Attorney Alan Augulis was quoted in the Wall
Street Journal on January 23, 2006 on the topic of handling a windfall.
The article entitled, “No Thanks: Sometimes, refusing a windfall can be
a wise move. Here’s how to do it,” examines some financial and estate
planning steps that families can take when they come into a financial windfall
that brings financial complications.
Money Matters
No, Thanks:
Sometimes, refusing a windfall can be a wise move. Here's how to do it.
By KAREN HUBE
Special to THE WALL STREET JOURNAL
January 23, 2006; Page R7
“Your great-uncle, whom you haven't seen in decades, names you as the
sole beneficiary of his $500,000 estate. A windfall?”
“While for many individuals an inheritance brings financial relief, more
and more people are finding that infusions of assets bring financial complications.”
“People with estates valued higher than the federal estate-tax exclusion
(which jumped to $2 million this year from $1.5 million in 2005) put elaborate
strategies in place to reduce the bite that taxes will take out of their estates
upon their death.”
“People aren't thinking about financial-planning options, or don't even
know there are any," says Alan Augulis, an estate-planning lawyer in Warren
Township, N.J. But there are steps you can take to avoid the burden of an inheritance
or ensure that its value for your own heirs is maximized.
“If your benefactor is still alive, the most drastic option is simply
to request to be left out of a will. Before going that route, however, you should
consider a more flexible, if complicated, alternative: You can ask that the
benefactor, rather than naming you directly as an heir, instead establish a
"generation-skipping trust" -- one that names your children as the
beneficiaries.”
“If it's too late for advance planning and you receive an unwanted inheritance,
a final option remains: You can disclaim all or part of a bequest, which means
you formally decline to accept it.”
Hands Off
“In most cases, a disclaimer will be valid only if you haven't already
accepted any of the inheritance. If you have cashed a dividend check, for example,
you will be ineligible to disclaim property, Mr. Augulis says. However, if you
inherit a house that you were already living in, you still have the right to
disclaim the property.
“As long as the assets would go to your own beneficiaries -- say, your
children -- a disclaimer usually is preferable, from a financial standpoint,
to accepting the assets and then gifting them to your kids, Mr. Augulis notes.
That's because any gift above a certain amount per year -- for 2006 the amount
is $12,000 per recipient -- reduces the giver's estate-tax exclusion. So, for
instance, a $100,000 gift to a child this year would reduce your estate-tax
exclusion when you die by $88,000. With a disclaimer you avoid such tax implications,
and the assets still end up going where you want them to”, Mr. Augulis
says.
Correcting a Mistake
“A disclaimer can also be used by a surviving spouse to correct a big
oversight that some people make in their estate plans.”
“Here's how: Take a couple with a $4 million estate. Ideally, they should
consider setting up a trust that is funded with an amount equal to the current
$2 million estate-tax exclusion. Upon the death of one spouse, the trust gives
the surviving spouse the right to use the money if needed, but assets in it
will pass to the children tax-free after the second spouse dies.”
“This structure preserves more assets for the kids, because it enables
them to take advantage of two estate-tax exclusions rather than one -- they
inherit the trust tax-free as well as $2 million from the estate of the second
parent, also tax-free. So ultimately the children stand to inherit the entire
$4 million without having to pay any taxes on it.”
Without such a trust, "the kids only get one exemption amount when that
second spouse dies," Mr. Augulis says. In this case, that would leave them
with only $2 million of their inheritance tax-free, and about a $900,000 federal
tax bill for the remaining $2 million.
To read the full article, please visit the Wall
Street Journal online or to learn more about this topic, please read
the Law Firm’s Estate Planning News article, entitled “How
to Handle a Windfall.”
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