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Your Money

How to get two exemptions for the price of one

Columnist

Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota.

Dear Michael: I am caught in a conundrum. I am divorced and remarried. My new wife and I set up a pre-nuptial agreement before we got married. The problem is now my estate has grown to an estate taxable value. I know we both get an estate tax exemption of $11 million or so, but to use her exemption I would have to leave her the excess over the $11 million at my death.

Although I love my wife, her children and I do not see eye to eye; I would prefer my estate goes to my children. How do I choose between paying estate taxes and giving part of my estate to stepchildren? – Caught in a Conundrum.

Dear Caught in a Conundrum: When you pass on, IRS determines whether you have an estate taxable trust. Currently the amount you can pass estate tax-free is just over $12.6 million without incurring any taxes.

In your case, Conundrum, there is a solution for you – although you will need to check it with an estate attorney for drafting.

You may use your wife’s estate tax exemption in certain cases. There is something known as a marital exemption trust that qualifies for using her exemption.

She must agree to it. Second, the fact that you have a pre-nup and kept your property separate since your marriage allows you to use this option. You must have kept separate checking accounts to pay bills on your property such as insurance, utilities, taxes, upkeep, etc. If you maintained this throughout your lifetime together, then you have separate property.

If you paid for bills out of a joint checking account, you have negated your pre-nuptial agreement. If anyone (her, her children, Medicare, IRS) can prove she had incidence of ownership by paying any costs for the property, even if you wrote the checks from the joint account, it is deemed she owned half of that account and therefore may be entitled to half of your estate.

Remember, it is not just her or her children who may debate this – it could be Medicare or IRS.

Let’s say you have met all the requirements. Then you and your wife would have a will that states upon your death, any excess over and above the $12.6 million goes into a trust for her for her benefit. All income and use of the assets in the trust will pass to your spouse for her lifetime. It would also qualify for her $12.6 million upon her death.

You can get the benefit of a second estate tax exemption on the property in the trust when your wife dies.

Who would oversee these assets? You will need to designate a trustee who will be fair and impartial. In that vein, is it a good idea to name your children? If they do not want to wait until she dies, they can make life pretty miserable for her by making late payments of income or use of the property or selling the property.

For example, most trustees have broad powers to maintain, trade or sell assets within the trust. If you wanted your wife to live in the home you are in now, you had better specify this. You do not want to leave her a life estate in the home because if she leaves, she still has right to the property and the trustee cannot sell it. Your will needs to be very specific about when this home could be sold by the trustees.

For example, if my wife should leave this home for a period of one year, the trustee would then be allowed to sell the home. If she goes into a nursing home, you want to be able to sell the home before it falls down in disrepair.

The good news is you can use your wife’s exemption. The other news is you must think long and hard about how this trust will be set up, who will run it, and the ins and outs of such a thing.

Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota. Email him at KeeptheFamilyFarm@gmail.com.

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Columnist

Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota.

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