This article is to review your estate planning options when a client decides to marry.
Getting married is a major personal commitment. State and federal governments each recognize that commitment in their laws. The list of items below is not a comprehensive list but one that highlights some of the issues that you need to be aware.
Under federal law the following things will occur upon marriage:
- You can file joint tax returns which may reduce your overall income tax.
- You may be able to share in each other’s social security payments options.
- You are each responsible for the cost of each other’s long term care that is not otherwise paid from any long term care insurance that you may have.
- There are no gift or estate tax consequences if you decide to re-title ownership of assets from your individual name to owning it as husband and wife.
- You can protect $500,000 from capital gains tax on the sale of your personal residence.
- You can use each other’s “unused” federal estate tax exemption to protect a greater share of your own wealth from estate taxes. This applies in situations where the surviving spouse’s wealth is less that the federal exemption amount using qualified terminable interest property trust provisions (QTIP trust). Protecting estate taxes can also apply in situations where the surviving spouse’s estate is greater than the other spouse’s estate under federal estate tax portability rules.
Depending on your state of domicile, the following things could occur:
- You are each responsible for family expenses even though only one of you incurred the expense.
- You can make health care decisions regarding the removal of life support and feeding tubes. Those statutes do not automatically authorize each of you to make health care decisions that are not directly related to life support. To make those other decisions, you each need to sign an advance directive for health care.
- Any existing Will is void when you marry. If you have no living trust agreement in place and you do not sign a new Will that states otherwise then the distribution of assets at death will be 50% to the surviving spouse and the remainder distributed in equal shares to the children of the decedent spouse.
- Even if you sign a new Will or modify an existing trust agreement, you each have the legal right to claim a portion of each other’s wealth, known as spousal elective share rights.
- Elective share rights apply to assets that transfer to someone else automatically at death including life insurance, pensions, annuities, and retirement plans.
- Elective share rights increase from 5% as to any separately owned wealth at the time of the marriage to 33% or more for a long term marriage.
- This is true unless you each sign a pre-nuptial agreement that states otherwise.
You need to sign a power of attorney that lists those you wish to have the legal authority to access your financial accounts. In a similar manner you can state your preference regarding your preference as to whom you wish to act as your conservator or guardian in the event of disability. You can choose to include or exclude the spouse from those you authorize.
A prenuptial agreement is an appropriate means to ensure that you each retain the right to your wealth to those you wish to receive an inheritance that is not subject to spousal elective share rights. The pre-nuptial agreement allows each of you to keep your separate assets but does not preclude you from later transferring title to joint ownership if you wish.
The pre-nuptial agreement needs to be considered in combination with the provisions of your Will and living trust agreement. While the pre-nuptial agreement states that you are not required to leave any of your separate assets to the survivor, these estate documents can state that you choose to do so either outright or in a structured manner.
That structure is known as a testamentary trust. The terms of this trust can be included in a Will or living trust agreement. When these provisions are included in a living trust, they can apply during your lifetime as well as after the death. The terms of that structure can include any combination of the following.
Distribution of principal
- None of it.
- Some of it (discretionary standard subject to distribution purposes and limits)
- All of it (not applicable)
Distribution of income
- All of it
- Some of it (discretionary standard subject to distribution purposes and limits)
- None of it (not applicable)
Distribution purposes (any or all of the following)
Limits on distribution
- Consideration of the surviving spouse’s separate financial resources before a distribution is made from trust assets.
- Live rent-free in a residence but surviving spouse can be required to maintain the property, pay property taxes, assessments and insurance and any major repairs.
- Issues relating to distributions of income and/or principal for the spouse’s long term care which would be treated as a resource for Medicaid purposes.
- Giving the spouse a right of first refusal to purchase certain assets (i.e. the residence) for its future fair market value or for an amount that you determine that may be less than the future fair market value. You can also set the terms of the purchase which includes the purchase price, the amount of down payment (if any), the term of any installment payments and the interest rate for those payments.
- The right to receive distributions can terminate if the surviving spouse remarries or upon some other event (such as becoming eligible for Medicaid assistance benefits for long term care) or the failure to maintain the property or make required payments.
Creating a trust fund for the surviving spouse to receive income and/or principal and the use of the personal residence has to be considered in light of issues relating to the management of those trust assets. These issues include the following:
- If you wish to place limitations on distributions then it would make sense to name someone other than the surviving spouse to be the decision-maker (trustee) on how and when those distributions are to be made.
- Identifying other family members to serve as trustee can be a source of conflict and place stress on any existing relationship that exists between those other family members and the surviving spouse.
- The most obvious conflict is when the family decides to limit distributions knowing that the result of those limitations is to increase the share that family member will inherit at the death of the surviving spouse.
- The solution is to name a neutral professional trustee (bank trust services) which understands fiduciary standards and there is no learning curve associated with the management and distribution of the trust assets.
There are inherent costs associated with the management of trusts.
- During your lifetime those costs are “hidden” in that you do not charge for the management of your own wealth.
- In the event of disability or at death, others you have named as trustees (family members or bank trust) cannot be asked to be responsible for the work that is required and to do that work for free.
- The cost of investing and reinvesting liquid financial assets such as stocks, bonds, mutual funds and other investments.
- The cost of managing non-liquid assets such as real property which can include the cost of maintenance, repair, taxes and insurance even if a tenant (or the surviving spouse) is required to make those payments but fails to do so.
- Prepare and file income tax returns.
- The payment and cost of oversight of social services that are provided for the benefit of the surviving spouse or other beneficiary.
- Making the required minimum or other discretionary distributions of tax-qualified retirement funds in a manner that maintains the tax-qualified status of those funds (applicable with Conduit or Accumulation Trusts).
- The costs of defending the terms of the trust when the trust beneficiary (the surviving spouse) objects when the trustee rightfully says “no” to a requested distribution by that beneficiary.
- Most of these costs are normally included in the services reflected in a standard fee schedule based on the value of the trust being managed.
- These costs are often comparable to the cost of having your liquid investments managed by an investment advisor.
To be economically viable, the trust estate should have a minimum of $500,000 liquid assets (investments) in addition to any non-liquid assets (real property). The larger the amount of non-liquid assets will require a large amount of investments held in trust. Anything less than that minimum amount will likely result in the future collapse of the trust due to lack of sufficient long-term funding. If the size of the trust fund is not large enough to “work” then you need to decide how you wish distributions be made at death.
- One option is leave all assets to other family members and make no provision for the surviving spouse.
- The other option is to leave specific items to the surviving spouse knowing that your other family members will not later inherit those asset(s) at the death of the surviving spouse.
As you can see there are multiple things you need to consider. The best approach is to consider these issues one-by-one as part of your overall plan. Some of these issues relate to the law, others relate to the financial aspects of your choices. It is important therefore for your attorney work with your financial advisor to achieve a result that is acceptable to you and has a reasonable chance of success in meeting your goals.