Estate Planning Vault

Don't Waste Your Estate Tax Exemption

Sam, a married man, age 61, owns his own business and is worth about $4 million. He created an estate plan in 1991, and now that his children are grown and since tax laws have changed, he is wondering if his current plan (which utilizes credit shelter trusts to maximize estate tax exemptions and assigns all his assets to his wife for protection against potential lawsuits) is the best approach.

Currently, the estate tax exemption amount allows each taxpayer to pass up to $2 million to heirs other than their spouse, so a couple can leave their heirs up to $4 million without triggering the estate tax. However, typically, due to improper planning (or no planning) couples worth at least $4 million may lose one of the $2 million exemptions. What usually happens is Spouse A dies and surviving Spouse B inherits all. However, when Spouse B dies, only $2 million can be passed to heirs free of tax, in effect wasting Spouse A’s $2 million exemption.

The typical workaround has been to divide assets equally between Spouse A and Spouse B and create a credit shelter trust. With a credit shelter trust, when Spouse A dies, assets pass to a trust and surviving Spouse B can receive distributions from the trust for life. When Spouse B dies, the trust can pass up to $2 million to heirs, tax-free, and Spouse B can also pass up to $2 million to heirs, tax-free.

Because Sam has put all his assets in his wife’s name, he has no assets to pass to the credit shelter trust, so, if Sam were to die this year, he would, in effect, forfeit a $2 million tax exemption. A better approach to minimizing risks from creditors might be to purchase additional errors and omissions insurance, says Richard B. Freeman, a financial advisor at Round Table Services in Greenwich, CT. Freeman also points out another disadvantage to having all assets in the wife’s name only is a potentially hefty capital gains tax bill if she should decide to sell assets. If assets are in both spouses’ names, when Spouse A dies, Spouse B can inherit assets at their current market value, sell them, and incur no capital gains tax. If everything is already in Spouse B’s name, when she sells, she will likely incur taxes.

Source: www.Newsday.com, 11-5-06