For married couples, you will need to decide how to pass all or a portion of your assets to the surviving spouse under your estate plan. This newsletter will review your available options.
I. Certain types of assets normally pass outright for income tax reasons.
In most cases, we recommend that your (i) primary residence, (ii) Individual Retirement Accounts (IRAs), (iii) Qualified Retirement Plan accounts (QPs), such as 401(K) accounts and pensions, and (iv) annuities pass outright to your surviving spouse for income tax reasons.
A. Primary residence.
Your surviving spouse will be able to qualify for the normal $500,000 gain exclusion if the residence is sold within 2 years of your death (still considered married for this 2-year period) or for the normal $250,000 gain exclusion if the residence is sold after this 2-year period (at which point the surviving spouse is considered single again). However, in order to benefit from this gain exclusion, the surviving spouse must own this property in their own name (or in their own Revocable Living Trust) and treat it as their primary residence.
B. IRAs, QPs, and annuities.
While the income tax rules related to IRAs, QPs and annuities can be somewhat complex, in most cases, the income tax treatment is normally better if these assets (accounts) are passed outright to the surviving spouse. For example, IRAs can be rolled over to the surviving spouse’s own IRA account to further postpone or reduce the required distributions under the Required Minimum Distribution (RMD) rules.
II. Tangible Personal Property (TPP) normally passes outright.
In most cases, we recommend that your TPP be passed outright at your death. These types of assets include, for example, your furniture, clothes, jewelry, TVs, computers, and autos. Normally, no significant reason exists to complicate the handling of TPP assets by passing them in trust. However, we do normally recommend exempting out of this TPP category those assets that are considered business property, valuable collections, and precious metals held for investment.
III. Optional ways to have your remaining assets benefit the surviving spouse.
A. Outright.
The simplest way to benefit your spouse is to pass these remaining assets to your spouse outright. Beginning in 2013, with the newly created portability election for estate and gift tax purposes, the old, primary reason to pass assets to the surviving spouse in trust no longer existed for most married couples. So, unless a better option exists for you below, this is the right answer for you.
B. Pass in Trust.
This is not the simplest way to benefit the spouse, but it may be the right answer in your situation. Why? Because passing assets in trust can provide three (3) benefits, including asset protection, control, and possible tax benefits.
By asset protection, we mean that no one else can get access to the assets in trust other than the stated beneficiary(ies). This means that the trust structure can protect the trust’s assets from a future divorcing spouse, judgement creditors, bankruptcy court, and predators. Another asset protection related benefit discussed below is the ability to use a supplemental needs trust (SNT) structure to prevent the assets passing to a surviving spouse from being counted by the government for means tested government benefits (ex., Medicaid) purposes.
By control, we mean that the first spouse-to-die retains some control over what happens to any assets remaining in trust at the surviving spouse’s death. This can be a significant issue with blended families with children by prior marriages. While control can also enable limitations on how the spouse can benefit from the trust’s assets, this is only done in a minority of situations.
By possible tax benefits, we mean that the tax ramifications are a mixed bag. The traditional tax benefit of getting access to the first spouse’s estate tax exemption (now known as the Basic Exclusion Amount or BEA), is no longer a concern with the ability to make a portability election after the first spouse’s death on a timely filed IRS Form 706, Estate Tax Return. Dealing with income taxes is more of an administrative concern since multiple possible taxpayers exist, depending on the amount of income distributed or retained during the tax year. As a result, income tax issues do not normally drive this decision. However, one tax benefit still exists for wealthier couples. This benefit relates to the exemption from an esoteric tax, called the Generation Skipping (GST) Tax. Basically, because the portability election does not apply to the GST tax exemption, the first spouse’s GST tax exemption will be lost if it is not otherwise used. One of the primary ways to effectively use this first spouse’s GST tax exemption is to pass assets to the surviving spouse in trust. The practical benefit of the GST tax exemption is to eventually pass assets from the children’s generation to the grandchildren’s (and, possibly, lower generation family members) without any further estate or GST taxes.
If the decision is made to pass the remaining assets to the surviving spouse in trust, the next question is what type of trust structure should be used for this purpose? The key is to choose the best one in your situation that provides the most benefit with the least cost and hassle as to implementation and ongoing maintenance. An example of the types of trust structures used for this purpose are commonly referred to as: (i) credit shelter with QTIP marital; (ii) single (QTIP) marital; and (iii) disclaimer trust.
C. Supplemental Needs Trust (SNT) planning.
If the spouse may need to qualify for means tested government benefits after the first spouse’s death, such as Medicaid to help pay for nursing home related expenses, then all assets should pass to the surviving spouse in an SNT. In this regard, please note: (i) for technical reasons, the SNT should be set up in a Will rather than in a Revocable Living Trust; and (ii) the SNT should be structured as a flexible SNT so the selected Trustee will have more ability to deal with the facts that exist at that time.
If you would like to discuss the best way to pass assets to your spouse under your estate plan, please call us at (678) 720-0750 or e-mail us at info@morgandisalvo.com to schedule a consultation. We can discuss your situation, answer your questions and determine what might be the best fit for you. We look forward to meeting with you.
