Unintentionally Disinheriting Your Spouse

When’s the last time you reviewed your will? Do you remember your attorney discussing a concept known as the unified credit? Did your attorney discuss an amount that was exempt from estate taxes? Not that long ago, this exemption amount was $3,500,000. As a result of the Tax Cuts and the Job Acts of 2017, the exemption amount is $10,000,000. The provision of the TCJA 2017 sunsets on 12/31/25. Thereafter the exemption amount reverts to $5,000,000.  With that increase, and with lower asset values, many individuals who formerly were concerned about estate taxes, may no longer think they should be concerned. The problem, however, is that many people believe that if they don’t have a federal estate tax problem, they don’t need to review their wills. That is always incorrect, and one specific problem, unfortunately, is that inaction may result in a surviving spouse being disinherited.

Many estate plans for married couples are set up so that when the first spouse dies, a certain amount of money and property is allocated to a family trust equal to the exemption amount. The estate’s balance is usually left outright to the surviving spouse or to a marital trust for his or her benefit. The purpose of this common estate plan design is for a married couple to shelter as much assets as possible from estate taxes. This was once a great estate plan when any unused portion of the exemption amount of the first spouse to die was “wasted.” Today, however, that unused amount is “portable”: it can be used by the surviving spouse in addition to his or her own exemption. Now, an estate plan set up a few years ago could be disastrous.

Let’s take a simple example. Bill and Mary are married. Bill has an estate of $5,000,000 (the same amount it was worth in 2009) and dies in the current year. His will was drafted in 2009 and directs his executor to fund a family trust with property equal to the exemption equivalent. When Bill drafted the will, the exemption amount was $3.5 million, and many people believed it would stay that way, so he believed Mary would receive an outright bequest of $1.5 million. Now, however, upon Bill’s death, the family trust will receive the entire estate, and Mary will receive nothing.

Bill undoubtedly didn’t intend to disinherit Mary. Yet Mary now only has the assets in her own name, and maybe an income interest from the assets held in Bill’s family trust. It’s probably safe to say Mary isn’t happy.

To complicate matters, a surviving spouse may have the option of contesting a will or trust if he or she isn’t provided a certain amount of money. States that are considered “separate property” states usually have “right of election” laws that prevent an individual from disinheriting a spouse – intentionally or unintentionally. Even with this right of election, however, the result for the surviving spouse may not be what was intended.

Individuals like Bill should review their estate planning documents with their attorneys and financial professionals to determine the impact of the changed exemption amount. Indeed, estate planning is an evolving process. It’s important to have your estate planning documents reviewed periodically; certainly whenever there are tax law changes or major life or economic events. In this way, your attorney can have the documents updated to reflect the changes in the tax laws, financial environment, or intent.

 

Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.Brought to you by The Guardian Network © 2015. The Guardian Life Insurance Company of America®, New York, NY

 

2018-61902 Exp. 6/30/2020