Monday, March 27, 2000
ASK THE MONEY PANEL
Pour-overs, living trusts can reduce taxes
Question: My husband and I have basically a simple will, but we were wondering: our net worth is $1.2 million. Do we need more than a simple will? Do we need a trust for our children? Do we need other things?
— J.E., Blue Ash
Answer: Frank Diedrichs, an estate planning lawyer and partner at Rice & Diedrichs in Hyde Park, says you need to trade your simple wills for new pour-over wills and living trusts for you both.
Here's why: With simple wills, there would be no federal or state estate taxes due at death of the first spouse because of marital deductions. But at the survivor's death in the year 2006 or later, there would be combined federal and Ohio estate taxes of about $109,000 (assuming no change in your net worth).
If you had pour-over wills and living trusts prepared and evenly divided your assets between the two of you, there would be significant estate-tax savings. Although it is often difficult to evenly divide marital assets, such as IRAs or other retirement accounts, this example assumes that you can achieve an equal split.
At the first death, there would be estate taxes of about $30,000 due to the state of Ohio. A similar amount would be due at the second death. There would be no federal estate tax due because both estates would be below federal limits. Thus, the estate tax savings from adopting living trusts would be about $49,000, if your net worth remained the same. The savings would be even larger if your net worth increased.
In addition to the estate tax savings, you would also save probate court costs and attorney fees associated with the probate court process if you funded the living trusts by transferring your assets into the respective trusts. The potential savings could amount to several thousand dollars for each estate. An intangible benefit would be limiting exposure of your financial affairs to public record.
The trusts could also be used to delay distribution to your children until they reach a more mature age. Also, they could deal with special circumstances, such as caring for elderly family members or children with problems.
You also should have a financial power of attorney in case you lose the ability, because of sickness or accident, to manage your own affairs. Also, a living will and power of attorney for health-care decision-making are important documents that everyone should consider.
— Compiled by Amy Higgins
Readers should consider the advice from the Money Panel as general information only. Investors should seek the help of professionals on questions regarding their own portfolios because circumstances might vary.
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