Tom Martino: Hi, Tom Martino, your troubleshooter, 303-713-TALK, 713-8255. Okay, CJ, we have Blake Harris with us, attorney at law milehighestateplanning.com. Blake, hang on a sec, CJ has a good question. I’m going to sum it up for you, all right, CJ, and then you tell me if it’s correct or not?
CJ: Okay. All right.
Tom Martino: How do you know John, by the way, CJ?
CJ: He’s a friend of mine.
Tom Martino: A friend of hers, okay. John’s mom died, okay, and she had sold her house before she died. All the cash went in to the bank, okay. She sold it about six months before she died. All the cash went in the bank. His mom died. He opens up an estate, a probate, and he goes to the bank as the executor or personal representative. And the bank says, “Oh, you’re already on the account as a beneficiary.” Now, he realizes he did not have to open the estate or the probate.
Tom Martino: But he has a question, what does he do? There’s going to be about, let’s just say roughly $800,000 in capital gains. The basis of her home she bought 60 months ago is next to nothing. And if you add up improvements over the years, let’s just say she is going to have an eight or $900,000 gain. Of course, a big part of that has to be paid. Does the estate file a tax return? Do they need probate? That’s the story, Blake, ask away.
Blake Harris: Okay, so if in the year that your mom passed away, were her taxes filed? Has she paid taxes since the year she passed away?
CJ: No. No taxes were filed. The house closed January 4th of this year.
Tom Martino: And when did she die?
CJ: July of this year.
Tom Martino: Okay.
CJ: Here’s my question.
Tom Martino: Hold on. Wait. Just Blake, keep going and then we’ll let CJ ask. Go ahead.
Blake Harris: Okay, well, go ahead with your question.
CJ: Okay. Since he learns that he is the designated beneficiary on the account, doesn’t that make it outside the estate and the estate actually has no money to pay the IRS taxes?
Blake Harris: I would take the money and I would not worry about the IRS at all.
Tom Martino: Wait a minute. Hold on. Hold on. Hold on.
Blake Harris: If you are the beneficiary of an account and the money is going outside of probate, it’s not your issue whether or not the individual who’s passed you that money paid taxes on it.
Tom Martino: Wow.
CJ: Right. Okay.
Tom Martino: Wait a minute. He doesn’t have an obligation that he opened probate now to make sure the estate pays the bills before taking that money?
Blake Harris: Oh, oh, oh, oh, well-
CJ: He has no money.
Tom Martino: Hold on CJ, please. I really-
Blake Harris: No, these are two different vehicles, two different vehicles you were driving and the money does not need to cross between the two of them regardless of whether… Oh, well, now that you’ve opened it, you have to… But even as a personal representative, you can’t reach in and take the money from something that’s not going to be part of it. There’s debt. I mean, you can try to pay the taxes, but you can also on the other side of it, say it doesn’t matter because the property’s already been distributed out by the estate.
Tom Martino: Okay, so Blake, let me get this straight. If money is outside the estate, totally and legally outside the estate, for example, the day she died, it went to him directly and it did not become part of the estate, right?
Blake Harris: Correct.
Tom Martino: If it’s outside the estate, the personal representative has no obligation to claw back anything into the estate.
Blake Harris: Not only do they have no obligation, they don’t have the ability, they don’t have the power to.
Tom Martino: He would not have the power to take that money and to give it to the estate.
Blake Harris: Right. He can’t pay the taxes if he wanted to.
Tom Martino: Oh my God, they just got away with $300,000 in taxes probably. Holy crap. CJ.
CJ: Isn’t it like life insurance, where there is money going to a designated beneficiary when somebody dies? That doesn’t become part of their estate either.
Tom Martino: Yeah, that’s right, CJ. CJ, this is really good news, but here’s what I would do. I’m serious, it’s not going to cost a lot of money. I would have your friend John do an official consultation with Blake just to get everything straight on how to do it.
Blake Harris: Sure. We can have-
CJ: Well, I would but I’m in Seattle.
Tom Martino: Oh, you’re in Seattle, okay. I’ll tell you what-
CJ: I listen on your podcast by the way.
Tom Martino: Well, I’m so happy you’re listening. And Blake, wow, is that interesting. I hope people understand that. Milehighestateplanning.com. We have more coming up. We have a new referral list member in the house who does restoration. Honestly, we love to have those kinds of companies, so we’ll talk to him and more coming up on The Troubleshooter Show, especially about black mold.