Finance
My father ‘intentionally and hurtfully’ cut my late sister’s two children out of his will. How can I ensure that they get a fair share?
Dear Quentin,
I will inherit a significant amount of money – hundreds of thousands of dollars – from my father. This means that my only sibling, my deceased sister, is effectively cut out of the will because her children will not inherit what would have been her half as set out in his previous will before she died.
In the interest of fairness, I would like to give my sister’s two children, my niece and nephew, what would have been half of my sister’s inheritance had she been alive. He deliberately and hurtfully left out all of his grandchildren from his written will. What is the best way to do this so that no one is penalized for gift taxes and other costs?
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Should I tell him I’m doing this ahead of time, or wait until he’s passed away?
The good aunt
Dear aunt,
Grandpa wasn’t messing around. He clearly had his reasons for leaving your sister’s children out of his will, assuming he took the time to mention them by name. Handle this knowledge with care, or he will do the same to you. If you challenged him, he might end up leaving his estate to the dogs and cats at home (no matter how worthy they are).
The good news is that you believe your father should leave half of his estate to his two grandchildren instead of to your sister, and you have the power to right what you see as wrong. It would have made more sense if it had come from him and, as you suggest, he probably could have done that without them having to pay inheritance tax.
To give your niece and nephew the money after you inherit it, it’s best to split it into annual gifts under the $18,000 federal gift tax exclusion. That means you can give up to $18,000 to your niece and nephew each year, and even give that amount to each of their spouses and children, if they had any.
Married couples, if filing jointly, have an annual gift tax exclusion of $36,000; both parties must agree to the donation and file joint tax returns. (You can read more about that here.) These amounts would not be subject to estate taxes and would require no paperwork to be filed. But if you give more, you’ll need to file tax forms that count toward your lifetime federal and applicable estate tax thresholds.
“The lifetime exemption from inheritance and gift taxes is expected to be reduced by half by 2026 and adjusted for inflation.” according to Kiplinger. “Estimates indicate a reduction of nearly $7 million or less. If you are wealthy and have a large estate, gifts given in 2026 or beyond (if the sunset limit is exceeded as planned) may be subject to up to 40% gift tax.”
Education and medical expenses
Even before you receive an inheritance, if you have the money for it now, you can open 529 plans for their (or their children’s) education, knowing that it will eventually count toward the money coming through you from their grandfather. “You would be able to combine five years of gifts, or as much as $90,000, into a single contribution to help fund their future education,” said Martin Schamis, vice president and chief estate planning officer at Janney Montgomery Scott.
You might be able to give them an even greater gift by opening a custodial account for trading stocks, bonds and exchange-traded funds. This allows them to learn the magical powers of compound. If you invested a few thousand dollars in an index fund, which is essentially mutual funds that track the performance of stock indexes, and contributed a few hundred dollars a month, your niece and nephew could have a savings pot worth tens of thousands of dollars over ten years.
Cynthia D. Great Britain, a partner at Karlin & Peebles, LLP in Los Angeles, said you could also just pay their tuition and fees directly to their university or private school and it wouldn’t count as a gift, deducting it from their “inheritance” later . “Payments for higher education do not trigger any form of gift tax reporting,” she says. “The same applies to medical expenses, as long as payments are made directly to the medical facility, if relevant or applicable.”
For those who Are leave large sums of money to their families: The amount of the federal estate tax exemption is currently $13.61 million per individual or double that for married couples, and is expected to be at pre-Tax Cuts and Jobs Act levels 2017, which would be an estimated value. $7 million per individual, adjusted for inflation. The maximum federal estate tax rate remains 40%.
Currently, only six states – Maryland, Nebraska, Kentucky, New Jersey, Pennsylvania and Iowa (where the estate tax will be phased out in 2025) – impose estate taxes. Maryland also charges estate and inheritance taxes. However, Pennsylvania is the only state that charges fees”linear heirs” (children and grandchildren) and imposes an inheritance tax of 4.5%.
So any obligations to Uncle Sam will largely depend on whether you want to give them a large lump sum, or parse it out over time. But if a few hundred thousand dollars come in – hopefully later rather than sooner – it should be possible to carry out your wishes in a tax-efficient manner. There is only so much control we can exert over our estate after we are gone.
PS The nickname “The Good Aunt” is my gift to you.
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