Financial & Estate Planning For the Dual Income Family

In today’s world, it is more common than ever to find dual income households. Recent estimates by the Department of Labor find that women comprise around 47 percent of the American workforce. Compare this percentage to 1960 accounts estimating women in the workplace at around 33 percent. Because of the proliferation of working women, special planning is necessary to properly address the issues faced by households where both spouses work.

Life Insurance

Although also true for single income households, the need for life insurance should particularly be evaluated when both spouses work. Life insurance can provide a means to replace a wage earner’s salary in the event of an untimely death. The necessity becomes even more evident in the case of a simultaneous death. Life insurance could be the only means of providing income to dependent children for their own care, replacing their parents’ incomes.

Additionally, it is common for both spouses to share childcare and household responsibilities. Upon the death of one spouse, the survivor may need to hire additional help to care for dependent children and perform everyday household duties, in order to be able to continue working. Proceeds from the deceased spouse’s life insurance policy can provide added funds to pay the cost of such extra costs while allowing the surviving spouse the freedom to continue working.

Life insurance can also provide estate liquidity upon the death of one of the spouses. In the typical estate plan, no federal estate taxes are due upon the first spouse’s death because of the Unlimited Marital Deduction. However, federal or state estate taxes may be due, such as in a simultaneous death situation, or when a large amount of assets are given to the children of a prior relationship. In these and other similar situations, life insurance combined with an Irrevocable Life Insurance Trust can provide a way to pay the federal and state government, while not forcing your heirs to sell off assets to pay taxes.

Irrevocable Life Insurance Trust

The creation of an Irrevocable Life Insurance Trust is vital considering the many important uses of life insurance in a dual income household. This is an estate planning technique used to ensure that life insurance proceeds will not be subject to federal estate tax. Quite simply, a trust (or multiple trusts) is created to be the owner of any insurance policies on the spouse’s lives. As the insured spouse no longer owns the policy, the policy is not taxed in his or her estate. It can be used effectively to reduce the size of the taxable estate and to provide a source of tax-free funds that may be used to pay any death taxes due at the death of the insured.

Disability Insurance

Similar to the need that arises with the death of a spouse, where one spouse becomes disabled, the family unit ends up losing that spouses income, possibly replaced only partially or temporarily by government assistance. Additionally, added expenses will oftentimes be incurred due to the disability, such as the need to hire in-home care for the disabled spouse. Disability insurance can be a source of income replacement allowing the survivor to continue paying the family expenses, and can provide added income for new expenses that may arise from the disability.

Medical Insurance

Where both spouses work, it is generally more economical to choose to participate in only one employer’s medical plan, rather than purchase potentially duplicative coverage through both spouses’ employers. Therefore, it is necessary to thoroughly evaluate the scope and cost of each plan and to choose the one that more appropriately meets the family’s particular needs. It is important to keep in mind that once participation is declined, there usually are specific windows of time in which an employee can enroll in the medical plan (except where due to the death or unemployment of a spouse). Therefore, switching between providers may cause a delay in coverage and could possibly subject you to health screenings and pre-existing condition limitations.

“Sprinkling” Credit Shelter Trust

A Credit Shelter Trust (also called a Family Trust or the “B” Trust) is commonly used in tax planning. As its name suggests, it shelters the amount (termed the Applicable Exclusion Amount, or “AEA”) that a person may transfer estate tax-free ($675,000 in the year 2001, escalating to $1,000,000 by the year 2006). Without this or a similar type of segregation of the AEA, a married couple could lose the AEA of the first spouse to die.

Generally, the Credit Shelter Trust is created with the surviving spouse as the beneficiary, with the remaining assets going to the deceased spouse’s heirs upon the survivor’s death. However, in households where both spouses work, upon the first spouse’s death the survivor may not need all the assets from the deceased spouse. This could occur because the survivor continues to work after the decedent’s death, earning enough income to fulfill his or her needs, or because the survivor has built-up his or her own wealth throughout the years. Whatever the reason, proper planning takes this into consideration.

Where this is the case, the Credit Shelter Trust can be structured to provide the survivor with access to the decedent’s funds, yet allow the funds to accumulate should the survivor not need them. This is accomplished through the use of a “Sprinkling” power. The Trustee of the Credit Shelter Trust is granted the power to distribute assets to the Survivor as he or she deems necessary. Upon the death of the survivor, the assets are distributed according to the deceased spouse’s wishes. The survivor is left with the security of knowing that the deceased spouse’s assets are available to him or her, should the assets be needed, while at the same time, having the discretion to let the assets accumulate in the trust for the heirs if the assets are not needed.

There are many planning options available and necessary for the dual income household. Inaction could prove costly to you and your loved ones, especially in households that rely upon both spouses’ income. To discuss these and other areas of concern, contact a qualified attorney specializing in estate planning. Don’t be caught unprepared.

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Don’t Let a Recession Control Your Estate Plan

Question: What do most people do during a recession?

Answer: They cut back on everything, of course.

They may cut back on dining out, vacations, gifts, and other things considered nonessential. One example of a “nonessential” matter might be their estate plans. An estate plan seems like something that can wait; something which can be taken care of some future time. But an estate plan should never be considered a “nonessential.”

The reason for this is simple: There are some things which can be controlled, while other matters cannot. Personally, I love dining out. Eating out, however, is obviously not essential. Although I love the freedom of dining in a restaurant, it’s obviously less expensive to cook. While I may be able to restrain my urge to dine out during hard economic times, there are other matters where I exercise little, if any, control — like the unpleasant issues of disability, illness and death. The fact that these events are often unexpected shows why estate planning should not be left for later, but should be dealt with today.

However, estate planning is different from other products and services. If you don’t buy a new refrigerator, you either do without, or continue using the old one. If you don’t buy a vacation, you generally stay at home. But this is not the case with an estate plan. Whether you realize it or not, everyone has an estate plan right now. The state has devised a plan for those who have never written a Will or a trust. Through the laws of intestacy, each state dictates the post death transfer of property for those who die without a Will. For example, in California, when a husband dies “intestate” (i.e., without a Will) his property will be divided in certain proportions between his surviving wife and children. But most of my clients would prefer to have their surviving spouse — often the widow — receive their entire estate, reasoning that her future earning power is much less than that of the children, and that she has a greater immediate need for the money. Yet this concern would not dictate the result in California. Should the husband die without a Will, his property will be split between his wife and children. This would be the case even if (for example) the children are incredibly wealthy, and the surviving wife lives in a public housing project in abject poverty.

Planning your estate takes control from the state, and returns control to you as the estate planning consumer. Having a Will returns control: No longer does your state legislature have the final say concerning your estate plan. Also, while a Will is a good estate planning tool, in many cases a trust is much better. Generally, owners of real property incur much less cost in transferring property through a trust than through a Will. Often with Wills it becomes necessary to open up a probate proceeding. This is usually not the case with a trust.

The reason for this added expense is simple: A probate proceeding is really nothing more than a specialized lawsuit, and in a lawsuit lawyers and the court want to be paid. While other states may differ, in California both attorney and executor fees are based upon the value of the estate as directed by a payment schedule in the Probate Code. Those fees are paid directly from the property in the estate. For example, under California Probate Code section 10800, a modest estate of $300,000 going through a California probate will cost $9,000 in attorneys fees. If the administrator or executor charges full statutory fees the cost will double to the amount $18,000. A slightly larger estate of $500,000 would cost $13,000 in counsel fees, with a grand total of $26,000 should the executor/administrator also charge his or her fees. Other costs such as filing fees and appraiser fees (called a court “referee” in California) would be extra charges added to the counsel and executor fees.

Moreover, this is only a minimum statutory charge. If the attorney engages in extraordinary services, he or she may petition the court for additional fees.

These costs should be compared to that of a typical trust, which might cost a few hours of time in meetings with the attorney and a few thousand dollars to prepare. Therefore, an uncertain economy is not a justification to avoid planning your estate. Rather, it is a reason to take control and to ensure that your decisions are carried out at the smallest possible cost for your family and loved ones.

Disclaimer: The information in this article is not legal advice, and the use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any links from this article is expressly disclaimed. This article is not to be acted upon as if it were legal advice, and is subject to change without notice, or may include obsolete or dated information, or information not relevant to your jurisdiction. If you require legal services, you should consult with an attorney.

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What is an Estate Plan?

An Estate plan is essentially several legal documents brought together to guide nominated persons through decisions you have made about the end of your life. In specific terms, a Will, a Living Will and a Power of Attorney all need to be incorporated into the Estate plan. Trust documents may also be included in cases where they are needed.

The most detailed document is likely to be your Will. How you would like your assets to be distributed and details of specific gifts you wish to make, should all be mentioned in here. It should also contain details about how you wish to make provision for your funeral expenses and Inheritance Tax payment.

Children under 18 of course need to be provided for, both financially and in terms of appointing guardians. In this instance, the creation of an additional Trust document, may be appropriate.

Living Wills are a newer but valuable addition to the Estate plan. In here, should you become unable to think or communicate clearly at some point in the future, you are able to specify how you would prefer to be looked after and if you would choose for medical staff to prolong your life, should you suffer from a terminal illness or severe injury. Not something any of us enjoy thinking about but nevertheless a very important issue for your loved ones.

Finally, Power of Attorney. Again this document relates to your actual lifetime rather than post-death, and refers to a scenario where you are unable to make decisions for yourself. The Power of Attorney will dedicate a named individual to organise all of your financial and legal dealings.

At first glance, it appears that Estate planning is a long and complicated process, dealing with many issues none of us care to dwell on. However, an experienced probate practitioner and Will Writer will be able to guide you through the whole process relatively quickly, leaving no stone unturned. They will also be able to advise you on the most efficient ways of preparing for your death and dividing your Estate, to minimise Inheritance Tax and other related costs.

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