To: The children of John Doe
From: The Internal Revenue Service
Re: Estate evaluation and Thanks
Date: November 30, 2011
First, the U.S. Government is profoundly grateful for the $1,100,000 your father donated to it in the form of estate taxes. By using his real estate attorney to draft simple wills rather than a more experienced attorney focused on the field of estate planning, your parents lost out on a massive opportunity to utilize both of their $1 million estate tax exemptions. While there were no estate taxes due when your mother passed on, having a simple will meant everything went to your father without any estate tax savings provisions. Had your parents used credit shelter trust provisions, your mother’s half of the then-$2 million estate would have captured and applied her estate tax credits. Instead, the “extra” $1 million she could have sheltered became part of your father’s estate resulting in $550,000 in estate taxes. Again, the IRS appreciates this donation.
Next, the other $550,000 in taxes paid to the U.S. Government was from the additional $1 million that your father had in life insurance on top of the $2 million estate. While many life insurance agents are cheerful to say life insurance is tax free, what they mean is that life insurance is income tax free to the recipient. Owning and controlling the policy means that the payout value is included in the taxable estate. Had your parent’s inquired further about an irrevocable life insurance trust, they may have set one up to be the owner of the policy and avoided the 55% tax. So once again, the IRS thanks you for the more than $1 million in unnecessary estate taxes.
And speaking of income taxes, we also greatly appreciate your own donations totaling more than $150,000 in the form of income taxes. When your father named you as the direct beneficiaries of his retirement accounts, he intended to avoid probate. However, there were some significant income tax savings he could have passed on to you through an IRA Trust but did not. Instead, you did exactly what the U.S. Government hoped you would do and cashed the checks from the investment company and spent the money. If the funds had gone into an IRA Trust, then the funds could be set up in a tax-deferred account called an Inherited IRA and only small taxable portions would have to be taken out each year. Instead by cashing the check you provided the federal government with income taxes up front with no ability to have the accounts grow tax-deferred. So for the donation and especially for giving up decades of tax-deferred growth, the IRS thanks you.
As for using Wills instead of a revocable living trust, that has resulted in some indirect benefits for the IRS as well. Your parents’ estates have lost tens of thousands of dollars paying attorneys to handle the probate work that resulted from using Wills. While the probate court processes could have been completely avoided through use of a revocable living trust, there is now a lot more income going to the attorneys which will come to us in the form of increases on their income tax forms.
In summary, the IRS is extraordinarily grateful to you and your parents for not arranging your affairs in a more tax-friendly, tax-efficient, and bureaucracy-avoiding manner to the point we collected an extra (and unnecessary) $1,300,000 and more in taxes. In these tough economic times, we need all the tax money we can get to buy $1,200 hammers and $3,000 toilet seats. For this, especially during this time of Thanksgiving, we wanted you to know how thankful we are to you and your parents for arranging your affairs to provide maximum taxes to the federal government.
Irving Robert Sinclair