A Tale of Two Small Estates: Lessons Learned

Last year brought home to me the reality of aging. My husband and I experienced five deaths of people close to us which included responsibilities for three of the estates. My mother, Joan, and a close family friend, Russell (through his wife Mary) chose me to handle their estates as Personal Representative – a role I’d never held before. Since both estates were small and had been prepared by the same local estate attorney, the comparison of how they turned out was eye opening.

Choices for a Widow with Children

Joan passed first (January 2022). She was a widow with four grown children. Her goal in estate planning was to make everything simple and equal for her four children while preparing for the possibility of needing Medicaid for long term care. We first looked into long term care insurance when she was in her 60s and newly retired. Her financial advisor at the time stated categorically that she had no need for long term care insurance because her assets were less than $250,000. By the time she came to me for help, she wasn’t able to qualify health-wise for typical long term care insurance plans She had some ongoing health issues she kept under control with alternative care and supplements, things which Medicaid would never pay for.

We consulted a local estate attorney with a stellar reputation and experience in Medicaid planning. The estate attorney recommended creating an Irrevocable Family Trust. A portion of her assets were moved to the trust under the care of a Trustee with her children as equal beneficiaries. Through the Trust, her children would have family assets available to continue her alternative care even if she had to apply for Medicaid for extended care. The attorney also recommended that her will be a “pour-over” will which would “pour” the rest of her assets into the Trust upon her death.

To help her stay at home longer, another portion of her assets were used to purchase a single premium life insurance plan with living benefits which would provide cash for any type of extended care. If she never needed it for her own care, the death benefit would pay her four children a tax free inheritance – meeting another of Joan’s requests.

The remainder of her funds were kept in an IRA and a brokerage account for emergency use, fun money and travel costs. Again, her children were equal beneficiaries of the two accounts. And lastly, she had checking and savings accounts to receive pension and social security deposits and pay expenses. She chose to make them joint with me so I could easily move money and pay bills for her (with the help of a general power of attorney).

To make things even simpler, Joan had down-sized to a roomful of personal items – giving away most of what had filled her home to those she wanted to inherit them. When she passed, only a small amount of personal items were left to share amongst the family.

Since the majority of her assets went to each of the four siblings as beneficiaries, there was no question of who got what and how much. All that was required from each beneficiary was to file simple company-specific forms accompanied by a certified death certificate. Some benefits were taxable but most were tax free.

The life insurance benefits were tax free as were the funds from her brokerage account (which were small and well under the inheritance tax limit in Colorado.) The beneficiaries were required to roll their portion of Joan’s IRA into their own separate inheritance IRA. (The money in Inheritance IRAs must be withdrawn in full within 10 years and income tax paid on the amount withdrawn in the year of withdrawal.)

The Irrevocable Family Trust had taxable income, too. Fortunately, the Trust documents allowed the taxable income to “pass-through” to each beneficiary who would then pay taxes at their own tax rate. Trust tax rates increase rapidly based on the amount of taxable income received by the Trust which means that individual tax rates are often lower than what the Trust would pay.

In fact, the Trust took advantage of another strategy to minimize tax payments from the Trust fund. All of the funds earmarked for investment in the stock market were moved into a variable annuity. At the time of Joan’s passing, the trustee requested all investments be liquidated and the cash moved to the Trust checking account. Thanks to the investments coming from an annuity instead of from a brokerage account, all the typical tax complications of stock market investment like calculating profit and loss, fees, short term vs long term investments, etc. were left behind when the annuity was surrendered. The amount originally invested was an untaxable cost basis and the growth was simply taxable income.

Together, the sibling beneficiaries agreed to pay for any of Joan’s estate and funeral-related costs from the Trust assets before being paid themselves. Since there were no assets left in the Estate due to the roll-over Will, having family money to pay the bills was important. No one had to put money into the estate from their own pockets to cover costs which avoided delays, complications and hard feelings.

As with all things requiring forms and approvals, we had some glitches and delays but overall the administration of the inheritance was quick and straightforward with very small legal expenses. My mother’s wishes were fulfilled and there was no argument over who inherited what. Avoiding that kind of stress between family members was another, very special, gift from our mother. Grief can strain the best of relationships and close siblings are no exception. While we did have to deal with a tangle of raw emotions in a group of strong personalities, thanks to Joan’s foresight we did NOT have to deal with finding money to pay bills or fighting over who inherited what.

Probate, Power of Attorney, and Personal Representatives

Administering that estate did not prepare me for being Personal Representative for my friend’s estate. The two were so different. Russ passed away in December 2022, after several years of increasing illness and disability at age 92. His 85 year old partner Mary had taken care of him to the exclusion of caring for herself for the last 3 years because he’d become almost totally reliant on her and refused outside help. Fortunately, they’d taken the time to settle their estates beforehand. Thanks to an experienced local estate attorney, Russ’s will, Power’s Of Attorney (POAs), and other documents were clear and the only beneficiary was his wife Mary.

On nearly all of his bank accounts, Mary was a joint owner with right of survivorship. However, the house was still in his name alone. When he was ill, Mary being able to sign checks made it easy for the bills to be paid. When he passed the funds in those accounts became Mary’s alone since she was the surviving owner. She could easily pay for the remaining medical bills, final expenses and any other bills that cropped up without having to wonder where the money was going to come from.

The house, however, had to go through probate before it could be passed to Mary. Mary was to be the Personal Representative (PR) for the estate. But she had some chronic health issues of her own that needed attention. The health issues, exhaustion and grief proved too much to handle on top of trying to be the PR for Russ’s estate. After a few months, she decided that, as next in line on Russ’s will, I should be the PR instead. If Russ hadn’t named a backup PR, she would have also had the burden of guilt for not wanting to do the job as well as the burden of finding someone else to do it. She and Russ did not like to burden others by asking for help.

Never having gone through a probate process as PR before, I confess to feeling a bit at sea. Fortunately, the estate attorney was supportive. Papers were filed to appoint the Personal Representative officially and the attorney acted as guide, providing a list of everything the PR was responsible for. The first task was notifying all of Russ’s creditors and debtors of his passing, closing all the joint accounts and rolling the money into Mary’s sole account, and identifying the accounts that would end up in the probate proceeding. That was very time consuming as the documentation had to be approved at each company before making any changes. Each company had a different process and different requirements.

In spite of sometimes-hard-to-understand paperwork and processes, this estate was simpler to complete. With only one beneficiary and only a few estate assets to manage, the main challenge was patience with the process. Tracking decisions and transactions is critical to creating a transparent process but since Mary and I were the only ones with a say in the decisions we could greatly simplify it. While it could have been simpler if transfer of the house had avoided probate, paying the attorney for help through the process was worth every penny and Mary’s peace of mind was worth every effort.

Next Steps:

Planning for both estates had been well put together based on the wishes of those setting up their estates. That alone made them easier, quicker and less stressful to processes. As you can see, even as small and simple as the two estates were, the way the assets were structured was very different in order to get the results desired.

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If you’re wondering how to structure your assets to give you the kinds of protection and benefits you want, please book a time with us to discuss your priorities and needs. We’ll do research and guide you through the pros and cons of each option and how they can be adapted to your situation.