This week, Gail implores you not to make rushed decisions about inherited assets.
Dear Gail —
My husband passed away a month ago and I inherited his bank accounts via "POD." He had $116,000 in his separate checking and savings accounts and a $125,000 CD that will actually mature later this month. I still work and don't need the money. I'd rather it went into the trust he set up in his will to pay for college for our two grandchildren. Somebody told me I can just "disclaim" the money and that will take care of it.
Could you please explain how this works?
Dear Jessica —
In a word, it probably won't work.
First, let me back up and say I'm sorry for the loss of your husband. He obviously cared a lot about his grandchildren and it makes sense for the money he left to go into their trust, since you don't need it. But if everything were sensible, we wouldn't need lawyers!
"P.O.D." stands for "Payable on Death." It's a way for someone to transfer ownership of an asset when they die without that asset having to go through probate. Typically, P.O.D. designations are used with bank accounts. In your case, your husband named you as the person who was to receive these accounts at his death.
However, just because someone bequeaths you something, that doesn't mean you're under any obligation to accept it. There are lots of reasons why you might not want an asset, especially a material rather than a financial one: You might not like it (you know that painting that hung in the den?), it might be inappropriate (Grandma's family Bible, except that you converted to Buddhism 6 years ago), someone else in the family might need it more than you do (Uncle George's 1986 clunker of a Honda and you already have a Beemer), etc.
If you do not wish to claim an asset left to you by a decedent, you have to make a disclaimer. A disclaimer is not a complicated document. In fact, it's more of a paragraph. But to be legal, it has to include specific language, so you ought to have an attorney draw it up for you.
Here's the catch: If you disclaim an asset, you essentially walk away from it. You must not receive any benefit from the asset. For instance, you could not drive Uncle George's old car for a week and then disclaim it to your kid sister.
Moreover, the person who disclaims an asset is not allowed to control who gets the item in his/her place. Instead, it will pass to the "contingent", or back-up, beneficiary. If there is no contingent beneficiary, then the asset ends up going through probate where the decedent's will or state law will (if there is no will) decides who gets it.
Which is why you cannot disclaim the bank accounts left by your late husband and direct that they go to the grandchildren's trust instead. The only way this would be possible is if these accounts named the trust as the contingent P.O.D. beneficiary and, frankly, that would be rare.
Bill Wagner, an editor of National Underwriter's Tax Facts, points out that if a person disclaims an asset, "you can't say where it's going to go or else it is considered a gift"— from you to the person who receives it. As long as the value is $11,000 or less, that's not a problem because you can give that much away each year to as many people as you want without triggering gift tax. But in your case, we're talking about an amount well in excess of that. (The fact that you might want to gift this to a trust further complicates matters.)
Another consideration concerns a concept called the "unlimited marital deduction." This mainly comes into play with estates large enough ($1.5 million this year) to be subject to estate tax. But estate tax is only an issue if you are leaving assets to anyone other than your spouse.
Federal law allows you to leave your spouse an unlimited amount of assets when you die. These will pass completely free of any estate tax. Of course, when the surviving spouse eventually dies, he/she will theoretically have an even larger estate (thanks to their own assets + those inherited from the first spouse). If this is left to the kids, the estate tax bill could conceivably be larger than if each spouse had left his/her assets outright to the children.
As Wagner points out, if you disclaim the $241,000 in the P.O.D. accounts, your husband's estate loses the marital deduction for this amount. Again, this isn't an issue if your late husband's taxable estate is under $1.5 million.
There are a couple of questions you want to ask your attorney: 1) where do the P.O.D. accounts end up if you disclaim them?, and 2) would this generate any estate tax?
My hunch is you are probably better off taking over the accounts and gradually gifting the money to your grandchildren. However, without getting into the complexities involved, it may not be possible for you to gift the money to their trust yourself (it depends upon whether the children have a "present interest" in the trust). That's another question for the attorney.
Frankly, the simplest thing would be to open a 529 college savings account in the name of each grandchild. Under federal law you could contribute $55,000 (5 years worth of annual gifts) in a single year to each account, provided you don't give the child any other gifts for the next 5 years.
At the end of this period, this will remove $110,000 from your taxable estate and yet you, as the controller of the 529s, would still be able to decide what happens to the accounts — how they're invested, when a distribution is to be made, etc. You could also transfer control of the accounts to one of their parents.
Importantly, unlike a trust, provided the money in a 529 plan is used for qualified higher education expenses, all of the gains will be tax-free when they're withdrawn.
The best advice I can give you at this difficult time is to not rush into anything. (You have until 9 months after the date of death the execute a disclaimer.) Take your time... and take care of yourself.
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