It’s January 2019, and as is usually the case, I have a number of new clients with “resolutions” to make or update their estate planning paperwork. With that in mind, I felt it would be useful to mention the top 10 mistakes many people make when creating a Will or other planning documents. So here is the first common estate planning mistake – leaving your assets to your surviving spouse outright.
How can this be a mistake? Shouldn’t I want my assets to be available to take care of my spouse? Of course most people want to make sure their spouse is taken care of after they die. However, it isn’t always a good thing to leave your assets outright to your spouse.
If your combined assets create a taxable estate, then estate tax could be due when the surviving spouse dies. This isn’t often a problem with the federal estate tax because the exemption limits are so high, however, Washington State has a much lower exemption amount. As an example only (and using easy round numbers), if you have a combined estate of $3,000,000, there would generally be no tax on the death of the first spouse. But when the surviving spouse dies, that spouse will have all $3,000,000 in his or her estate. That figure exceeds the roughly $2,000,000 per person exemption limit. So tax would be due on the amount over the exemption limit.
A standard technique to address this is by using a credit shelter trust. When the first spouse dies, his or her share of the total assets is placed in trust for the benefit of the surviving spouse. When the surviving spouse dies, the trust assets are not subject to estate tax.
Even if you don’t have a taxable estate, it may still be prudent to use a trust for your spouse instead of having your assets pass directly to him or her. For example, say you and your spouse have combined assets of $1,000,000. You are below the state and federal estate tax exemption limits so no tax is likely to be due at any time. However, there is another problem that you may want to anticipate – the cost of long term care. For many working people this expense, not estate taxes, is the new problem that must be addressed. With the cost of care ranging from lows of $3,000 per month up to more than $12,000 per month assets can get wiped out quickly.
The planning technique in this case is also a trust. A spouse leaves his or her assets in trust for the surviving spouse. This trust, often called a special needs trust, is somewhat similar to the credit shelter trust, but different in certain key ways. These differences will allow the surviving spouse to retain assets in trust while helping to qualify for public benefits which help pay for long term care. The trust assets can then be used to supplement and improve the life of anyone receiving long term care.
Almost any way you slice it a trust for your spouse may be better than giving him or her everything outright. If you believe these strategies may be right for you, give us a call.
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