In Estate Planning, Be Aware Of The Consequences

There are times in life when we cannot control the outcome of a situation. We are then left to sort things out wishing that we could have done something to change the results. In my professional career, there have been several times I have been consulted after the fact on a question dealing with “estate planning.” The person has been frustrated by a consequence that they were unaware of when they had made the decision that produced the unintended result. In virtually every instance, the person had acted without consulting a professional. However, some of these people had previously worked with professionals to develop an estate plan. So what went wrong?

The desire to reduce/ avoid taxes is a primary objective in estate planning for many people. With proper advice from professionals (financial planners, CPAs and attorneys), sound strategies geared to the specific situation can be developed and implemented that address the objective in a reasonable manner and help achieve the desired results. However, when people take matters into their own hands, based on information they read in an article or are told by a well-intended friend, the outcome can have financial implications that if realized by the person prior to acting may very well have been a deterrent to the action. So what am I specifically referring to?

I preface the reminder of my comments by stressing that consultation with professionals is essential to ensure that the issues relevant to your situation are carefully considered. I am not giving legal advice!

The practice of adding presumptive heirs as coowners on assets such as bank accounts, investment accounts or even real property is a tactic employed by people in a “self -help fashion” in an effort to reduce the Pennsylvania inheritance tax liability which will arise at the time of their death. So how does that work?

Under Pennsylvania law assets that have been titled jointly by two or more individuals for more than one year are deemed to be owned by each of the joint owners in equal shares. Pennsylvania inheritance tax considers the value of assets titled in the name of each person who dies. If an asset is owned by multiple people, only the value attributable to the deceased person is considered for inheritance tax purposes. While the strategy of adding heirs as joint owners on an account funded solely with a parent’s money may reduce the inheritance tax liability if the parent dies before the children, the strategy becomes much less desirable if one of the children dies first because now the parent is inheriting from the deceased child! So what is the impact?

An example with variables will best illustrate the different outcomes. Scenario 1- A widower, Dad adds his children, Jack and Jill as co-owners of his investment account in January 2019. Unfortunately, Jack dies in January 2021. The account is worth $300,000 so Dad and Jill each inherit $50,000. Dad’s inheritance tax liability is $50,000 x 4.5% (the rate on transfers between lineal descendants) =$2250 and Jill’s is $50,000 x 12% (the rate on sibling transfers) =$6000. Total tax -$8250. Scenario 2- Dad dies first. The tax liability to each child is $50,000 x 4.5%=$2250, totaling $4500. Scenario 3Dad never added Jack and Jill to the account-$300000 x 4.5%=$13500. Each scenario yields a different inheritance tax liability. So, what should you do?

Talk to a professional so you can understand the consequences in advance and make an informed decision that best fits your situation!