You might think you don’t have to worry about federal estate taxes anymore. Current laws exclude the first $5 million in your estate for estate tax. And to make it an even sweeter deal, a couple (if both are American citizens) can exclude up to $10 million.
Does that mean you don’t have to worry about estate tax if your net taxable estate is less than $10 million? Not really.
First, these levels expire after 2012. That means if Congress fails to act, the exclusion will drop back down to $1 million. That probably isn’t going to happen, but it’s no forgone conclusion that the $10 million exclusion will stay in place. There may be a reduced exclusion and couples may not be able to combine the exclusions. Who knows what lurks in the minds of the politicians? But keep in mind that asset levels above the exclusion can be taxed at 55%. That’s a spicy meatball. It makes sense to keep your eye on this issue. There are estate tax changes all the time.
And even if the federal exclusion stays put, you still have to be concerned with state estate tax law. Many states levy estate taxes on assets over $1 million.
That being the case, it behooves you to learn about the estate tax rates in your state. If you find yourself in the crosshairs of your state’s estate tax rates, you still have alternatives.
A Family Trust Can Help Solve Estate Tax Problems and Much More
A well-drafted document can give your spouse access to the money while still keeping the state and federal tax collectors at bay. Speak to a trust attorney to find out more about the laws in your particular state. But even if you don’t have an estate tax problem, a trust could be a very smart move for you.
For example, you may want to create a trust to put someone with greater expertise in charge of your survivor’s financial affairs. I’m not a fan of using a professional trustee, but there are times when such a person is required.
Are you worried that your spouse is going to make crazy investments? Worse, are you scared that he’ll loan money to his sister? The solution could be to set up a trust for his benefit. This ensures the money will be there to take care of his needs. But he won’t have access to it, so he won’t make bonehead investment mistakes. The trustee makes the investment decisions for your husband.
In some cases, a good trust can shield your assets from creditors’ suits. I recently saw how powerful this can be. A small business owner passed away in the midst of being sued by her creditors. Before she died, she put all her assets into special needs trusts, and she set up an irrevocable life insurance trust too. The result? Her family got everything rather than being cleaned out by the creditors.
Finally, if you have children from previous marriages, a good trust can be vital. If you leave all your assets to your spouse, your children will be left with nothing. And even if you are on your first marriage, you should consider setting up a proper trust.
If you pass away and your spouse remarries, he might name his new spouse beneficiary. If you set up a trust, you can take steps to make sure your children are never disinherited.
There is one more very important issue when it comes to trusts and estate planning. I recently met with a client who was married to the same man for over 30 years even though it was a second marriage. Her husband’s children turned the man against my client in his declining years of dementia. He changed the trust and left her with nothing. Her mistake was that she trusted her husband and didn’t get her own legal counsel prior to signing off on the new trust documents. Make sure you have your own attorney represent you. This is especially true if your marriage has some acrimony in it. Remember, acrimony leads to alimony.
Make sure that you understand your trust no matter how great things are between you and your lovey dovey.
Don’t let the new estate tax law exemptions lull you into a state of ambivalence. You’ve worked all your life. Don’t overlook these easy steps that can help you protect all you’ve worked so hard for.
Other Posts of Interest
Frequently Asked Estate Tax Questions – IRS