Welcome StratWealth team and clients! Learn more here.

Do you have sizeable jointly held accounts with your spouse? Is your estate large enough that it could be subject to federal or state estate taxes? If you answered yes to both of these questions, then pay attention, because your Will may not do what you think it does.

What’s the problem here?

Your Will is not the end of the story. Your Will might only “work” if you title your accounts properly. It’s not uncommon for us to see well-drafted Wills with solid tax planning incorporated into the estate plan. In the case of a high net worth client, this might involve the use of a “credit shelter trust”. Although the specifics can be confusing for some clients, a credit shelter trust is conceptually pretty straightforward: it’s a trust designed to make use of your estate tax exemption when you die, so that your exemption isn’t wasted. If your exemption isn’t properly used when you die, there could be a higher estate tax bill at the death of your surviving spouse.

Real-life Scenario

One of our high net worth clients was very appreciative when we recently identified and rectified the following situation:

  • Husband and Wife, both New Yorkers, had a $15M jointly held account.
  • We had already helped them remove substantial assets from their taxable estates via a series of gifts, sales and loans. They were nonetheless due for an estate planning “check-up”. Their Wills were five years old and, although the tax landscape had changed substantially in that five years, the terms of the Wills still looked pretty good.
  • The Wills contained a common structure that we refer to as a “State Credit Shelter” Trust, which works like this: If wife died first, the amount of her New York estate tax exemption (currently $5.93M) at her death would pass to a credit shelter trust for her husband’s benefit. Any of wife’s assets above that amount would pass outright to husband. The purpose of the credit shelter trust structure is to literally “shelter” $5.93M of wife’s assets from estate tax. If her Will contained no such structure, and everything passed to husband outright, we’d be wasting wife’s New York’s estate tax exemption. It’s a use it or lose it situation. If her NY exemption isn’t used at her death (via the credit shelter trust), it is lost forever. You’ve wasted the opportunity to shield $5.93M from NY estate tax.

The Wills sound great, so what’s the issue and how did we fix it?

The plan doesn’t work because wife doesn’t have any of her own assets to pass to the credit shelter trust! So, the credit shelter trust never gets funded when wife dies, and her exemption is wasted. Remember how we said that the $15M was held in a joint account? That means that when wife dies, the entire account passes to husband automatically by operation of law (that’s how joint accounts work); and nothing passes in trust.

Once we noticed this glaring problem, we simply re-titled the accounts from jointly held to “tenants in common”. Now, wife has $7.5M of her own money (half of $15M). If she died in 2021, at a time when the NY estate tax exemption is $5.93M, then $5.93M would pass to the credit shelter trust for husband, and the remainder ($1.57M) would pass outright to him. Due to this simple change in account titling, now a full $5.93M is shielded from NY estate tax. And, even better, all of the appreciation on that initial $5.93M is also shielded from tax. So, if husband dies many years later – after the trust has grown substantially – the tax savings are even greater.

What would happen if we hadn’t identified the account titling problem?

A lot more estate tax would be due at husband’s death. In the simplest scenario, assume husband dies later that same year with the same $15M that wife’s estate passed to him outright (remember, without the proper titling, the credit shelter trust was never created). His estate would owe over $1.9M in NY estate tax.

If, on the other hand, the credit shelter trust was funded because the accounts were properly titled, his estate would only owe $926,000 in NY estate tax. That’s a difference of over $900,000!

Bottom Line

Make sure your accounts are titled properly if you don’t want to give more to the government than you have to.

 

Wealthspire Advisors LLC is a registered investment adviser and subsidiary company of NFP Corp.
This material was created by Wealthspire Advisors LLC. This material was created to provide accurate and reliable information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. © 2021 Wealthspire Advisors

Nicole Hart, J.D.

Nicole Hart is head of our trusts & estates department and works in our New York office.