Friday, October 22, 2010

Estate Planning for Blended Families

In 2010, “blended” families became the predominant family form in the United States.  Couples in such relationship are often conflicted with the desire to not only provide for the needs of the surviving spouse upon the first death, but also to ensure that their own children receive their “rightful” inheritance. 

Unfortunately, too often the estate planning done by remarried couples consists of simple “I love you” wills that provide that all the couple’s assets pass to the surviving spouse.  Not only does such a disposition forfeit a number of planning advantages – including preserving each spouse’s estate tax exemption, protecting assets from creditors and from a potential remarriage of the surviving spouse – but under this scenario, the first spouse to die (the “Deceased Spouse”) would have no assurance that upon the remaining spouse’s death, the surviving spouse (“Surviving Spouse”) will in fact leave the assets of the Deceased Spouse to that spouse’s children. 

A better solution is for each spouse to establish one or more trusts to hold their assets upon their respective deaths.  Upon the Deceased Spouse’s death, his or her estate plan may provide that all or a portion of his or her trust assets passes to a “Marital Trust” for the benefit of the Surviving Spouse.  The Marital Trust would provide income from the trust to the Surviving Spouse for life, and may provide distributions of principal to or for the benefit of the surviving spouse at the Trustee’s discretion. Upon the Surviving Spouse’s death, the trust assets would be distributed to the children of the Deceased Spouse, either outright or preferably in a creditor-protected trust.  One caveat is that the assets in the Marital Trust would be taxable in the estate of the Surviving Spouse; it is critical that the trust instrument provide that the estate taxes, if any, attributed to the Marital Trust assets be payable by the appropriate parties (typically the Deceased Spouse’s children).

If there is a concern that the children of the Deceased Spouse may have to wait too long to receive their inheritance, a portion of the Deceased Spouse’s assets may go directly to his or her children upon death, either outright or in trust.  In 2011, the first $1,000,000 distributed to anyone other than a Surviving Spouse will be exempt from both Federal and New York State estate tax.

Trustee selection is critical in these cases.  Due to the inherent conflict, it is poor practice to have the Deceased Spouse’s children serve as Trustee of the Marital Trust for the Surviving Spouse.  A better choice is typically a professional trustee such as a trust department of a bank or other financial institutions.  Regardless of Trustee selection, it is important that the Marital Trust include explicit instructions describing the circumstances, if any, when the Trustee may provide trust principal to or for the benefit of the Surviving Spouse.

One final piece of “blended” family planning is the need for each spouse to sign a waiver of their spousal right of election.  In the absence of such waivers, the Surviving Spouse would be able to upend the couple’s planning by simply asserting his or her right to the statutory share of the Deceased Spouse’s assets – which in most states is at least one-third of the Deceased Spouse’s assets, and often more.

Wednesday, October 13, 2010

Congress Continues to Fumble The Estate Tax

Despite Senator Chuck Grassley's recent prediction that Congress would "solve" the federal estate tax uncertainty by reinstating a $3.5 million per person estate tax exemption before the end of 2010, others on Capitol Hill remain uncertain if or when Congress might act to prevent the federal estate tax exemption to revert to $1 million on January 1, 2011. Included in the Democrats proposal to extend the Bush era income tax cuts to those earning $250,000 per year or less was a proposal to reinstate the federal estate tax exemption at $3.5 million per person, indexed for inflation.  In an effort to bridge the gap between the parties, Republican Senator John Kyl and Democratic Senator Blanche Lincoln have instead proposed a $5 million per person exemption.  But as one Congressional observer was quoted in The Hill, “I hear all sorts of things, which means I hear nothing.”

For the complete article, click here.

Thursday, October 7, 2010

Estate Tax Planning With Spousal Gifting Trusts

On January 1, 2011, estates in excess of $1 million will be subject to payment of federal estate tax.  With the federal exemption reverting to $1 million, far more Americans will be impacted by the estate tax.  For example, in 2008 the federal estate tax exemption was $2 million per person.  The estate of a New Yorker dying in 2008 with a total taxable estate of $2 million would only have paid a New York State estate tax in the amount of $99,600.  In contrast, a New York resident with a $2 million estate dying in 2011 will be subject to a combined federal and New York State estate tax of $435,000.

Given the huge sums at stake, planning to minimize estate taxes will take on greater importance. One powerful and relatively straightforward planning technique for couples with a moderate to high net worth is the Spousal Gifting Trust (“SGT”).

In very basic terms, the SGT works like this: each spouse establishes an irrevocable trust, with the wife typically serving as a Trustee of husband’s trust, and the husband typically serving as a Trustee of wife’s trust.  Depending upon the client objectives, a co-Trustee may be named as well. 

Once the SGT’s have been established, both spouses will make gifts to their respective trusts in an initial amount not to exceed $5,000 per year.  As the value of the trust grows over the years, the amount that can be gifted to the SGT annually can be increased.  Ultimately, the maximum amount that can be gifted to the SGT annually without utilizing any portion of the donor’s annual $1 million gift tax exemption is a sum equal to the annual gift exemption (currently $13,000 per year).  The beneficiary spouse will have a temporary right to withdrawal the gifted sum, typically for a period of thirty days.  If the gifted amount is not withdrawn from the SGT, it can remain in the trust and invested in whatever financial vehicles the Trustee chooses.  Once funded into the trust, the assets in the trust can be used for the beneficiary spouse’s needs at any time.

How does funding an SGT provide any estate tax benefits?  The magic here is that the amounts gifted by each spouse to their respective SGT’s will not be included in the taxable estate of either spouse!   The key is that in making the gifts to each SGT, the couple is intentionally not utilizing the “unlimited marital deduction” that would ordinarily apply to spousal gifts.  While using the unlimited marital deduction will ensure that a gift made by the donor spouse would not be taxable in his estate, the spouse receiving the gifted assets will ultimately have those assets included in her estate.  By instead gifting some of the couple’s assets to SGT’s, the assets in each spouse’s SGT will grow over time completely exempt from estate tax inclusion.

To demonstrate the cumulative power of an SGT, imagine that a husband and wife, each 45 years old, contribute $5,000 to their respective SGT’s each year for 30 years.  If the assets in each SGT were to grow annually at an average of 6%, the value of the assets in each SGT would be $395,291 – or a combined value of $790,582 – none of which would be subject to federal or New York estate tax.

A final point: despite its name, the SGT can be used by same-sex and unmarried couples to provide an estate tax-exempt repository of assets.

Monday, October 4, 2010

Is New York's Medicaid System to be Overhauled?

It's no secret that New York has one of the most expensive (and generous) Medicaid program of any state.  Outgoing Lt. Governor Richard Ravitch just released this report that recommends that the state legislature carefully examine New York's Medicaid system to see if changes should be implemented to reduce the costs of the Medicaid program, without reducing services to those who need them. 

Ravitch's report notes that New York's spend-down and spousal refusal rules are just two planning techniques that are often used by middle class people to preserve assets while still qualifying for Medicaid long-term care coverage.  If New York's legislature in fact wishes to reduce the state's long-term care Medicaid costs, these techniques will likely be among the first to be restricted.  Given the dysfunction that is New York politics, however, it will likely be some time before any of the issues discussed in Ravitch's report will be scrutinized, and even more time before any changes are made to New York's rules.

Saturday, October 2, 2010

News Alert -- Upcoming Radio Interview

On Wedenesday, October 6 at 7:00 p.m. ET, I will be interviewed by WTBQ radio's Teddy Smith about current issues in estate planning.  Orange County residents can tune in to 1110 AM, or 99.1 FM.  WTBQ also streams at

I hope you will be able to listen-in!