Your Wealth, Health, And Lifestyle Newsletter

Be Careful Of Leaving Everything To Your Spouse

By Jason Markum

I am all about asset protection and planning ahead for the future in case anything bad should happen to you. That used to mean keeping an up to date will. These days wills are hardly used at all, instead people use trusts because they do a much better job than a will does for multiple reasons one of which is keeping your assets from getting locked up in probate after your death. There are also some tax reasons why trusts are far superior to wills but I’m not going to get into taxes in as much detail today because it’s too complicated to discuss in a simple article.

Today I want to talk about a different aspect of asset protection and long-term planning; it’s a trap that many families fall into that can be avoided with a little bit of prudence. I’m talking of course about leaving all of your assets to your spouse in the case of your death.

There are several reasons why people leave all their possessions to their spouse and one of the main ones is to escape death taxes. When you transfer items between spouses, in any amount whatsoever, as long as you’ve done this before you die, while you are alive then you’re not taxed after you die. It seems like a really good idea, but in fact it’s not and here’s why.

For one thing you may end up paying more estate taxes in the end. For example if you as well as your spouse didn’t take complete advantage of the lifetime transfer credits; then the survivors estate might end up paying much more tax than is necessary. The lifetime transfer credit allows every estate out there to leave $600,000 or more tax-free. This rate may increase or decrease in any given year, be sure to check with the current tax lawyer who specializes in estate planning to get the current amount.

Let’s take an example to make things more clear. Let’s say that a wife dies before her husband and leaves an estate that has a value of $1.2 million and let’s say that she leaves it to her husband. What she should have done is left only $600,000 and put the rest of it in a trust for his benefit. That way the trust gets a $600,000 lifetime credit and the husband gets a $600,000 dollar lifetime credit and neither will pay the transfer taxes. Then the entire $1.2 million passes to the children tax-free in the end.

There are, of course, other reasons not to leave all of your assets to your spouse that I’m not going to get into any sort of detail. The point of the matter is, you should check with a competent estate planner or an estate attorney, or even a specialized estate CPA in order to deal with the current tax laws in a satisfactory manner and get everything tidied up the way you need it to be.

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