The (Inheritance) Tax Man Cometh

A Joint Revocable Trust is meant to direct the property of the first spouse to die entirely to the Survivor’s Trust for the benefit of (and subject to control by) the surviving spouse, but includes a provision that directs any property disclaimed by the surviving spouse into a credit-shelter or bypass trust (referred to as the ‘Family Trust’). The Survivor’s Trust and the contingent Family Trust last for the survivor’s lifetime. At the survivor’s death, the contingent Family Trust and the Survivor’s Trust pass to continuing trusts for descendants that can last for lifetime or can terminate at ages specified.

Inheritance taxes are something that many people think about. Virginia tracks the federal rules and currently does not have a separate estate tax, unlike other jurisdictions such as Pennsylvania. This means that at death a person can give $5 million and a married couple can give $10 million without incurring federal estate taxes (there is no limit on the amount of money a spouse can give to another spouse – there is also no limit on the amount of money a person can give to charity). These figures are set to adjust for inflation, so 5 and 10 become nearly 6 and 11, but we’ll use 5 and 10 for ease of reference. Just remember that the actual numbers are higher and are set to move with inflation.

You might say that those numbers are so high that the average person doesn’t have to worry about them. And you would be right on that specific point, but you would be wrong not to consider the real taxes and costs that apply to most families. These aren’t called taxes, per se, but they are costs which are hidden underneath the high lifetime exemption numbers. Because it can be confusing – especially for lawyers who don’t specialize in this area – people don’t know how to work within the rules which means that many of them end up spending much more money than necessary.

States have default rules about who inherits if someone dies without a will. Even if someone is okay with the default, they need to know that the cost of opening such an administration in Virginia is more than the cost of a will. The reason for this is that Virginia requires surety on a bond for a person to qualify – even if that person was the decedent’s spouse or another family member. This is essentially an insurance policy that doesn’t have to be purchased, but the requirement can only be waived with a properly worded will.

The other thing that costs money is the assets themselves. If an asset passes to another person under a will or through Virginia’s default rules, then there are “probate fees” that have to be paid to the Commissioner of Accounts. These are in the hundreds of dollars when all the filings and accountings, and related expenses are considered. In addition to these fees, Virginia collects a one-half percent (0.5%) tax for assets which pass through probate. This amount can add up quickly when taken into account with the other costs of probate. This is especially true when a house passes to someone else under a will – the one-half percent tax is applied to the value of the house. For example, a $200,000 house would require a probate tax of $1,000 just for that asset alone.

There are many straightforward ways to ensure that real estate and other assets pass as intended without unnecessary cost. The points mentioned above are but a few of the considerations that should be made when deciding how to make a plan for your family. Consult a specialist to make sure that you are not volunteering to pay inheritance tax, regardless of whether your estate is less than the federal estate exemption amounts.