unequal inheritance
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Anonymous
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First, I recognize the privilege that I have in receiving a significant inheritance. I have not received or benefited from these funds for most of my life (but they did pay for college), however now I'm entering into a new situation..
Sp, My mom just passed away, and left an unequal inheritance. There are 2 kids, me (54) and brother (57). I am married, have two kids of my own, brother is divorced, no kids, not going to have them, but may remarry one day, though no partner now. We both are stable, I make 140k, my spouse makes 200k; brother makes 220k. I am trustee and executor for my mom who had two trusts. Here's the situation. Brother and I are equal beneficiaries of one trust, which now dissolves and inheritance will be about 1.5m/each after some other distributions. Mom's other assets were placed in a separate trust and include real estate and accounts totaling about 2m total. As far as I understand it, this trust is divided into two halves, one half goes to me outright, and one half in trust to my kids but with with my brother as a lifetime income beneficiary. So, I would be in charge of distributing income and--if I deem necessary--principal during his lifetime but balance goes to my kids after his death. There are two issues with this. 1) this becomes an irrevocable trust and thus when the kids inherit, there is no step up in capital gains, which could be a big tax drag in c. 30 years; also my brother doesn't want income now (he is in a high income state) and if the trust doesn't distirbute income its taxed at 37%. He might want the income later though. Second issue is that it is unequal, but my mom's intentions were to ensure that grandchildren would be receiving something and she may also have been worried about my brother marrying someone who would take his inheritance (based on a very poor choice he made with first wife, who did kind of financially ruin him and he's had to rebuild). I think he wouldn't get in that situation again, but I'm not sure what to do. We have two options according to my initial consult. First, we can do aminor trust modification that would allow step up basis after my brother passes away. This money would still be in a trust and I would be giving him income, if needed but it would address the tax drag when the trust dissolves. The other option is that he disclaims it entirely, and then I just gift him a portion of it, say 1/3. Financially, he's in a pretty good place (has 2m plus saved, will be inheriting 1.5m, and owns a 1.2m house outright that he bought years ago and has low expenses. Should he need additional funds or care, the trust would provide, but I could also just give him the money now. We are also in a good place, though we have higher expenses. We have about 2.5m saved (spouse will have a 50k pension too) and we have 600k equity but 600k mortgage, plus two kids heading to college so our expenses are significantly higher. I'm trying to balance being fair to my brother and fair to my grandkids/respecting my mom's wishes. What would you do? |
Anonymous
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If you haven't already consulted with a professional such as a tax accountant/financial advisor, I'd start there for information and advice. Perhaps they can give you a referral for a lawyer who can assist you.
I would think there's a means to place the annual funds for your brother someplace where it won't count as annual income, plus protect the remainder that your children will inherit on a stepped up basis. |
Anonymous
| How much of the trust can you give your brother now and how will it be taxed? |
Anonymous
So, if he disclaims I receive the whole thing, and I can gift him without tax consequences. Otherwise I establish a trust and strobe I come annually to him and we could prob do a low income high growth model. I think my question is partly about taxes but also about whether to follow what my mom wanted or ignore and just my brother part of the money. |
Anonymous
| You give him one half of your amount. |
Anonymous
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I would ask him what he would like to do as the lifetime beneficiary for the 1M and let him have at it. Let him know that you will be leaving that extra 1M you got to the kids, so he shouldn't worry about spending as much as he wants. Your mom's thinking was very reasonable. Mama thought you both should be comfortable with the 1.5M each, but she did not want to leave the other 2M directly to the grand kids just in case you and your brother need it. So she left 1M to you, knowing you will leave it to your kids if you don't use it, and then left 1M to your brother making sure that the remainder goes to her grandkids if he doesn't need all of it. Smart plan! |
Anonymous
| Your brother should have his own lawyer/accountant. This will avoid future tension between branches of the family. |
Anonymous
So she gives him half of the 1M extra she got and then he still gets life tome income from the 1M? |
Anonymous
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I would contact the attorney who wrote the trust for your mom and discuss about it.
Also try to make it as less complicated as possible like giving the real estate and some cash payments to your brother and the real estate going to your kids when he passes away . |
Anonymous
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OP, who is advising you on this?
Im a lawyer, but not an estate lawyer, but I'm the person in my extended family who communicates with our advisors and we have a lot of trusts. You wrote: "As far as I understand it, this trust is divided into two halves, one half goes to me outright, and one half in trust to my kids but with with my brother as a lifetime income beneficiary." I am wondering if you are understanding this correctly. It's possible it's set up this way, and it's not a terrible if it is. But are you sure your brother is not the primary beneficiary of this trust during his lifetime and your KIDS are the remainder men? I wonder if you are confused on that point. I am childless and my nieces are the remainder men of the trust my parents set up for me. I am the trustee of the trust. All it means is that when I die, they get what's left in it. But in the meantime, I can spend what I need from it based on my needs - health, education maintenance and support. Also, are you sure it is written so that the interest is paid out automatically to your brother vs the HEMS standard (health, education, maintenance and support)? It might be. That's fine, though HEMS might be better. This is not necessarily a problem. It just means your brother gets all the income for life and then your kids get it when he dies. Hopefully there is a provision that if he has kids, his kids get it instead of the nieces and nephews. Honestly, it's really hard to advise on this without seeing the actual trust document. No one on here is going to be able to give good advice. You need a good estate attorney to talk this through. Are you in touch with the estate attorneys who wrote this? |
Anonymous
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OP I don’t understand why you are inserting yourself and trying to change your mom’s wishes. All your reasoning above makes little sense to me. Please consult with the attorney who wrote the trust and stick with your mom’s wishes.
On the tax issue with your brother not needing the income now. 1. The trust can be re-invested for growth such that it throws off very little income. 2. If he takes all of the income as it is now, it only increases his marginal tax rate on that income which is really nbd. He can pay the incremental tax out of that income and save the money he doesn’t need in an investment account outside of the trust. You need to get a good attorney (preferably the one who wrote the original trust) and a good CPA to advise you. You are making this way more complicated than it needs to be. |
Anonymous
Are you sure because that doesn’t make sense. How are there no tax consequences? |
Anonymous
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OP, as executor you are supposed to follow the estate plan.
He gets the income for life. Your kids get what is left when he dies. This is fine. |
Anonymous
| stop messing with this. your mom was trying to protect her money. this setup is fine. |
Anonymous
| If he doesn’t want the money, does he want the house? Maybe ask him what’s best for him |