Special needs trust
Sherry was worried. Her husband’s father was dying, and she feared that when he died it would be the financial death of the whole family as well.
Tim, my husband, and his brother, Daniel, work for their dad at this machine shop he owns. They’ve worked there forever. I keep the books and see all the papers, so I know pretty much what’s going on. The shop makes pretty good money, but it’s just all these machines mainly, and a lot of the money goes back into the business to keep the machines going. Some of them are getting pretty old, but the business is still worth about a million bucks.
The way it’s set up is that Tim’s dad owns the whole business. He says one day it’s all going to be Tim’s and Daniel’s, so not to worry. He’s pretty old and not well at all, and Tim’s mother is probably not going to live that much longe1 either. I don’t mean they’re both going to die tomorrow, nor do we want them to, but they are both in their mid-eighties, and death, I keep telling Tim, is a fact of life. Pop owns the business, and when he dies, if Mom is still living, she inherits it. He has a will saying so. Then her will leaves everything to Tim and Daniel. The shop is a family business, so what happens next is that Tim’s and Daniel’s wills both leave the business to each other. We’re all really close, but it still doesn’t feel right to me, or to Daniel’s wife, Christine, either. What will happen to me when Tim dies? What happens to Christine when Daniel dies? When Christine and I ask them, they’re just like Pop—they both just say, “Don’t worry, I am taking care, it. End of discussion.” But I am worried.
Sherry was so right to be concerned. How many times have we said or heard those words: “Don’t worry, I’ll take care of it”? These words don’t handle the problem; at times, in fact, as was the case here, they create the problem. Sure, we all intend to get around to taking care of things, but there’s a big difference between thinking we will and actually doing it. Being responsible to those you love is knowing that you have taken care of everything, rather than just thinking you have. Being responsiHe also means being open to talking about issues such as death, sitting down with everyone involved to discuss their concerns, fears, misguided assumptions, and questions. Seldom do the words “I’ll take care of it” take care of anything.
When Sherry came to see me, I told her her family could be in big trouble. Even though Pop and Mom had a will, in truth they had not taken care of the very problems they sought to avoid.
To begin with, their total assets were worth more than $600,000, which is the maximum amount you can leave to anyone other than your spouse without having to pay estate taxes to Uncle Sam. Therefore, when Pop and Mom die, and Tim and Daniel inherit a business worth $1 million, they are going to owe huge estate taxes. And because the ownership of the business and house and bank accounts passed under a will rather than a trust, they could be hit with huge probate fees as well.
Is there a way for Sherry’s family to reduce the federal estate tax that would be owed on an estate worth $1 million? Yes. Tim and Daniel’s father could have really taken care of it by setting up a tax-planning trust. This is a trust for those with larger estates—worth $600,000 or more.
Depending on whom you talk to, these trusts can be known as marital trusts, credit shelter trusts, bypass trusts, or AB trusts: they’re all the same thing. I like to call them bypass trusts, because I just love the thought of bypassing taxes. A bypass trust can eliminate federal estate taxes on estates valued up to $1.2 million and reduce the tax considerably for even larger estates.
Federal estate taxes fall into the realm of the IRS and don’t vary from state to state the way probate fees do, so don’t confuse estate taxes with probate. Probate fees are determined in each state and cover the cost of processing a will through the court system to transfer property from the person who died to his or her living heirs. (Some states also impose estate taxes; see page 104.) Federal estate taxes are the share of the estate owed to the IRS if you leave more than $600,000 to anyone other than your spouse. Unless, that is, you eliminate or minimize the sting by setting up a bypass trust.
In Sherry’s family’s case, here’s how the inevitable deaths of Mom and Pop would play themselves out with, and without, a bypass trust.
Tags: financial