father contacts his bank or brokerage firm and fills out the correct forms, his assets will automatically – and privately – transfer to you and your siblings when he passes away,” he said. “Similarly, life insurance or qualified assets such as IRAs and 401(k)s will also pass outside of probate so long as the beneficiary designations are not payable to his estate or left blank.”

Joint with right of survivorship accounts are also useful to avoid probate but are typically best only used between spouses, he said.

Then there’s a living trust, which is another strategy to keep assets out of probate, especially if your father owns any real estate. This, though, would require the help of an attorney, Novick said.

“Keep in mind that while the strategies I’ve listed will help avoid probate, they will not avoid any taxes that may be owed, nor would they protect your father’s assets from his creditors if he has any,” he said.

Based on your father’s net worth, estate taxes should not be a concern.

While an inheritance of any size that’s left to a spouse is exempt from estate tax, an inheritance left to a non-spouse could be subject to estate tax when it exceeds a threshold called an “exemption,” Novick said.

He said the federal and New Jersey exemption amounts have increased over the years, but the threshold was always fairly high. For instance, both the federal and state exemptions were $675,000 in 2001, but the federal exemption is $11.4 million today while the New Jersey exemption got as high as $2 million before it abolished its estate tax last year.

“Note that New Jersey also imposes an inheritance tax, but the tax doesn’t apply to spouses or children,” he said. “Thus, it seems unlikely that you would have owed any estate or inheritance taxes when your mother passed away or that you will owe such taxes when your father passes away.”

Income tax is a completely separate tax, but inheritances, including life insurance proceeds, are not considered income.

“An inherited asset generally receives a step-up in basis so even if the asset is sold shortly after it is received, the capital gain and resulting tax should be minimal,” Novick said. “On the other hand, to the extent an IRA, annuity, or other tax-deferred account is liquidated and distributed to the beneficiary, such amount will generally be considered taxable income.”

But in the end, there is no substitute for a thorough consultation with a qualified estate attorney

Novick said he generally recommends using an attorney who specializes in estate planning to prepare a will and other documents, such as a trust, power of attorney or advance healthcare directive.

Of course, none of these strategies will help unless your dad agrees to see a qualified attorney to help him accomplish his goals.

So show him this article. Maybe it will help him see the privacy issues he will face without a proper plan.

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