Bringing up the estate tax with your aging parents can be as awkward as inquiring after their sex life—or worse, because it could imply that you are chiefly interested in your inheritance. But making sure that they understand the current complexities of the law will help their money end up where they want it.
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Talking about estate taxes is especially important right now, since the federal estate tax doesn't exist this year because of a legal quirk. Next year it's back, with an exemption of only $1 million (down from $3.5 million in 2009), unless Congress acts. That means navigating the ebb and flow of tax rates will require some complex maneuvering. Lawyers warn that the wrong wording in a will could inadvertently leave a spouse no money or accidentally award everything to an ex-wife, for example. Ignoring the issue could also mean giving Uncle Sam a big chunk of one's estate inadvertently.
Bringing up the topic isn't easy. Adult children often fear appearing like money-grubbing kids, while older adults prefer to avoid the topic altogether. Here's some advice from two experts: Alexandra Armstrong, financial planner at Armstrong, Fleming & Moore in Washington, and Deborah Jacobs, author of Estate Planning Smarts.
Don't be afraid to talk about it. As older adults increasingly turn to their children for help managing their finances, Armstrong says she sees more frankness concerning difficult money topics. One of her clients who is in his 80s delegates his financial affairs to his daughter, who told him that if they don't take action, a lot of his money will unnecessarily go toward taxes when he dies. That kind of logical approach can work best, Armstrong says.
Use a celebrity as a conversation starter. Jacobs suggests bringing up the recent death of a celebrity, such as George Steinbrenner. Since he died in 2010, his heirs won't need to pay the federal estate tax. You could say something like, "But next year, little people like us will have to worry about it," since the exemption falls to $1 million, says Jacobs.
You can also use yourself as an example to broach the topic. If you just updated your wills, mention to your parents how you did it. You can say something along the lines of, "It's amazing than in 2011, a young couple like us needs to be concerned about the estate tax," she says. That gives parents an opening to discuss their concerns. Giving them a financial planning book or article can also get the conversation going.
Table the issue if your parents don't want to discuss it. "If they don't want to talk about money, then you need to drop it and accept that this is not something you should pursue," says Jacobs. Some parents who grew up during or before World War II look forward to paying taxes, she says, and feel it's irresponsible to try to minimize them.
The main question, says Jacobs, is, "Can you have this conversation without damaging your relationship?" Because ultimately, it's the memory of the relationship that lasts, and the money is far less important. "If you have tense times towards the end of your parents' life because you're talking about estate planning, it will stay with you forever, and it's just not worth it," she says.
Acknowledge the uncertainty of the situation. Even financial planners admit that they don't know what's going to happen. No one knows whether Congress will take action to change the law before 2010 is over, Armstrong points out. In fact, many lawyers and advisors assumed that Congress would not have waited as long as it has. The uncertainty means that it's hard even for experts to recommend the best course of action; many estate plans now include contingences for all possibilities.
Talk about different options—not just giving you more money now. It's true that one of the easiest ways to reduce a taxable estate is to give money away early, before death. But not everyone can afford to do that, especially considering that no one knows how long he or she will live. That's why Armstrong only recommends this strategy to people with significant ($3 million plus) in assets who are living off a reliable source of income such as a pension. Suggesting this approach to parents can seem like asking for a handout, so tread carefully with this strategy.