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?
Estate Planning with a Financially Irresponsible Spouse
Leaving all of your money to your spouse is only a good idea if you have complete confidence that they will be able to manage that money well. Sadly, that’s just not true in a lot of instances.
[Read Transcript]
Hi. This is Barry Haimo. Thanks for tuning in to another dose of Bite-Sized Bits of Knowledge, where we give you a meaningful amount of information in a short amount of time.
Up to this point, you’ve learned a lot about estate planning, what it means, what it includes, why you do it, what happens if you don’t do it. I hope that you found it meaningful. Today we’re going to take a step forward in the direction of getting a little bit more complex.
What I want to talk about today is estate planning when there is a surviving spouse who is financially irresponsible. Let me paint a picture for you. You’ve worked your butt off for a long time. You’ve accumulated assets. Perhaps they consist of bank accounts, some stocks, bonds, maybe a car, maybe a boat, a house, maybe a vacation house, an investment, property, annuities, life insurance, 401ks, IRAs. Maybe you have a small business.
Whatever it is, whether it’s all or part of what I just said, those are yours, and you’ve worked hard for them. Your spouse has probably worked hard for them too. And in many cases, it’s all kind of one big pot of spousal assets.
Well, when one spouse passes away, as we discussed, everything will go to the spouse and/or minor kids, depending on a lot of different factors. That’s without planning. The spouse just gets the money. If they’re titled jointly, the spouse gets the money.
If that spouse is financially irresponsible, then there’s a risk that the money will be spent. It will be wasted. It will be mismanaged. And I guess, most importantly, it won’t end up going to your kids, your grandkids. It will go elsewhere. We don’t know where that will be.
If you find your spouse to be unable to manage money and you do a proper estate plan that includes leveraging life insurance, you may want to consider utilizing a trust where your spouse can be the beneficiary and he or she can, to some degree, participate in the management, control a portion, not control another portion. Maybe have another family member involved to manage the assets. Maybe have a professional trustee manage the assets.
The point is that if both spouses are on the same page about the inevitable ultimate goal being keep it in the family. Make sure it goes to the spouse for his or her maintenance, support, living needs, but then the balance goes to the kids, the only real way to do that is to a trust. Otherwise, you’re taking the risk and just kind of hoping that things will work out the way you intended.
So, to summarize, a trust is a really helpful tool to achieve your goals of ensuring that your assets will be properly managed, protected, and preserved for the next generation, while benefiting your spouse fairly and reasonably.
We’re not talking about withholding money. But just in a way that achieves your goals. That’s done through trust. Without it, you roll in the dice.
It’s a very common concern that we address. It’s a problem that we frequently solve, and I’m happy to bring it to your attention.
So thank you for stopping by. Stay tuned for more, give us a call, and we’d be happy and look forward to working with you. Thanks.
So, that covers one of the best solutions for if your spouse is a U.S. citizen. But Florida is a very international place, with lots of people meeting and falling in love from around the world.
What if you marry a non-U.S. citizen?
Estate Planning Concerns When Your Spouse Is Not a U.S. Citizen
If only one of you is a naturalized U.S. citizen, your estate plans probably won’t be much different than any other couple who both enjoy citizenship – for the most part. There are, however, three key estate planning concerns when one spouse is not a U.S. citizen.
Concern No. 1: Limitations on Marital Exemptions
Usually, when someone loses a spouse, all assets left to them are free from federal estate tax. It is known as an unlimited marital deduction and is an addition to their normal individual exemption. However, it does not apply to inheritance by spouses who are not U.S. citizens.
Concern No. 2: Joint Property Is Not Assumed
Joint property is typically assumed to belong equally to each spouse, but when one of you isn’t a U.S. citizen, that’s not the case. Instead, the government looks at actual (proven) monetary contributions in order to determine the percentage of ownership — not just a 50/50 split.
Concern No. 3: Gifting Becomes Complicated
One solution to the issues with joint property is to look at joint assets as gift values from the citizen spouse to the non-citizen spouse. However, even gifting has limits and can become quite complicated when a couple has multiple high-value assets.
Protecting Your Joint Assets When Only One Spouse Is a Citizen
There are generally two paths you can take as a couple when it comes to protecting your joint estate if only one of you is presently a naturalized citizen. The person without citizenship can try to become a citizen… or you can consider establishing a qualified domestic trust.
The Process of Becoming a U.S. Citizen Can Take a Year or More
If your spouse is a naturalized citizen by the time your first tax return after death is due, there will be no question about your jointly-owned property and gift limitations. An experienced estate planning attorney will understand the impact of our current political climate on this process in recent years, though.
Whereas in the past non-citizens could reasonably expect the naturalization process to take approximately six months, wait times have reportedly doubled on average — and are sometimes longer.
So, if your non-citizen spouse isn’t already well on the road to naturalization, your estate planner may suggest a qualified domestic trust in the meantime – or instead.
A Qualified Domestic Trust Is Effective Upon Establishment
Besides the extended waiting period for becoming a U.S. citizen these days, there are plenty of other reasons your spouse may not want to be naturalized.
In any case that involves one non-citizen spouse, an estate planning attorney is likely to suggest they consider a qualified domestic trust (or QDOT). Similar to other trusts, instead of directly devising your property to your spouse, you assign your assets to this trust and name your spouse as the beneficiary.
That way, your spouse can receive any income the trust generates tax-free. The difference is, with this kind of trust, there can be no other beneficiaries while your spouse is alive. Moreover, should the actual property within the trust (the principle) be distributed, taxes will still be owed on it except under special circumstances.
If you are interested in learning more about whether (and how) a qualified domestic trust might be a good component of your estate planning efforts, we encourage you to reach out.
Regardless of your marital situation, to successfully accomplish your estate planning goals, you’ll want an experienced legal professional to ensure your trust adheres seamlessly with current tax codes.
At Haimo Law, that’s what we do. Contact Haimo Law today and let’s get started on crafting an estate plan designed to fit your unique needs and ensure your family is taken care of after you’re gone.
