What Is the "100% Tax"?

Posted by John Crow | Apr 04, 2019 | 0 Comments

It sounds like something from the twilight zone. But, for many families the 100% tax is a real problem. This tax does not necessarily affect the rich. All families can potentially face this confiscation of wealth. To be clear, the 100% tax not an actual tax by the federal or a state government. Rather, it is loss that occurs when a child, grandchild, or other loved one is completely cut off from inheriting family assets.

What Triggers the 100% Tax?

The most common way a family is affected by the 100% tax is through estate planning that does not consider the impact of second marriages, divorce, and sudden deaths. In today's society, second marriages are extremely common and the rate of divorce for any given marriage is over 50%. These situations present unique estate planning issues and complications, especially with assets staying in the family bloodline.

Example of the 100% Tax

The best way to explain the 100% tax is by illustration: Emma is 75 years old and has one child, Vanessa. Vanessa has four children of her own and Emma loves her grandchildren dearly. Emma has instructed Vanessa to make sure that any inheritance she receives be given to the grandkids at her death. Additionally, Emma has told Vanessa if the grandchildren need money for college, a new car, or for medical expenses, Vanessa is to use the money on their behalf. Emma then develops an illness and dies a few months after she prepares her will. This will states that she leaves everything to Vanessa. At the time of Emma's death, Vanessa is married to Joe, her second husband, and not the father of Vanessa's children. Vanessa's own will leaves everything to her husband at her death. Vanessa dies two years after her mother and all assets go to Joe. Less than a year later, Joe marries Justine and forgets about Vanessa's children. He does not use the money to support the children or leave them any inheritance in his own estate plan.  

In this example, a person outside of the family ultimately inherited Emma's assets. Vanessa's children were completely cut out from receiving any assets that were to be used, at least in part, for their benefit. This is the essence of the 100% tax and it is a very real issue with many families. 

Be Conscious of the Realities of Divorce

Another potential exposure to the loss of inheritances can be found in divorce. If a child inherits assets and then co-mingles those assets with a spouse, those assets become marital property. That property then becomes divisible at the time of divorce.

Here is an example of how this scenario plays out: Jordan is married to Sue and they seemingly have a great marriage. Jordan inherits a large amount of assets from his father. Instead of keeping these assets in his name only, Jordan puts his wife's name on all inherited property. A few years later, Jordan and Sue get divorced. During the divorce, Sue asks Jordan for half of the assets that were his inheritance from his father. Not surprisingly, Jordan refuses. At trial, the Judge finds that Jordan co-mingled his inheritance with his wife and awards Sue one half of the assets.

In this example, Sue inherits 50% of Jordan's entire inheritance from his father. It is devastating to Jordan because it was his family's hard earned money, and now it is falling well outside the family bloodline.

How to Keep Assets in the Family

The 100% tax is devastating to families, especially minor children who are cut off from inheritance from their grandparents or parents. But the good news is that there are several ways to prevent these major losses. Here are some of the actions you can take:

  • Establish an estate plan early
  • Use trusts to control the ultimate distribution and use of assets
  • Be conscious of divorces and marriages that have soured
  • Make sure your wishes are reflected in your will or trust

Ultimately, the best way to avoid these types of family issues is to plan properly. Trusts are an estate planning tool that can effectively prevent disruptions in distributions. With the use of trusts, you can control who ultimately receives assets at the death of a family member. As in our first example, if the grandparent had used a trust for her child and then directed that the trust assets go to her grandchildren at the child's death, in-laws would not have been able to receive the assets. Similarly, as in the second example, the use of a trust would have prevented an in-law from taking half of a son's inheritance he received from his dad. 

Plan Ahead

If you are facing a situation in which you fear there may be exposure to this type of loss, give Attorney John Crow a call at 931-218-7800. We are happy to look over your estate plan and give you some ideas as to how avoid this 100% tax and ensure your family will be cared for after you are gone. 

About the Author

John Crow

John Crow is the founder of Crow Estate Planning and Probate, PLC, a boutique law firm located in Clarksville, Tennessee. He has extensive experience in guiding people through the important and often complex decisions surrounding wills, trusts, conservatorships, and business formations.

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