You and your spouse may have one of the most common type of estate plans between married persons which is the “Honey I love you, I leave it all to you” plan. With this type of plan, you leave all of your assets outright to your surviving spouse. This type of plan may seem attractive to you because it is very simple to draft and is very economical. However, there are many disadvantages.
Firstly, all of the assets you leave to your spouse are subject to claims against your spouse from lawsuits, bankruptcies and other creditors. In addition, if your surviving spouse marries Thor or Bambi after your death and predeceases their new and quite often younger spouse, Thor or Bambi may have a claim against your assets. This could limit the amount of assets that are inherited by your children.
Also, since the assets are going directly to your spouse, you have not taken advantage of your estate tax exemption. You and your spouse could only pass $2 million in 2008 estate tax free to your children upon your spouse’s death, instead of $4 million.
Lastly, any assets that are in your sole name at the time of your death would need to go through probate in order to get into your spouse’s name. Your assets will have to be probated again upon your spouse’s death in order to go to your children.
As an alternative to outright distribution of an inheritance to your spouse, you may want to set up a lifetime convenience trust for your spouse. By setting up this type of trust and funding your assets into the trust, you could avoid probate upon your death, avoid probate upon your spouse’s death and avoid the living probate of conservatorship upon your spouse’s incapacity.
If your surviving spouse remarries after your death, as long as these assets are kept separate and not commingled with Thor or Bambi’s marital property, they would be protected from your spouse’s divorce from Thor or Bambi. However, upon your surviving spouse’s death, Thor or Bambi may have spousal claims against your assets that you left to your surviving spouse in this type of trust.
In addition, this type of trust does not offer protection for claims against your spouse from lawsuits, bankruptcies or other creditors. Also, you lose your $2 million estate tax exemption to leave assets estate tax free to your children.
Another alternative is to use an asset protection trust for the benefit of your spouse. During his or her lifetime, your spouse gets income or principal whenever he or she needs it for his or her health, education, maintenance and support. You may give your spouse a limited power to name other beneficiaries of the trust after his or her death.
The assets in this type of trust avoid probate upon your death, in the event of your spouse’s incapacity and at his or her death. Your spouse’s inheritance is protected from claims against your spouse from lawsuits, bankruptcies, creditors and from a divorcing Thor or Bambi.
If you limit the amount of assets that go into this type of trust to the estate tax exemption of $2 million in 2008, all assets in the trust pass estate tax free not only to your spouse, but to your children upon your spouse’s death, even if the assets have substantially increased in value. Since your spouse can also leave $2 million tax free to your children, you and your spouse can leave up to $4 million tax free.
If your estate is in excess of the estate tax exemption of $2 million in 2008, you could avoid estate tax upon your death by setting up a Qualified Terminable Interest Property (QTIP) marital trust for the benefit of your surviving spouse for all of such excess. During his or her lifetime, your spouse gets all the income plus principal whenever he or she needs it for his or her health, education, maintenance and support. You have all the benefits and protections of an asset protection trust for the benefit of your spouse and in addition, since it qualifies for a marital deduction, there is no estate tax on the assets upon your death. The assets in this trust, however, are added to your spouse’s assets upon his or her death and are included in his or her taxable estate. You can give your spouse a limited power to name other beneficiaries of your QTIP trust after his or her death.
By: Matthew M. Wallace CPA, JD
Published edited December 7, 2008 in The Times Herald newspaper, Port Huron, Michigan as: How to leave an inheritance to your spouse