What are the implications of being named the sole heir on a will and asked to distribute the estate equally among my siblings?
My sister recently informed me she has written a will listing me as the executor and sole heir on her estate. She has verbally instructed me that when she passes I am to distribute the proceeds from her estate equally among me and my other two siblings. I'm willing to do this, but this seems like a bad idea. How would this effect my taxes? What happens if I should pass before my sister and she should die before changing her will again?
A reasonable first step may be to recommend to your sister that she visit with an estate planning attorney and have a proper set of documents drawn up. The language in your question is confusing -- if you are to be the "sole heir", then it would seem that all of your sister's property and assets covered by the will would simply become yours at her death (subject to probating the will in your state). Any further action, such as distributing some of those assets along to your siblings, would depend on your choices.
But it also sounds like your sister's actual intention is for her assets to be split among her three siblings, in which case all three of you would be "heirs", inheriting a share of those assets at her passing. In this case, it may be appropriate that you serve as "executor", which typically means that you would be resonsible for some of the practical aspects of seeing your sister's will carried out. The distinction between "heir" and "executor" is crucial here.
Depending on what type of assets your sister owns (like bank accounts, retirement investment accounts, real estate, etc), she may be served by proactively assigning beneficiary designations to those where she may, and using a trust to clearly describe her wishes for the distribution of the rest.
A qualified financial planner can help organize your sister's assets into categories and offer some guidance on how to accomplish her wishes; an estate planning attorney or service can assist in writing the appropriate legal documents to support those intentions.
Let's begin with a clarification. It's obvious your sister is naming the executor. However, you're not the sole heir. In fact, you and your two other siblings are the heirs and therefore there are three years to the estate. Having cleared this up, let's talk about the tax aspect. If you inherit assets from your sister's estate and those assets are other than retirement accounts that have never been taxed, your inheritance is income tax free. If however, during the settlement of the estate the assets earned dividends or interest, those dividends and interest will be taxed to you and your siblings but the taxation should be relatively minor.
The next question you asked was about the possibility of your sister surviving you, is much too big to provide you with an specific answer. Yes, she can change her will and there is nothing you can do about that. However, you may want to ask her if she's leaving the assets to the three of you, "per stirpes", and if this is the case, your share would pass to your children, assuming you have any. If you have no children, it would normally pass to your remaining siblings.
Your concerns are not unusual but you're asking legal questions a competent estate planning attorney could assist you with or even the attorney who your sister is using if she permits you to talk to her attorney. Whether you have the right to ask these questions is another story so I suggest you tread carefully.
Yes, this is a bad idea for everyone involved (you, your sister, and your other siblings). Your sister should put explicit instructions in her will (or other estate planning documents) detailing exactly what she wants to happen if/when she dies. Telling you to do this verbally, with nothing in writing, is a recipe for disaster.
This is a horrible estate plan. First of all, you figured out that if you die before your sister, and you hadn't distributed her estate before you died, then your sister's estate and your estate would be distributed by YOUR WILL or the laws of intestacy, if you don't have a Will.
But a worse thing that could happen is this: you become imcompetent, and a probate court appoints a guardian or conservator over you and your estate (which now includes your sister's estate if she died before you but after you became incompetent.) The probate court does not know of your verbal instructions from your sister, NOR DOES IT CONSIDER ANY SUCH VERBAL ORDERS, so your sister's estate will then be used to care for you, even if it is all gone!
So, get your sister to a competent estate planning attorney and have her write a proper Will that spells out what she wants to happen after her death. Also, have the attorney review her Durable Power of Attorney and health care directives as well. And while you're at it, review your own estate planning documents!
Good Job in asking this question at this time. I believe you will benefit in doing so.
As the sole heir, you can decline part or all of the estate which might help if you are concerned about taxes. This is done via a qualified disclaimer and is covered more in detail here. Below is a quick review of how it can be used.
- If a person has not set up an exemption trust prior to his or her death, a qualified disclaimer can be useful. It enables the beneficiary to refuse to accept part or all of the assets, rather than receive them.
If your other two siblings are next in line to inherit the estate equally, this might work out as it is explained. Nonetheless, I would get a copy of the most recent will and make sure that it is as accurate as it needs to be. I would also suggest that your sister add each of you as heirs. Your job as the executor will be difficult regardless. If you can adjust the will so that little to no decisions are up to you, you can do your duties as spelled out in the will. Here is an executors guide that should help:
How will this effect your taxes?
Well many items may receive a step up in basis as long as she wills them to you. If she gifts them to you before death, than this voids the incredible benefit of the step up in basis. Again, if this is going to be a negative impact on you and burden you with tremendous tax, you can disclaim the inheritance as noted above.
Lastly, if you preceded her in death, and there is no contingent executor.... I believe that the probate courts will appoint one. In regards to your inheritance, it could go to your kids or to your siblings. This is know as per stirpes versus per capita and will depend on the will.
Hope this helps and points you in the right direction.
With love and regards,
Jose Sanchez, CFP®