Estate Planning for Your Valentine

Written by Jim Worthington on February 14, 2023

The simplest form of will for a married couple basically says: “I give, devise, and bequeath everything I own to my beloved spouse if my spouse survives me. If my spouse does not survive me, I give it to someone else.” Estate planning lawyers call this a sweetheart will.

In the past, the sweetheart will’s simplicity gave up a great tax-saving opportunity. When I first began drafting wills in North Carolina around 1997, the amount that passed free of estate tax was only $600,000. Since that included life insurance and retirement accounts, many couples had taxable estates. It went up a little by the time I started practicing in Kentucky in 2000, but it was still only $675,000. In 2023, the amount is $12.92 million. Not many couples have that large of an estate.

Time warping back to 1997, the problem with the sweetheart will was that it could leave the family with a tax bill to pay when the surviving spouse died. Think about a married couple with one working spouse and one staying at home. Suppose they had a home worth $200,000, savings of $25,000, a retirement account for the working spouse of $100,000, life insurance for the working spouse of $500,000, and life insurance for the stay-at-home spouse of $75,000. Those assets total $900,000. If everything ended up in the hands of the surviving spouse, he or she could have a taxable estate after passing away.

We were able to cut this tax to zero with a credit shelter trust and by having each half of the couple own some assets. We drafted a lot of those trusts back in the day and spent even more time telling couples why they needed more than a simple sweetheart will. An earlier version of this article, linked here, walks you through the calculation and the way we used credit shelter and disclaimer trusts to save estate taxes. With today’s high exemption, you may be thinking that we don’t have to fool with any of that.

Does 2023’s $12.92 million exemption mean we can go back to sweetheart wills?

About the only people who can safely do so are a married couple with no children or grandchildren and no chance of any. Plus, they need to be 100% committed to leaving all their property to the same people after the second spouse dies. Everyone else should at least consider a trust. Four common situations and solutions follow:

• Someone with children from a previous relationship may want to use a trust to provide both for the surviving spouse and the children. This type of split interest trust is common and can be designed to avoid some of the possible headaches associated with the stepparent relationship.
• Persons with asset protection needs, including physicians or rental property owners, may want to use trusts and limited liability companies in their estate plan.
• Those with children or grandchildren who are not ready to manage an inheritance should have a trust for them. This trust will release the childrens’ or grandchildrens’ inheritance gradually, so they have help with it from a trustee until they’re ready to manage it on their own.
• Anyone with special needs children or grandchildren needs a trust. A special needs trust can keep an inheritance—even a modest one—from disqualifying a beneficiary from means-tested benefits. Since medical insurance often accompanies those benefits, losing eligibility could mean losing insurance. Thus, staying eligible is critical.

Good estate planning is a gift you can leave your loved ones. After your chocolate and champagne, give your estate planning lawyer a call to protect your loved ones.