What better way to show your love than to make sure that you have an estate plan that covers and protects your spouse, while at the same time maximizing wealth transfer to your children (and grandchildren)? Protection can come in the form of reducing the taxes that will be owed on your estate, or reducing fees that would be have to be paid to lawyers to administer any assets that have no beneficiary designation. It can also come in the way of shielding your assets from creditors in the event that your spouse or children come upon hard times.
Here are a few ways to accomplish the task of preserving your wealth for your spouse, and ultimately your children. Taking these steps will fill up your spouse’s love tank as much as it will fill their pockets:
Equalize the property
Start by equalizing the property between the spouses. If one spouse dies before 2026, the current $22 million estate tax exemption limit will apply, and the spouse’s portion of the estate can be gifted directly to heirs without triggering any estate tax (as long as it is below $22 million). If only $2 million of a $22 million estate was in that spouse’s name, you will not be able to take full advantage of the estate tax exemption. When the second spouse dies, say after 2026, the remaining $20 million will be subject to a hefty estate tax bill. If you equalize the estate, only half the estate will be left in the surviving spouse’s name, to be subject to estate tax laws in place at the time of their death (after 2026, the exemption will revert back to around $5 million, or 2017 levels). In this way, you protect the estate. No gift tax is due on transfers between spouses.
Set up a Family Trust, also known as a Credit Shelter Trust
Gifting money to a credit shelter trust has the benefit of shielding assets from creditors, but it also removes assets from the estate for both spouses. Thus, estate taxes will not be triggered by the death of either spouse, preserving more wealth for the family. This is especially beneficial from now until 2026, when the lifetime gift exemption is at an all-time high.
The surviving spouse and children would be named as beneficiaries, with the surviving spouse having access to the funds if necessary, but funds will be more easily accessible for the spouse through a marital trust (see below).
Set up a Marital Trust
A marital trust enables you to transfer assets to your spouse during your lifetime to ensure that your spouse will not have to worry about probate, or paying taxes on these assets upon your death (however, estate taxes are due upon the death of the surviving spouse). Your spouse can be both the beneficiary and the trustee, which gives them easy access to funds. (You may also choose to to hire someone who is more savvy with money management, like an institutional trustee, as well). Assets held in the trust are protected from creditors and con-artists who may be to weedle funds from individuals who are all too trusting.
There are a few different types of marital trusts to choose from, including a QTIP (Qualified Terminable Interest Property) Trust, in which the grantor provides for the widow during their lifetime, but the widow does not have the ability to change beneficiaries. The assets will automatically go to the heirs named by the trust creator after the widow’s death. This protects the assets in the event of remarriage, for example, by preventing assets from going to a new spouse and/or step-children.
Set up an Irrevocable Life Insurance Trust
Suppose you have left $5 million in a marital trust, and $10 million in assets were not gifted prior to 2026. A total of $15 million is now subject to the applicable estate tax exemption limit at the time of death of the 2nd spouse (let’s assume that exemption limit is approximately $5 million, since it is after 2026). At this point, $10 million is taxable at 40%, so a total of $4 million in estate taxes is owed.
In this rare case, an insurance policy with a $4 million death benefit (insurance policies are not taxable) could be set up to cover the cost of the estate taxes, allowing the full amount of the estate to pass to heirs. The policy must be out of the estate (through an irrevocable trust) in order to benefit from tax-exempt status.
When all is said and done, and your family begins to benefit from your thorough advance planning, they will certainly ‘feel the love’. As you get started or make changes, it’s important to consult with a professional for your specific case since there are several requirements for trusts to maintain their benefits in terms of tax protection. For example, a credit shelter trust must be in effect for a full 3 years prior to the death of the grantor to be exempt from estate taxes.
At Axia Global, we have nearly a century of collective experience in the financial services sector, and would be more that happy to help assist you or your affluent clients with complex elements of an estate plan. Feel free to give us a call. Our goal is to make a measurable difference in your financial life.
Note: the statements above should not be considered financial, legal or tax advice, but ideas for careful consideration with your trusted financial advisors and lawyers. For current tax or legal advice, please consult with an accountant or an attorney.