Keeping it in the Family

You may be hearing daily from family, friends, financial advisors, and the talking heads of every cable news station about the turbulence of our current economy. You may feel by turns worried, confused, and uncertain.

However, with the right team on your side, you and your family will weather this storm. Instead of keeping constant vigil with the 24-hour news and financial networks – talk with you advisors. You’ll get a realistic assessment of your situation, helpful ideas about what to do right now, and a welcome respite from many in the media who look for ways to boost your tension and, thus, their ratings.

Most of the factors contributing to our current economic situation are beyond our control. There are, however, things you can do to assure that you, your family, and your assets are protected now and in the future. At Smith Barid, we find that helping people take control of the things they can control creates true peace of mind.

One of the important things you can control is what happens with the legacy you’ve worked so hard to create once it passes to your children and grandchildren. We all acknowledge that the divorce rate in our country is staggeringly high. If one of the loved ones you leave behind finds themselves in the middle of a divorce, will some or all of your hard-earned assets leave the family along with the soon-to-be ex?

Divorce (a major part of what many call Family Law) is a complex, and often difficult, process. One of our local Superior Courts (the courts in GA which handle divorce matters) just released an attorneys’ guide to property division in divorce. The memo is 14 pages, single-spaced, with 8 footnotes. This isn’t simple stuff. It is important to know, however, that the only assets divided by a judge or jury (Yes, GA still allows juries in divorce cases!) in a divorce are marital assets.

Proper planning done now can prevent your hard-earned assets from becoming marital assets of your children. That is to say, the right kind of revocable living trust or testamentary trusts will allow you to pass your legacy to the next generation without those assets being subject to division in a future divorce.

A qualified estate planning attorney will help you to seize the reins of your legacy, control what you can control, and find your bearings in this transient maelstrom of anxiety-ridden news stories.

Estate Planning and the Non-Citizen Spouse

When it comes to estate taxes, married couples in which one spouse is a resident non-citizen are treated differently than married couples where both spouses are U.S. citizens. Generally, assets that pass between spouses at the first death are free from estate taxes due to the Unlimited Marital Deduction, no matter how large the estate.

However, where the surviving spouse is a resident non-citizen, the Unlimited Marital Deduction is not automatically available. Although the government allows all taxpayers to pass a certain amount of assets at death estate tax-free, called the Applicable Exclusion Amount (“AEA”), estate taxes will be due on amounts in excess of the AEA (currently $2,000,000.00) unless proper estate planning is in place.

Yet, if either you or your spouse is a non-citizen, the difference in how you are treated does not end here. There are also limitations that apply while you are both alive. Generally, U.S. citizen couples can make unlimited gifts to each other without the gift being taxed. However, when gifting to a non-citizen spouse, a citizen spouse is limited to gifts of $125,000 per year.
This may seem like a sufficient amount, however, certain estate planning techniques may not be available where such a limitation is present. For example, a basic Estate plan may include a Revocable Living Trust which, upon the first spouse’s death, takes his or her assets and divides them into two sub-trusts: a Survivor’s Trust (sometimes called an “A” Trust) and a Family Trust (also called a “B” Trust). The purpose of the Family Trust is to segregate assets equal to the Applicable Exclusion Amount. By doing so, a married couple can pass double the AEA estate tax-free.

However, where one spouse owns more assets than the other spouse the estate may need to be “equalized” so that the spouse with fewer assets does not waste his or her AEA, in the event he or she dies first. This is accomplished by having the propertied spouse gift assets to the non-propertied spouse so that the estates are equal. Should the non-propertied spouse be a resident non-citizen, the gift would be limited to $125,000 annually, potentially hindering the effectiveness of the estate plan.

One way to resolve these planning problems is for the non-citizen spouse to become a U.S. citizen. Obviously, this can occur while both spouses are alive but also can be accomplished after the U.S. citizen spouse’s death. For gifting purposes, citizenship must be obtained before the death of the U.S. citizen spouse. In order to avoid an estate tax, without additional planning, citizenship would have to be obtained before the decedent spouse’s estate tax return is filed (generally within nine months of the citizen spouse’s death).

However, a non-citizen spouse may not want to obtain citizenship merely for planning purposes. These unwanted results, as discussed above, can be avoided through the use of a Qualified Domestic Trust, or “QDOT”. The non-citizen spouse’s inheritance could be put into a QDOT under the following provisions:
• The Trust must have at least one trustee who is a U.S. citizen. The spouse can be a trustee but he or she cannot be the only trustee. When assets reach a certain level, a professional trustee will be required.
• The surviving spouse must be entitled to all of the income of the QDOT.
• The QDOT must be established within nine months of the deceased spouse’s date of death and must be elected on his or her estate tax return (no later than one year after the time prescribed by law, including extensions, for filing the decedent’s federal estate tax return).
The non-citizen spouse’s inheritance goes into the QDOT when it is established and is tax-deferred until the non-citizen spouse dies or when he or she withdraws any or all of the principal.
The idea is to allow the non-citizen spouse the receipt of income generated by the QDOT assets, while at the same time securing the collection of the deferred taxes on the principal by the government. The requirement of having a U.S. citizen as one of the trustees was established to ensure the government had someone responsible to pay the taxes if the non-citizen decided to return to his or her country of origin without paying the taxes.
Generally, QDOT assets are taxed upon the occurrence of any of the following events.
• Principal withdrawn from the QDOT is subject to a QDOT tax.
• If the QDOT fails to meet the QDOT requirements at any time, all the trust assets are subject to a QDOT tax.
• When the non-citizen spouse dies, the QDOT assets are taxed.

The QDOT tax is incremental and is calculated in reference to the U.S. spouse’s estate tax. In broad strokes, the tax is determined by calculating what the QDOT assets would have generated in estate taxes were they in the estate of the U.S. citizen spouse. The QDOT amount is placed “on top” of the U.S. citizen’s estate to determine the applicable tax rate bracket for the QDOT assets, thereby generating the highest effective rates.

The mechanics of the QDOT, and the options available to a couple in which one is a non-citizen, are both complex and dependent upon a great number of personal factors (especially the value of the estate). If you or your spouse is a resident non-citizen, consult an estate planning professional at Smith Barid, LLC to discuss your specific planning needs.

If you are a non-citizen whose U.S. citizen spouse died recently, you may find yourself in a situation where proper planning has not been done. In this case it is imperative that you contact a qualified estate planning attorney immediately to discuss possible remedies that may still be available to you. The road to estate planning, especially in this situation, is dangerous without professional guidance.

Decisions . . . Decisions . . . Decisions . . .

When asked how people want their assets divided after they are gone, some people have definite opinions, while others are less certain. Not only do people differ in the level of their uncertainty concerning how to divvy up their assets, they even differ in what factors are important in making the decision.

In June 2007, Money magazine released a reader poll concerning various financial issues. The following percentages of respondents ranked each factor as very important:

• Dividing the estate equally among your children: 69%
• How responsible each child is about money: 37%
• How helpful each child has been to you: 29%
• How close you are to each child: 22%
• How much money each child has: 22%
• How many children of their own each child has: 19%
• How much you like each child’s spouse: 10%
• 37% said it can be reasonable to disinherit a child.

Another item of indecision for many people is the choice of decision makers: Trustee, Personal Representative, Guardian, and Agents under powers of attorney. For each of these positions, it is important to name people whose decision-making ability you trust. You may be tempted to name all your children or siblings to avoid hurting anyone’s feelings. However, naming a large number of people to serve together in the same role invites family disharmony and chaos. For example, if property in the Trust is to be sold and you have seven Trustees, many of whom may be out of town, it would be a logistical nightmare to route paperwork all around the country. Typically, things work more smoothly if you limit the number of people in any given role. Besides, having a job thrust upon them may be something many would just as soon avoid.

Regardless of what factors are important to you, a qualified estate planning attorney can help you achieve your goals. For example, if you are concerned about your child’s ability to manage finances, the money can be left in a Trust which will prevent him or her from accessing the funds without the permission of a person whom you designate, the Trustee. If you do not like your child’s spouse and are concerned he or she might divorce your child and take some of the inheritance you leave your child, you can leave your assets in a “Divorce Protection Trust.” Such a Trust keeps the assets separate from marital assets. Therefore, it minimizes the risk of the assets ending up in the hands of the child’s future ex-spouse.

A qualified estate planning attorney can help you achieve your goals while paving the way for your family’s continued success and harmony after you are gone.

Protecting Your Children from Their Nightmares…and Yours

You tuck your children into bed and kiss them goodnight. In the doorway, you watch them drift peacefully off to sleep. They are so innocent, so naïve. After your long day, you fall into bed and dream of the day your children will be grown. You dream you are walking your daughter down the aisle at her wedding, beaming with pride. Your dream starts out normally, but then you see that your soon-to-be son-in-law is actually a chimpanzee.

While our dreams can be a stage for many bizarre fears, this one is fairly logical. No, it’s not likely that your daughter will marry a chimpanzee. However, we have reason to be mindful of our children getting into bad marriages destined to end in divorce. In the United States, the rate of divorce is up dramatically from one or two generations ago. The rate of divorce is more than double the rate in 1940 and is up 86% from 1960. Nearly half of all marriages in the United States end in divorce.

Is it possible that your children or their descendants could be a party to a divorce? Definitely. So, how can you protect your children in the event of their divorce? A living trust. First, upon your death, you can leave assets to your children in a “divorce protection” trust. Such a trust allows your child to keep his or her inheritance from being considered marital property or community property. Your child can still be in charge of the money. He or she can be the trustee and can make decisions on the management and investment of the money. Even if the child is not the trustee, he or she may have the power to pull money out of the trust.

In addition to protecting your child in the event of his or her divorce, you can also protect them from the event of your marriage ending. If you remarry (especially if your spouse is not the parent of your children), you can ensure that your children are provided for after your death. Rather than leaving all of your assets outright to your spouse at your death, you can leave those assets in a trust.

You can leave up to $2 million (in 2007) in a “Family Trust” for the benefit of the spouse and/or children. This trust can pay income or principal for the needs of the spouse and/or children. Anything over that amount can be left in a “Marital Trust,” paying all income to the spouse. The Marital Trust could be dipped into for the needs of the spouse, or you could provide the spouse with income only. Either way, whatever is left over would be there for the kids and would not go to a new spouse.

You may not have control over your daughter marrying a chimpanzee, or even someone who acts like one. However, you can protect her inheritance so that she will be able to recover financially after a breakup. A qualified estate planning attorney can help you protect your children from divorces (www.smithbarid.com).