“Stan” created a trust that first distributed the first $2 million to his wife, “Wendy” before making $500,000 bequests to each of his two daughters, Doris and Diane. When Stan created his trust, he considered the bequest to his wife to be enough for her to live off of the rest of her life, also considering that she had other assets of her own in her own trust. He didn’t want Doris and Diane to wait until both his and Wendy’s deaths before enjoying any of their inheritance, and that is why he included those bequests.
When Stan died, his trust had less than $2 million of assets in it. Stan had more than $1 million of other assets, both those were all held jointly with rights of survivorship with Wendy. They were not ever funded into Stan’s trust.
So Wendy took the joint assets as her own. When Stan’s trust was administered, the entire balance also went to Wendy. Doris and Diane received nothing from Stan’s estate.
And this is the important point that I wish to make today. Stan may have considered the joint account to count towards what he wanted to leave Wendy from his estate. But Stan didn’t direct his attorney to draft language into his trust indicating that was his intent. Maybe Stan assumed that the joint account gift would serve to satisfy part of what he intended to leave Wendy through his will and trust.
But that isn’t the case.
Maybe Stan intended to fund the joint account into his trust account in order to satisfy his intent. Transferring a joint account into a single trust generally requires both joint account owners’ signatures. Perhaps upon discovering this, Stan decided not to do it, and didn’t believe it necessary to alter the terms of his trust.
Upon discovering what was to occur in Stan’s estate administration, Doris and Diane wondered if anything could be done to rectify the situation. The answer is “No” unless Wendy wants to cooperate. Wendy could, for example, file a legal disclaimer for some portion or all of the $1 million in bequests that Doris and Diane didn’t receive. A legal disclaimer must be signed in accordance with Florida law and with the Internal Revenue Code. There are several requirements that must be satisfied to file a disclaimer.
Wendy could also cooperate if she simply gifted some of her inheritance to Doris and Diane. The gift would be “taxable,” as it would be above the $14,000 annual exclusion limitation, which only means that the gift would reduce Wendy’s current $5.43 million federal estate tax exemption. Provided Wendy’s taxable estate at the time of her passing is below the then available federal exemption, the gift would not affect her. If, on the other hand, Wendy’s estate could be in danger of exceeding the limitation, she has the option of filing a Federal Estate Tax Return Form 706 on Stan’s estate to transfer any of his unused exemption to her own estate negating the gift transfer.
Depending upon the assets that Wendy transfers, and whether they came from the joint account or from assets she inherited from Stan, there could be unrealized capital gain that may one day be realized by Doris and Diane that would require the payment of capital gains taxes. This is because joint account assets do not receive a full “step up” in tax cost basis upon one of the account holder’s deaths.
Wendy may also choose not to cooperate, leaving Doris and Diane with no inheritance. Much of this depends upon the relationship between the parties as well as Wendy’s comfort as to whether she has sufficient funds to live off of the remainder of her lifetime.
So as you can see, an assumption on Stan’s part could lead to some very real problems between his loved ones. If you have questions as to whether certain accounts will serve to satisfy bequests you have in your will or trust, be sure and discuss your questions with your estate planning attorney.