Purtzki, Johansen + Associates


Distributing Your Estate Assets Fairly

Most of us have a cavalier attitude about preparing our last will. We seldom set aside the time such an important document deserves to address the unique circumstances of our family, practice, and financial lives.

Your lawyer may, as a reward for years of loyalty, prepare a will pro bono or for a nominal fee. But this may turn out to be a disservice as you can end up with a boiler plate will which is worth …well, exactly what you paid for. It is ironic that once a will is done, we tend to treat it with respect and put it in a safe without having spent much energy preparing what is arguably one of our most important documents.

Most wills are plain Jane types. These are simple wills of the criss-cross variety, where spouses leave their assets to each other, and only upon the death of the surviving spouse are the remaining estate assets distributed to the children. Such a simple will may be adequate if we are only talking about the family home and a few dollars in a savings account.

For a doctor, however, these off- the-shelf wills may not be adequate for several reasons:

  • Available credits and deductions may be lost, such as the capital gains exemption on the shares of your dental corporation.
  • A simple will does not provide for creditor proofing, since estate assets are subject to seizure by the deceased’s creditors.
  • Your spouse and children may end up paying more tax on income earned on the assets transferred unless you make provisions in your will, for instance, taking advantage of special income-splitting testamentary trusts.
  • If you and your spouse have children from different marriages, a simple will does not solve the problem of providing for the surviving spouse after your death and, at the same time, maintaining a portion of your estate capital for the children of your first marriage.

The magic of testamentary trusts.

If you want any say in how your money is spent after you are gone, you need to set up a trust. A trust created in your will is called a “testamentary” trust. Parents often set up a testamentary trust when they want funds to be held by a trustee for their children until they reach a certain age. A common trust provision requires the trustee to pay for education expenses and other necessaries until the child reaches age twenty-five, when perhaps one-half of the child’s interest in the trust capital is paid out, with the remainder being paid out when the child turns thirty.

The spousal trust

When you look at reducing tax on death, the only available tax deferrals occur when assets are transferred to a surviving spouse or to a spousal trust. What is a spousal trust and what are its benefits?

The tax-free rollover of assets upon death only applies in cases where there is a pure spousal trust. In a spousal trust, the spouse is the only one entitled to any income or capital during his or her lifetime. No one other than the spouse can benefit from the trust. The property transferred to the trust must “vest indefeasibly,” meaning that the spousal trust must have absolute legal and beneficial ownership of the assets with no strings attached. On the death of the spouse, the remaining trust assets are distributed according to the trust provisions.

From a tax point of view, upon the death of the beneficiary, there is a deemed disposition at fair market value of the assets, creating the same tax bill as if the spouse had personally owned the assets. The trustees of the spousal trust can be your children. Your spouse can also be one of the trustees. Investment income is paid out to the spouse. On the death of the spouse the trust can be wound up, and the investments are transferred to the intended beneficiaries.

The spousal trust is heaven-sent for those of you who wish to keep control of your assets. It is a perfect solution for those who want to transfer assets to children from a prior marriage, and at the same time provide an income stream to the current spouse.

Providing for a fair and equitable distribution of assets to your beneficiaries, while at the same time reducing the severe impact of income taxes upon death, should be your overriding objectives when drafting your will.

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