Why Leaving Everything to Your Spouse Isn’t Always the Best Idea
By: Barry E. Haimo, Esq.
March 5, 2015
In Florida, if you are married and have adult children together (assuming that neither one of you has children with another person), all of your assets will automatically go to your spouse unless you create an alternate plan.
This is a good thing, right? After all, most married couples with adult kids would probably want their better halves to inherit everything so they’re taken care of and can help the children as needed. Even better, you can transfer an unlimited amount of assets to your spouse without incurring any estate or gift taxes (U.S. citizens only).
To say that in another way, let’s pretend that you’ve done really well for yourself and your estate is valued at approximately $12 million dollars. Under the current federal tax law, you will end up with an estate tax bill for several hundred thousand dollars if you don’t plan correctly or if your executor or personal representative fails to file the appropriate election. By transferring it to your spouse gift tax free, you defer the taxes until his or her death, which creates opportunities to plan and spend down the amount. How could this ever possibly be a bad deal? Ask the Markinsons.
Save Now – Pay Later
Tim and Jenny Markinson celebrated their 50th wedding anniversary before Tim sadly passed away in his sleep. They’d led good, fulfilling lives – with Tim serving as CEO to a Fortune 500 company for many years and Jenny bringing up their six children and running a successful non-profit. They were quite well off, enabling them to take good care of their kids and maintain their lifestyle even after retirement. But despite his success in business, Tim never had much patience for financial matters. Consequently, after learning that all of his money would go to Jenny tax free if he just did nothing, that’s exactly what Tim did.
In the short term, it worked out fairly well. Jenny was able to give him a fitting send off, keep their large house, and generally live as she did when Tim was still alive. Since their kids were grown and out of college, and so much of Tim’s money was just sitting in accounts doing nothing, she decided she was going to spend her remaining years enjoying it — not just preserving it.
Jenny toured the world as she and Tim had always said they would. She bought her eldest granddaughter a new car when she turned 16, and her Christmas and birthday gifts to everyone were lavish. There were even promises of paying for college for the grandchildren. Jenny’s adult children worried about her running out of money, but she easily assuaged their fears by producing a single bank statement – their father’s money wasn’t running out any time soon, and it certainly looked like she could keep her promises.
Then, a decade after Tim passed, Jenny followed him. The family was surprised – she always seemed to full of life – but there was a bigger shock coming. Much of that money that they had started counting on wouldn’t be coming.
Jenny had left specific instructions for her assets to be divided between her children and grandchildren, but like Tim, she hadn’t bothered to work with an estate planning attorney to plan her estate or at least ensure the proper tax elections were made. If she had, he would have warned her against spending so freely and promising money so boldly. As a result, the government took its pound of flesh, taking a huge bite out of what was left. When the dust settled, her children and grandchildren ended up getting about half of what they were expecting.
This wouldn’t have been such a big deal except for the fact that many of them had made plans based on their expectation of getting a specific inheritance from Jenny. It was especially hard on a few of the college-age grandchildren. One ended up having to delay his education by a year to save up more money, and another had to take out high-interest loans to cover her senior year.
Giving to Your Spouse Can Make Your Kids Pay
If there’s a lesson here, it’s that simple rules like giving your estate to your spouse tax-free are never really simple. Tim thought he was helping his family to avoid taxes, but instead he simply delayed them and pushed the burden onto his children and grandchildren.
The worst part is that it could have been avoided. If Tim wanted to ensure Jenny was taken care of and didn’t have to worry about taxes, he could have done any number of things. One of the easiest would have been to set up a trust. This would have preserved his money not just for her, but also for the younger generations. A trust would have also allowed them to bypass probate and guardianship, and minimize estate and gift taxes while retaining use and enjoyment of the assets – important if you’re worried about your family’s financial security.
The problem is that Tim was a smart, impatient guy and assumed he knew everything that mattered after learning a tiny little nugget about how inheritance works. Sadly, our system is not simple and straightforward. If you truly want to ensure you’re doing the best possible thing for your family, sit down with an estate planning attorney as soon as possible and discuss your options.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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