(Business Insider) My grandparents were smart about their money. Before they died, my dad's parents organized their finances so that he wouldn't have to pay huge amounts in inheritance tax.
That still didn't stop my dad from dealing with major headaches.
When your parents pass away, "that's when you're least prepared to deal with their finances," my dad told me. "You have so many other things going on that seem much more important."
The issues he dealt with after his parents died prompted him to organize his finances even more efficiently for me and my brother. Now, if all goes according to plan, we'll receive our inheritance without having to shell out too much for taxes and lawyers — and without having to untangle the threads of forgotten bank accounts.
My grandparents thought they'd figured it out
When my dad's father passed in 2011, years after his wife, he thought he'd put everything into a modest trust to make it easy for my dad and his brother to inherit. Problem was, he'd forgotten to include one bank account, which still remained in my grandfather's name.
This meant my dad had to go through probate to gain access to that bank account, the official process of proving a will's validity. My dad and uncle had to put advertisements in the area newspapers announcing their father's death, so that anyone else who had possible claims to his estate could be notified. These claims could range from illegitimate children to debts my grandfather had failed to settle.
Luckily, my dad didn't end up discovering any secret siblings. But he did have to buy an insurance policy to cover the amount of money left in that bank account, in case he and his brother embezzled or spent it before a possible other claimant could come forward. Meanwhile, my dad was doing all of this in small, rural towns away from his home state, where finding an insurance company and getting the appropriate paperwork wasn't easy. Each step in the process required him to make a four-hour round trip.
One day, my dad went to the bank that held his father's last account. He had to change the account name from his father's to "the estate of" his father. The money was then supposed to sit in that account for six to 12 months before my dad and uncle could touch it.
"The local bank had no idea what the regulations were," my dad said. So finally, after months of long car trips and bureaucratic headaches, a clerk at the bank said to my dad, "Wouldn't it be easier if I just close the account and give you a check for the money in it?" It would have been, but it also would have been out of compliance.
My father will structure our money differently
Eventually, my dad was able to get access to his father's estate, but he learned a lesson in the process. He didn't want my brother and I to have to go through what he did in claiming his late father's money. The part of his father's inheritance that he didn't use, he handled in two different ways.
First, following in his father's footsteps (and not working with a financial planner), my dad put some of his inheritance in a trust. My dad has control over the trust until he dies, at which point, if my mom survives him, it will go to her. When they both pass, it will automatically go to me and my brother. All we'll have to do is prove to the trust holders that our parents have passed. (For the record, I'm not trying to be morbid. This is just good planning.)
But my dad didn't put all of that money in a trust, which we'll still have to pay taxes on one day. Thanks largely to the surprise extra bank account, he had some money left over from his father that he didn't need to set aside for his and my mother's retirement. The second thing he did with it was keep it accessible, so (starting in 2018) he could send my brother and I each around $15,000 per year — the largest monetary "gift" you can send someone without them having to pay taxes on it where we live.
Passing on the money early is good for taxes, but it's also good for our family
My dad says he'll make these gifts annually over the next two years, to make sure we get some of his father's inheritance both tax-free and at a time in our lives when we need it most. This way, we can use the money to make a down payment on a house, or a car, or to go back to school, instead of getting it when we're well past the age of wanting to first make those major purchases.
With this extra money, I can do things I'd otherwise have zero chance of as a freelance writer living in one of the world's most expensive cities. I plan to either invest in property (certainly not in my city, but somewhere outside of it), or maybe go back to school and get a graduate degree. Obviously, I am extremely lucky. My grandparents happened to all be first-generation Americans who did much better than their immigrant parents and were able to provide for their family generations down the road.
You can also, I learned, pass along this equivalent amount of cash in the form of property. Rather than sending a $15,000 check each year (or whatever the tax-free gift amount is at the time — it sometimes changes), you can transfer that money's worth of your property. This could put your property fully in the hands of your children before you're, well, not around to live on it anymore.
My parents have not opted for this route. I wonder if they think my brother and I would be bad landlords.