This article is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA
My mother passed away at age 84. While her estate was fairly modest, here is some estate planning lessons we learned about her estate.
Give While You Are Alive
My mom’s estate was modest. She had a house, a car and a C.D. Even though her estate was not large she did give her grandchildren several thousand dollars when they turned 16. This was to be used to pay for college or buy a car or whatever they wanted to use it for. There were no strings attached. While our children worked and saved some money when they were teenagers, this gave them a big leg up. I know it made my mother happy to share with them while she was alive. My children, of course, were thrilled. I was just as thrilled. This is a lesson that, given the opportunity, I will clearly follow.
This is theme that we also encourage our clients to do with their charity. Many people are no longer subject to federal estate taxes due to the increase in the federal estate tax exclusion. The federal estate tax exclusion for 2023 is $12.92 million per individual. A married couple will be able to exclude $25.84 million from federal estate tax. This is under the concept of “portability.” The surviving spouse is allowed to use the deceased spouses unused estate tax exclusion.
For Connecticut Residents however they still need to be aware of any potential State of Connecticut Estate Tax. In Connecticut the estate tax exclusion is $11.4 million per individual. The tax rate is 12%. The State of Connecticut does not have “portability” feature like the federal estate tax. This is a “Use it or Lose it” rule.
People who are charitably inclined and aren’t subject to the federal estate tax should consider making some donations during their lifetime. If they were already leaving some assets to charity through their will by making bequests or by other means when they die, why not make some of those donations now? Please note we’re only talking about making relatively modest donations. Don’t break the bank here. When in doubt, err on the side of caution when deciding how much lifetime gifts to make.
One advantage to making donations during lifetime is the possibility of getting an income tax deduction. Charitable donations are deductible by taxpayers who itemize their deductions. Taxpayers can take the higher of the standard deduction or their itemized deductions. The major categories of itemized deductions are medical, taxes, mortgage interest and charitable donations. The standard deduction for a married couple filing a joint return in 2023 is $27,700. This amount is indexed to inflation.
Your favorite charity gets the money sooner, you get to see it being put to good use and Uncle Sam subsidizes your donations.
How cool is this?
When making charitable donations consider donating appreciated assets, which means they’re worth more than the cost basis. To determine the cost basis you will need to know how the asset was acquired. For example, when you buy a stock the cost basis is what you paid for the stock, assuming any dividends weren’t reinvested. For stock that was inherited the cost basis is generally the fair market value on the date of death of the decedent. If the stock was received as a gift the basis is generally the same basis as the donor’s, which is known as carryover basis. Some examples of appreciated property are stocks and bonds. There are two reasons it’s preferable to give away appreciated property. First, you may get an income tax deduction for the fair market value of your donation, subject to some limitations. To get a deduction for the fair market value, the property needs to have been held by the donor for more than a year. If appreciated property that was donated was held less than a year, the donation is limited to the cost basis. Also, the deduction for donations of appreciated property is limited to 30% of AGI. Amounts over this can be carried forward and deducted over the next five years. Second, when giving away appreciated property, you don’t pay any capital gains taxes. If you sold appreciated property that resulted in a capital gain and then donated the cash to charity, this wouldn’t be a smart tax move. You would have to pay capital gains tax on this sale. By gifting appreciated assets, you avoid paying capital gains taxes and may get an income tax deduction.
For example, let’s say you want to donate $10,000 to your local hospital. If you had the cash you could write them a check. Conversely, if you were a little short on cash or you didn’t want to part with your cash, you could sell some of your stocks and donate the proceeds from the sale. Don’t sell any appreciated securities as you would be stuck with a capital gains tax bill. If you sold securities held long-term worth $10,000 with a cost basis of $5,000, the federal capital gains tax of 15% on the gain would be $750. Assuming the state income tax rate was 5% that’s another $250 for a total capital gain tax of $1,000. By donating the stock directly to the hospital you avoid paying this capital gain tax.
Update Your Estate Planning Documents
While my mom had estate planning documents, regrettably they were not updated. She did have a Simple Will, Power of Attorney and a Health Care Proxy. These documents however were more than a decade old. My brother Barry passed away at age 46 from pancreatic cancer. He was still listed in the will. Fortunately I get along with my other two brothers so there have been no issues while we are trying to settle her estate.
Your estate planning documents should be reviewed every three years. Why? Life Happens. Marriage, having children and divorce affect many. Your documents need to be updated to where you are in your station in life. Remember, You Only Get a Mulligan in Golf.
Fair Is Not Equal
Fair is not equal essentially means you don’t have to give all of your children (or grandchildren) the same amount of support. This is advice I have given to my clients. The only time I see where I have experienced this with my children is with their education. We have, and will continue to spend a significant amount of more money on my daughter’s education than my son’s. Don’t worry; it’s not a free ride for her. Here are 3 Ways My Daughter Financially Contributes to her College Education.
My brother Barry lived with my mother until he passed away. He helped her out, maintained the house and put his own money into the constant repairs and updates that needed to be done. He never wanted anything in return.
My mom recognized this and came up with some formula to recognize his contribution to the property. He would have received two thirds of the home with my other two brothers and me splitting the other third. Any other assets would be split equally between me and my three brothers.
This made perfect sense to me. My brother Barry worked real hard to maintain the home and keep it in good shape. If he was still with us, this would have been recognized.
She also gave her car to one of my brothers. He had been her primary driver the past couple of years. My brother asked my sheepishly if I was, “OK” with this. I said of course. First, it’s what she wanted. Second, well, he had done a lot of her driving recently and, again, she wanted to recognize this.
Maintain Your Home
I’ve heard your house never looks better than the day you put it on the market to sell it.
While my mom’s house fortunately didn’t need any structural work, it did need a ton of cosmetic work. We had the entire inside of the house painted. Additionally we hired a handyman to take care of a half dozen projects that needed to be fixed.
We have always tried to maintain our home. While sometimes it may seem that owning a home can be a money pit, there are huge advantages. The tax advantages of owning a home have been well documented. And over the long run, it clearly beats renting. Face it; you’ve got to live somewhere. Hopefully it’s not with your in-laws!
We have always tried to consistently do little projects. This allows you to maintain your home over time and, hopefully, not break the bank. When the cost of the projects became more than our savings and current cash flow, we have cautiously used our home equity line of credit. The key word here of course is cautiously.
Don’t Be a Hoarder
While my mom’s estate was modest, the things she had in her house were not. There was stuff EVERYWHERE. And I mean EVERYWHERE. There will be no pictures in this post to document this. You’re just going to have to trust me on this one.
Fortunately, my brother and his wife and my wife and my son did a lot of heavy lifting (figuratively and literally) to get the place cleaned up. I was preoccupied at work and could not contribute the way I should have. I was fortunate my wife and son picked up the pieces for me. Thank you.
While they didn’t have to rent a dumpster, there was tons of dump runs and items brought to Goodwill. My son made so many trips to Goodwill he was on a first name basis with Kyle, one of the kids that worked there.
I must admit, I am still mad at her for keeping my report cards and throwing out my baseball cards.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Thomas F. Scanlon and not necessarily those of Raymond James. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS we are not qualified to render advice on tax or legal matters.