Below is a recent question I answered on http://www.avvo.com/. It is a common question of many clients with creditor issues.
Q: does it make sense to purchase/transfer assets in the name of the spouse.: if you are in a profession/job subject to litigation, does acquiring/transferring assets in the name or your spouse keep those assets in the event you are sued. I live and work in the state of Washington.
A: Thomas' answer: Not necessarily. Washington is a community property state. Assets acquired during the marriage are presumed to be community property, which means each spouse has 1/2 interest in the whole. You may rebut the presumption if you can trace the funds used to purchase the asset to a separate property source (i.e. inheritance). But keep in mind, inheritance will only retain its separate character during marriage only if it has not been commingled with community funds. Separate entities such as limited liability companies and certain irrevocable trusts may be a better way to hold title to the assets depending on what assets you are acquiring. Also professionals should probably consider having malpractice insurance as well.
Visit my profile on Avvo.com
Tuesday, August 17, 2010
Friday, August 13, 2010
The Credit Shelter Trust
Typically people come to our office looking for a Will, which gives all of their assets to their spouse, if living, and if not, their children. Many times our clients know that there is an estate tax, but most have no idea that the estate tax could affect them.
I generally ask our clients to complete a brief asset worksheet which usually reveals something like this:
Equity in the Primary Residence = $200,000
Qualified Retirement Plan (i.e. IRA) = $200,000
Stocks and Bonds = $100,000
Term Life Insurance (Face Value) = $2,000,000
TOTAL = $2,500,000
Most people ask, "Why do you want to know the amount of our life insurance, its not subject to tax anyway?"
They are in part correct. Life insurance is not subject to income tax. But it is subject to the estate tax.
As stated in previous articles, the life-time exclusion amount for each person in 2011 will be $1,000,000 unless Congress acts. This means that if you die in 2011 the amount that exceeds $1,000,000 will be subject to an estate tax with a top rate of 55%.
Let play this out with the above clients. Assume that the above clients are a married couple and they would like an "I love you Will," which gives everything to one another first then their children.
Under current federal and Washington state estate tax laws, a husband and wife may transfer an unlimited amount of property to one another free of estate taxes (called the unlimited marital deduction). Assume that husband dies in January 2011 and gives everything to his wife. Now, the wife's estate is worth $2,500,000. If she dies the following December leaving everything to the kids, then $1,500,000 will be subject to the estate tax at a top rate of 55%. So wife's children could be looking at roughly a $800k tax bill.
However, if the couple had their estate planning attorney draft a "credit shelter trust" in their Will, rather than going with the standard "I love you," they could have saved their children the $800k.
So what's a credit sheleter trust? It is a paragraph in your will that says if I die before my spouse then I want a portion of my estate to go into a trust for the benefit of my spouse's health, education, support and maintence. The suriving spouse can be the trustee of this trust as well as the life-time beneficiary. When she dies, the rest will pass to the children in equal shares.
If husband dies with a credit shelter trust, then an amount equal to the life-time exemption amount ($1 million in 2011) of the husband's total estate goes into the credit shelter trust for the benefit of the surviving spouse. The rest of the husband's estate ($250,000) passes to the surviving spouse outright. No estate tax is paid at husband's death because he used his $1 million exemption amount to shelter the property that went into trust, and the $250,000 that transferred to wife passed tax free under the unlimited marital deduction.
Wife now has a $1,500,000 million dollar estate rather than a $2.5 million dollar estate. Now she can use her $1 million exclusion amount to shelter all but $500,000, saving over $500,000 in estate taxes.
The credit shelter trust is a widely used estate planning tool used by many people in this situtation. However, there are many other tools that can be used to save even more. In the articles to follow, I will address what the wife can do to shelter the remaining $500,000 from the estate tax.
I generally ask our clients to complete a brief asset worksheet which usually reveals something like this:
Equity in the Primary Residence = $200,000
Qualified Retirement Plan (i.e. IRA) = $200,000
Stocks and Bonds = $100,000
Term Life Insurance (Face Value) = $2,000,000
TOTAL = $2,500,000
Most people ask, "Why do you want to know the amount of our life insurance, its not subject to tax anyway?"
They are in part correct. Life insurance is not subject to income tax. But it is subject to the estate tax.
As stated in previous articles, the life-time exclusion amount for each person in 2011 will be $1,000,000 unless Congress acts. This means that if you die in 2011 the amount that exceeds $1,000,000 will be subject to an estate tax with a top rate of 55%.
Let play this out with the above clients. Assume that the above clients are a married couple and they would like an "I love you Will," which gives everything to one another first then their children.
Under current federal and Washington state estate tax laws, a husband and wife may transfer an unlimited amount of property to one another free of estate taxes (called the unlimited marital deduction). Assume that husband dies in January 2011 and gives everything to his wife. Now, the wife's estate is worth $2,500,000. If she dies the following December leaving everything to the kids, then $1,500,000 will be subject to the estate tax at a top rate of 55%. So wife's children could be looking at roughly a $800k tax bill.
However, if the couple had their estate planning attorney draft a "credit shelter trust" in their Will, rather than going with the standard "I love you," they could have saved their children the $800k.
So what's a credit sheleter trust? It is a paragraph in your will that says if I die before my spouse then I want a portion of my estate to go into a trust for the benefit of my spouse's health, education, support and maintence. The suriving spouse can be the trustee of this trust as well as the life-time beneficiary. When she dies, the rest will pass to the children in equal shares.
If husband dies with a credit shelter trust, then an amount equal to the life-time exemption amount ($1 million in 2011) of the husband's total estate goes into the credit shelter trust for the benefit of the surviving spouse. The rest of the husband's estate ($250,000) passes to the surviving spouse outright. No estate tax is paid at husband's death because he used his $1 million exemption amount to shelter the property that went into trust, and the $250,000 that transferred to wife passed tax free under the unlimited marital deduction.
Wife now has a $1,500,000 million dollar estate rather than a $2.5 million dollar estate. Now she can use her $1 million exclusion amount to shelter all but $500,000, saving over $500,000 in estate taxes.
The credit shelter trust is a widely used estate planning tool used by many people in this situtation. However, there are many other tools that can be used to save even more. In the articles to follow, I will address what the wife can do to shelter the remaining $500,000 from the estate tax.
Monday, August 9, 2010
Surprise! You're Wealthy!
Well, here we are almost two-thirds of the way through the year and it appears more and more that, by default, Congress will redefine the definition of what it means to be wealthy in this country. Assuming Congress doesn’t act soon, on January 1, 2011 “wealthy” will mean any person who has the ability to leave more than $1,000,000 to his or her family and friends. Granted, on its face, $1,000,000 is a lot of money and few of us think that we realistically have the ability to leave that much when we died, but when you take a closer look at how that number is calculated, it’s surprising how many of us it includes. Generally the calculation includes any asset you have “dominion and control over” at the time of your death. The obvious things are bank and investment accounts and properties, personal property (e.g., vehicles, home furnishings, jewelry and collectables), and home equity (is there such a thing these days?). Then you have your tax deferred retirement accounts (IRAs, 401(k)s, etc.) and business interests. And finally, the one that surprises most people: the death benefit of life insurance.
If, when you add the value of all of these things together, the total is over $1,000,000, then 55 cents of every dollar over that amount will go to the U.S. Treasury. A couple of things make it even more painful. With life insurance, for example, it just doesn’t seem right that the death benefit should be subject to estate tax – after all, you never see a penny of it while you’re living. For business and real estate owners, the tax is levied on the value of the business or property. That means, unless there are other assets to pay the tax with (like life insurance), the business or the home may have to be liquidated. And then, if you have a qualified retirement plan, all of the unpaid income tax (at a rate of up to 35%) may become due at death in addition to the 55% estate tax.
The simplest strategy for avoiding the estate tax is to be sure to get rid of it all before you die, but that may be difficult to execute and, as might be expected, the government has devised ways to foil that strategy too. That said, there are other things you can do short of impoverishing yourself. In my next article I’ll discuss some of those strategies. Until then, enjoy your wealth.
If, when you add the value of all of these things together, the total is over $1,000,000, then 55 cents of every dollar over that amount will go to the U.S. Treasury. A couple of things make it even more painful. With life insurance, for example, it just doesn’t seem right that the death benefit should be subject to estate tax – after all, you never see a penny of it while you’re living. For business and real estate owners, the tax is levied on the value of the business or property. That means, unless there are other assets to pay the tax with (like life insurance), the business or the home may have to be liquidated. And then, if you have a qualified retirement plan, all of the unpaid income tax (at a rate of up to 35%) may become due at death in addition to the 55% estate tax.
The simplest strategy for avoiding the estate tax is to be sure to get rid of it all before you die, but that may be difficult to execute and, as might be expected, the government has devised ways to foil that strategy too. That said, there are other things you can do short of impoverishing yourself. In my next article I’ll discuss some of those strategies. Until then, enjoy your wealth.
Subscribe to:
Posts (Atom)