Provided by the Law Offices of RICHARD
MAYBERRY
MAYBERRY LAW FIRM
2010 Corporate Ridge
McLean, VA 22102
(703)714-1554
Committed to providing the highest quality estate planning legal
services for individuals, families and businesses |
Are you a member of a "blended family" or do
you know someone who is? If so, you certainly are not alone. Consider
these facts*:
• More than half of the Americans alive today have been, are now,
or eventually will be in one or more stepfamily situations during their
lives.
• One-third of all American children alive today are expected to
become stepchildren during their lives.
• One out of every three Americans is currently a stepparent,
stepchild, or stepsibling or some other member of a stepfamily.
• In the new millennium, more Americans are living in stepfamilies
than in nuclear families.
While much has been written
about the social, psychological and economic aspects of blended families,
little attention has been paid to the unique estate planning challenges
they face. For example, how can you provide for both your surviving spouse
and control the eventual distribution of your assets to your own children,
while ensuring that none of your assets is ever controlled or inherited by
an ex-spouse? If that is not challenging enough, how do you maximize your
federal estate tax savings so the IRS is not a major beneficiary of your
life’s work? Let’s look at a few complementary planning strategies
available to reach these apparently competing objectives.
Sheltering the Credit
No one wants to
pay more in taxes than is legally required. Why is it, then, that most
taxpayers fail to make estate planning arrangements to legally shelter
their assets from death taxes? After all, there are only two certainties
in life: death and taxes.
The Internal Revenue Code provides that each taxpayer may
protect $675,000 (increasing to $1 million by 2006) of their assets from
federal estate taxes upon their death. However, most married couples
forfeit the full value of this authorized protection (up to $1.35 million
per couple) by failing to plan for it.
The most common culprits are joint ownership of assets and
naming the surviving spouse as the primary beneficiary on assets such as
life insurance, along with simple, "Sweetheart" Wills (i.e.
those in which each spouse names the other as the beneficiary of all
probate assets). For couples with over $675,000 in total assets (including
the death benefit of life insurance) this can result in unnecessary
federal estate taxes at rates of 37% to 55%.
Alternatively, you may want to consider creating a
"Credit Shelter" Trust (also known as a "B" Trust,
"Family" Trust, or "Estate Tax Exemption" Trust). Such
a Trust can secure your full federal estate tax protection, provide
lifetime income and/or principal for your surviving spouse, and provide
the remainder of Trust assets for the benefit of your children. But what
if your assets exceed the $675,000 protection limit? Perhaps you should
consider the "QTIP" Trust option.
The QTIP Option
Sometimes the
Internal Revenue Code (IRC) actually makes sense, such as in the QTIP
provisions found in IRC § 2056(b)(7). These provisions permit you to
leave at least an "income" interest in your assets for your
spouse, but to ultimately control the disposition of the
"principal" upon the death of your spouse. Additionally, this
not only defers federal estate taxation of your assets held in the QTIP
Trust following your death, but may use any otherwise unused "Credit
Shelter" available in the estate of your spouse. Assuming you have
maximized your federal estate tax savings and provided for your surviving
spouse by "Credit Shelter" and "QTIP" planning, how do
you ensure that your ex-spouse does not control or inherit your assets?
If you thought you "disinherited" your ex-spouse in
your divorce decree, then think again. In the absence of proper planning,
your ex-spouse may control or even inherit your assets through your mutual
children. Your ex-spouse may inherit your assets through your children as
their "next-of-kin." Consider creating special long-term
discretionary trust provisions to protect your assets for your children or
grandchildren…and thereby specifically disinherit your ex-spouse.
* Source: Center for Law
and Social Policy (www.clasp.org)
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