Estate Planning of SC, LLC

Estate Planning of SC, LLC :: Blog

Archive for February, 2009

If your spouse died today – would you be prepared?

Tuesday, February 17th, 2009

In some younger families, one spouse is the breadwinner and another stays home to take care of the children.  Each spouse plays an important role – at the most basic, one provides income and the other provides services.  Most of these types of families are young with young children, and they have not yet accumulated many assets with much equity.  This is  normal progression.  Life insurance plays an important role in this family’s estate.

For example, if Husband is the breadwinner (I know – stereotypical), making $75,000 per year, and Wife stays at home with the children, but has no earned income of her own, then the family needs to have enough life insurance to replace the roles that they play in the family.  Term insurance is great for these types of needs, because as the family accumulates assets, their need for the insurance will decrease.

If Husband were to die first, the Wife’s expenses are not very different than when Husband was living.  She must continue to pay for the home they live in and daily living expenses.  This is generally not a great time to discover that she must go back to work (and put the children in day care?) In order to continue their lifestyle.  They should have enough life insurance on the Husband’s life to replace the income stream.  $1.6 million, assuming an interest rate of 5%, would yield $80,000 per year, thus replacing his income.

Now what if Wife were to die first?  Husband’s expenses will increase because there is no one at home taking care of the children.   Husband will probably want to decrease the amount of time he works so that he can spend more time at home.  The family should have enough life insurance on Wife to replace the value that she brings to the family.  All too often, this part of the plan is overlooked, but it is so important.

You need to talk with your estate planning attorney to ensure that the beneficiaries of these policies mesh with your estate plan.  For example, this family should, at the most basic, have Wills that create a trust for any minor children after both of their deaths, so that the children do not inhereit any assets directly.  Their Wills should also contain a nomination of a guardian for the minor children, along with an alternate.

If the minor children inherit proceeds of life insurance directly, a Probate Court proceeding will be needed to appoint a conservator, a very involved and expensive process; however, if the contingent beneficiary is the Trust for the minor children, then the court proceeding is avoided.  If you also need tax planning in your estate, then other beneficiary designations may be recommended.  Whatever you do, avoid naming your minor children as the beneficiaries under your insurance policies to avoid the conservatorship proceeding.

10 years sounds like a long time . . . .

Monday, February 16th, 2009

Doesn’t it?  In South Carolina, we have a statute of limitations that requires estates to be probated within 10 years of the date of death.  If the estate isn’t probated within that time period – SC law provides that the distribution must be as if the deceased did not have a Will.  In addition, you must hire an attorney to file a Petition asking the Probate Court to determine the heirs of the decedent.  This means that you must have witnesses to prove who the children of the deceased were – and they need to be uninterested witnesses – not family members.  The Probate Court requires that the surviving spouse (if there is one), the children and the uninterested witnesses all attend a hearing.

I bring this topic up because although most people know that probate administration is required when there are lots of assets that need to be transferred out of the deceased name, but sometimes if it is just one or two assets and the beneficiaries don’t need to sell the assets right away, the probate administration seems less important.

For example, Wife dies and she only has joint ownership of the house.  If Husband plans to continue to live there and doesn’t need to refinance the home, then he may just continue to live there.  The fact that the house is jointly titled doesn’t affect Husband – it just means that his wife’s name is still on the property tax notice.  This issue only becomes important when Husband needs to go to a nursing home or do something else with the property.  More likely than not, Wife’s will provided that all of her assets at her death should be transferred to Husband, but if more than 10 years have passed, then her will is of no effect.  Under SC law, her assets pass according to the intestate statute, which says that one-half of her assets pass to her spouse, and the other half pass to her children.

If the family members all get along, after the hearing, the children might decide to transfer the house back to Husband.  If the family relationships are not good, though, this could cause significant problems.  What if one child really needs the money and requires her father to buy back her interest in the house?

I know that probate administration occurs during a difficult time and that sometimes it may seem better not to deal with it at all.  Please let us assist you with this process so that time doesn’t fly by, making the process even more difficult.

It’s Tax Season

Wednesday, February 11th, 2009

April 15 Calendar

Tis the season when CPAs are working around the clock to prepare all of our income tax returns; however, it is also the season of the Gift Tax Return.  Did you know that if you gave away property valued at more than $12,000 to any individual or irrevocable trust last year that you must file a gift tax return by April 15th to report those transfers?

If you transferred a house to a child in 2008 – the child did not buy it from you – you need to file a gift tax return to report the transfer (and any other transfers that you may have made last year).    One of my clients moved to a nursing home last year and transferred his house to his niece.  This year, we will file a gift tax return reporting the date of the transfer and the fair market value of the house.

If you are married, the IRS allows you to split your gifts with your spouse (provided they give you permission).  For example, Husband gave $24,000 to his daughter last year.  Because he could only give $12,000 individually, he will want to use Wife’s exemption to avoid paying any gift tax on the transfer (provided Wife did not make any gifts to daughter last year).  In order to split the gift with Wife, Husband must file a gift tax return electing the splitting of gifts, and both Husband and Wife must sign the return.  If they do this, no gift tax will be due on the transfer to daughter.

More than likely, as you report these transfers, you will not have to pay any tax out of pocket because of the Gift Tax Exemption.  This exemption is $1,000,000 during your lifetime, which means you can give away $1,000,000 worth of property over the annual exclusion (last year, $12,000) and still not pay any tax out of pocket.  The gift tax return will just show that you have used a portion of your Gift Tax Exemption.   For my clients who do not have taxable estates, this generally does not affect their estate planning; but for those with taxable estates, this reduction of credit means that the Estate Tax Exemption ($1,000,000 of which includes the Gift Tax Exemption) will be reduced at their death, so that we may pay a little more estate tax when they pass away.

Most individuals who must file gift tax returns each year are those who have set up irrevocable life insurance trusts, and who make transfers to the trust each year in order to pay the premiums.  These clients have been educated about the gift tax when the trust was created; however, if they have not set up this sort of complicated planning, most people are not aware that the Gift Tax even exists.

In 2009, the annual exclusion (which is adjusted for inflation) increased to $13,000, so this year you can give $13,000 to as many individuals as you like.  The annual exclusion is per person, and there is no limit to the number of people you can make gifts to.   If you need help structuring a gift transaction, please contact us and we are glad to help.

Happy Tax Season!