Estate Planning Blog Articles

Estate & Business Planning Law Firm Serving the Providence & Cranston, RI Areas

How Do You Keep Inheritance Money Separate?

Families with concerns about the durability of a child’s marriage are right to be concerned about protecting their children’s assets. For one family, where a mother wishes to give away all of her assets in the next year or two to her children and grandchildren, giving money directly to a son with an unstable marriage can be solved with the use of estate planning strategies, according to the article “Husband should keep inheritance in separate account” from The Reporter.

Everything a spouse earns while married is considered community property in most states. However, a gift or inheritance is usually considered separate property. If the gift or inheritance is not kept totally separate, that protection can be easily lost.

An inheritance or gift should not only be kept in a separate account from the spouse, but it should be kept at an entirely different financial institution. Since accounts within financial institutions are usually accessed online, it would be very easy for a spouse to gain access to an account, since they have likely already arranged for access to all accounts.

No other assets should be placed into this separate account, or the separation of the account will be lost and some or all of the inheritance or gift will be considered belonging to both spouses.

The legal burden of proof will be on the son in this case, if funds are commingled. He will have to prove what portion of the account should be his and his alone.

Here is another issue: if the son does not believe that his spouse is a problem and that there is no reason to keep the inheritance or gift separate, or if he is being pressured by the spouse to put the money into a joint account, he may need some help from a family member.

This “help” comes in the form of the mother putting his gift in an irrevocable trust.

If the mother decides to give away more than $15,000 to any one person in any one calendar year, she needs to file a gift tax return with her income tax returns the following year. However, her unified credit protects the first $11.7 million of her assets from any gift and estate taxes, so she does not have to pay any gift tax.

The mother should consider whether she expects to apply for Medicaid. If she is giving her money away before a serious illness occurs because she is concerned about needing to spend down her life savings for long term care, she should work with an elder law attorney. Giving money away in a lump sum would make her ineligible for Medicaid for at least five years in most states.

The best solution is for the mother to meet with an estate planning attorney who can work with her to determine the best way to protect her gift to her son and protect her assets if she expects to need long term care.

People often attempt to find simple workarounds to complex estate planning issues, and these DIY solutions usually backfire. It is smarter to speak with an experienced elder law attorney, who can help the mother and protect the son from making an expensive and stressful mistake.

Reference: The Reporter (Dec. 20, 2020) “Husband should keep inheritance in separate account”

tax laws

Take Advantage of Tax Laws Now

The pundits are saying that the if Democrats win the White House and possibly Congress, expect changes to income, gift generation skipping transfer and estate taxes. This recent article from Forbes, “Use It Or Lose It: Locking In the $11.58 Million Unified Credit” says that the time to act is now.

Since 2000, the estate and gift tax exemption has taken a leap from $675,000 and a top marginal rate of 55% to an exemption of $11.58 million and a top marginal rate of 40%. However, it’s not permanent. If Congress does nothing, the tax laws go back in 2026 to a $5.6 million exemption and a top marginal rate of 55%. The expectation is that if Biden wins in November, and if Congress enacts the changes published in his tax plan, the exemption will fall to $3.5 million, and the top marginal rate will jump to 70%.

The current exemption and tax rate may be as good as it gets.

If you make a taxable gift today, you can effectively make the current tax laws permanent for you and your family. The gift will be reported in the year it is made, and the tax laws that are in effect when the gift is made will permanently applicable. Even if the tax laws change in the future, which is always a possibility, there have been proposed regulations published by the IRS that say the new tax laws will not be imposed on taxable gifts made in prior years.

Let’s say you make an outright taxable gift today of $11.58 million, or $23.16 million for a married couple. That gift amount, and any income and appreciation from the date of the gift to the date of death will not be taxed later in your estate. The higher $11.58 million exemption from the Generation Skipping Transfer Tax (GSTT) can also be applied to these gifts.

Of course, you’ll need to have enough assets to make a gift and still be financially secure. Don’t give a gift, if it means you won’t be able to support your spouse and family. To take advantage of the current exemption amount, you’ll need to make a gift that exceeds the reversionary exemption of $3.5 million. One way to do this is to have each spouse make a gift of the exemption amount to a Spousal Lifetime Access Trust (SLAT), a trust for the benefit of the other spouse for that spouse’s lifetime.

Be mindful that such a trust may draw attention from the IRS, because when two people make gifts to trusts for each other, which leaves each of them in the same economic position, the gifts are ignored and the assets in the trusts are included in their estate. The courts have ruled, however, that if the trusts are different from each other, based on the provisions in the trusts, state laws and even the timing of the creation and funding of the trusts may be acceptable.

These types of trusts need to be properly administered and aligned with the overall estate plan. Who will inherit the assets, and under what terms?

A word of caution: these are complex trusts and take time to create. Time may be running out. Speak with a skilled estate planning attorney with knowledge of tax law.

Reference: Forbes (July 17, 2020) “Use It Or Lose It: Locking In the $11.58 Million Unified Credit”

Search
Join Our eNewsletter

Recent Posts
Categories