Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, January 18, 1993 TAG: 9301160028
SECTION: BUSINESS PAGE: B6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
TAXING ESTATE CHOICES
COUPLES MAY leave everything to each other or may have everything in the husband's name, but the result is the same. They wind up paying unnecessary taxes to the government.\ Most mistakes that married couples make in handling their estates usually fall into two categories.
Bruce Stockburger, a lawyer who specializes in estate and tax work, said some couples, particularly older ones, still follow what used to be the typical pattern.
All of the assets are in the husband's name alone.
The problem with the idea is that "the IRS deals with us as individuals, not couples," Stockburger said. He is with the Roanoke firm of Gentry, Locke, Rakes and Moore.
Under current law, the Internal Revenue Service gives all of us a lifetime gift and estate tax exemption of $600,000, he explained.
If the couple dies together or if the wife dies, her exemption is lost forever.
That practice of holding assets is dying out, but Stockburger said the flip side is common today.
That's where the couple leaves everything to each other with what Stockburger calls "the typical I-love-you will."
As might be expected in such a situation, all of the assets are in both of their names.
The result, however, is the same. One tax exemption - worth $600,000 - is thrown away.
Couples can leave everything to each other without estate tax consequences. The problems come when the second spouse dies and the assets pass to the family's next generation or someone else.
Suppose, for instance, that the husband dies first. If he has an I-love-you will - or no will at all - everything will flow to the wife, provided, if there was no will, that he had no children from a prior marriage.
Suppose further that he had been a prudent man with some assets. His generous insurance, half the house, pension plans, CDs, stocks and bonds would go to the wife. Say it was worth $600,000.
Then the wife dies. She, too, had half the house, insurance and other assets - plus everything her husband had left her.
Her estate, which she leaves to the children, is worth $1.2 million.
Stockburger said the tax on a $1.2 million estate is $446,000. Because she had given away nothing beyond the $10,000 gift limit, she is entitled to one full exemption of $600,000. That brings back a tax credit of $192,800.
The final estate tax is $253,200, so the children receive $946,800. With proper planning to save both exemptions, the children would have received the full $1.2 million.
"It's kind of a sad situation," Stockburger said. The tax law forces people to spend money on estate planning and go through a legal process.
But with estate taxes starting at 37 percent and working up to 55 percent under current law, big money such as the $253,200 is at stake.
Without planning, the money goes to the government rather than to the heirs.
Stockburger figures that about 80 percent of his clients find they can benefit from the legal possibilities.
This involves dividing the couple's assets into two shares with creation of family trusts to hold up to $600,000 in assets. Ideally, he said, each spouse's estate should have the same amount of assets.
If the husband dies after that, the wife receives income from the trust until her death. Both estates qualify for exemptions of $600,000.
Stockburger said life insurance can be treated the same way, yet most people name their spouse as the beneficiary.
Retirement plans also should fit into the overall concept. The beneficiary should follow the estate plan, he said, and not necessarily be the spouse.
Naming the spouse would be the sensible thing to do, he said, "if we didn't have a gorilla out there called the estate tax."
Like everything else in estate tax planning, however, there are some exceptions.
If an asset was acquired prior to 1977, he said, it may be advantageous to keep it as joint property. That's because it might be possible, depending on the situation, to step up the tax basis to fair market value at the time of the death of the first spouse.
And he advises clients to own their home jointly. He considers their house "an emotional asset," that is not a legal or financial issue.
The house, he said, should be kept in both names so both spouses are assured of a home for a lifetime.
Stockburger pointed out that people in different financial situations have varied needs for estate planning.
Couples whose joint estates would total less than a half million dollars have no worries about estate taxes, he said. They could break all the rules and still never be subject to taxation.
But in calculating that remember that insurance and the house are counted in that total along with savings and investments for both spouses.
Couples who together will have more than $500,000 should begin to think about estate planning.
That's under the current $600,000 limit, but Stockburger noted that investments and the value of the house have a way of growing. And the more you have, the faster it grows.
Couples whose joint estates would reach $1 million, he said, must start dealing with complicated planning concepts. The larger the estates, the more urgent the need to plan.
Two types of clients usually come to his office for estate planning.
Some have read everything they could find on the subject. He said they end up very confused.
The others, he said, have "no earthly idea" about the concept of estate and tax planning.
Estate and tax plans also are subject to rapidly changing whims of Congress.
One proposal, which is expected to die in Congress, would have reduced the exemption from $600,000 to $200,000.
Another, Stockburger said, would change the tax basis of the assets passed in an estate.
As it stands today, the tax basis of the heirs is the fair market value of the house, stock or other asset on the date of the person's death.
The proposal being considered by the Clinton administration, he said, would give the heirs the same tax basis as the person who died. That would be the deceased's original cost of acquisition, he said, so that a capital gains tax would be piled on top of the estate tax.
Stockburger said that people who have worked hard all their lives to create assets must "go through hoops" to pass them on to the next generation.
He said they find they must break the financial habits of a lifetime and engage in manipulative devices to avoid heavy taxes.