Trying to Outsmart the Government

I had a call not too long ago from a woman who was concerned about avoiding probate and paying estate taxes upon her death.  She had figured out, or so she thought, how she could solve both problems and wanted confirmation from me that it would work.  She had written out a check to her son leaving the dollar amount blank.  She then instructed her son that upon her death, or if her passing was imminent, that he should write in the dollar amount and deposit the check in his account.

Of course, trying to outsmart the government in this way won’t work.  Firstly, going through probate will still be necessary as long as there are any assets that can only be accessed by appointing an executor.  In many states probate is not something to fear anyway.  Usually it is an inexpensive process that can be handled with little or no court involvement.  In those states where probate is messy and expensive, however, this woman’s solution still won’t work as long as she has even a single asset that requires the appointment of an executor.  Often, refund checks payable to the person who died will necessitate the appointment.

As for estate taxes, the government is smarter than that.  In determining the size of one’s estate all assets transferred within 3 years of one’s death are included as part of the estate for tax purposes.  This will specifically prevent the strategy of transferring all of one’s assets before death to eliminate the estate tax.  Now, you might be thinking that the estate tax is not something to worry about since the federal estate tax only kicks in on estates over $2,000,000 (and will go up to $3,500,000 in 2009).  However, most states have their own estate tax as well and the amount exempt from tax is much lower.  In New Jersey, for instance, the estate tax is owed on estates greater than $675,000 and in New York on estates greater than $1,000,000.

There are other ways this woman may be able to minimize taxes on her estate but writing blank checks with instructions to cash them when she dies is not one of them.  The government is much too smart for that.