estate planning lawyer Baton Rouge

Husband's Small Estate Can Do A Huge Favor to Wife's Family - the Estate Tax Portability Election

Blended families are common these days primarily because the divorce rate is high, and since people are living longer, it's common for someone to lose their spouse and then remarry in their 60's, 70's or 80's.

Many blended family situations are such that each spouse has their own children. It's common for the couple to establish a Marriage Contract (also referred to as pre-nup, pre-nuptial agreement, or separate property contract.

I've been working with a blended family in recent months that has strong ties to the Baton Rouge, New Orleans, and Lafayette communities. The wife has a very large estate (let's say, $10 million) and the husband has a much smaller estate (let's say $1 million). Each of them has their estate legal program set up so that when each spouse dies, their respective estates will go to their respective children. The problem is that the wife's estate, at $10 million, faces perhaps a couple of million dollars or more in estate tax when she dies (depending on value and tax law at time of death).

The couple is predicting that the husband will die first - he is older and is not in as good health as the wife. He'll be leaving everything to his four adult children. His wife will not be involved in his estate settlement. There will no federal estate tax return due after the husband dies because his estate - at $1 million - will be less than the applicable exemption ($5.45 million for deaths in 2016).

Here's the kicker: when the husband dies, there will obviously be no estate tax because his estate is relatively small compared to the estate tax exemption. But if the husband's estate, after he dies, files an estate tax return and makes the portability election, then the wife's estate, when she dies, will not only have her $5.45 million estate tax exemption, but she will also get to use the husband's unused exemption. So, let's say the husband does not use $4.45 million of his exemption and his estate makes the portability election on his estate tax return (IRS Form 706), then the wife, at her subsequent death, could exclude $9.9 million of her estate from the 40% tax.

Bottom line - when the husband dies, the wife and her children should be REALLY nice to the husband's family (particularly his executor) in order to sweet talk him into filing an estate tax return and making the portability election. In fact, the wife should offer to pay for the accounting and legal work necessary to get that done. It will be a small price to pay to recognize as much as $2 million of tax savings at the subsequent wife's death.

If you are in a marital situation and one spouse has an estate that is much larger than the other spouse, you may want to have a discussion with someone like myself who can help you set up a Louisiana estate legal program to minimize or avoid the tax that both families may have to incur later.

5 Questions That Were Answered At My Estate Planning Presentation Today

I gave an estate planning presentation today at my favorite breakfast place nearby in Prairieville, Louisiana. Their hashed browns and biscuits are to die for - no pun intended since I was discussing estate planning.

There was one woman there who said that for the last 30 years, she had been clipping different articles about estate planning and keeping them in a sack. She presented several questions to me before we even started the breakfast event this morning. Fortunately, I wrote her questions down as she asked me. The questions she asked me were the following:

  1. Does forced heirship still exist in Louisiana? Hint: She mentioned all of her children were over the age of 50.
  2. Is Louisiana a community property state?
  3. Is it better to have joint investment accounts or to name a beneficiary on the accounts?
  4. When you put your assets in a trust, do you give up control over the assets?
  5. What's the difference between a Living Will and a Living Trust?

My 45 minute estate planning presentation addressed most of these questions that she had. The ones that my presentation did not address, I addressed specifically after we finished the presentation.

One other note she mentioned. She said she was really worried that she did not have a deed to her home property in Ascension Parish. She said that her mother had given her and her husband the land many years ago, and then she and her husband built their home on the land. I told her that she can rest easy because there is no such thing as a deed in Louisiana. As long as the Donation from her mother to her and her husband was recorded in the Ascension Parish property records, then she and her husband were the owners of the land and the home that was subsequently built on the land. Her husband indicated that the property tax notice comes in their name every year, so obviously, the property had been put in their names correctly.

I look forward to seeing this couple in our office in a couple of weeks as we set up an estate legal program that will protect them, their children, and their grandchildren. She said that their main goal as they establish an estate legal program was to provide something for each of their seven grandchildren. I look forward to working with them.

Own a Business and Owe Estate Tax? Pay the Estate Tax in Installments: Section 6166 Election

Several of our estate planning clients own businesses in Louisiana (or elsewhere). Some of these business owners have an estate that will require estate tax to be paid when they die. Many business owners are told that "half of their estate will go to the government when they die" so they must take drastic action today to somehow reduce that tax.

What many people don't know is that there are breaks in our Internal Revenue Code which permits certain estates to pay the estate tax liability over a period of 14 years - if they qualify for it because they own a closely held business.

Generally speaking, if a business owner dies and the value of his ownership interest in his or her business exceeds 35% of his adjusted gross estate, then the executor is allowed a 14 year period to pay estate tax attributable to an estate's interest in a closely held business. The estate may pay interest only payments for the first four years, and the taxes can then be paid over a 10 year period.

Here's an example that would not occur in real life but it shows how this election can help an estate. Let's say that Fred owns Fred's construction company. This is the only asset in Fred's estate. The business is worth $10.45 million. Fred is told by some that half of his estate will go to the government when he dies. This concerns Fred because there is not $5.225 million in liquidity in his estate to pay this tax and Fred worries that his children will lose the business.

But the Fred realizes that his estate could make a Section 6166 election timely after Fred dies. First, the estate tax must be calculated. Since there is a $5.45 million exemption, and a 40% estate tax on the balance, Fred figures there would be $2 million in tax - still a big worry to Fred. But if his estate makes the timely IRS Section 6166 election after he dies, his estate can pay interest only payments of $40,000 for four years after Fred dies, and then his estate can $200,000 annually for another 10 years. Fred now realizes that his business will produce enough revenue annually to pay this tax over the 14 year period, and his children will not lose the business due to estate tax liabilities.

If you are a business owner in Louisiana, whether your business is in Baton Rouge, Lafayette, New Orleans, Lake Charles, Shreveport, or Monroe, and you want to make sure that your estate passes intact to your family or other heirs, you may want to give my office a call at 866-491-3884, and tell our great staff that you own a valuable business and you want to speak to me to find out how to leave it the right way, I look forward to the opportunity to speak with you about how the IRS Section 6166 election for owners of closely held businesses can help your family, or how other little-known tax elections can help your family.

Importance of Documenting the Accounts in a Louisiana Succession After the First Spouse Dies

We started working on a Succession today out of our Baton Rouge office. The wife had passed away. Her husband was talking to me about helping the family get the Succession complete. The couple had been married for about 20 years, but they each had children from their prior marriages. The deceased wife had two children. The surviving husband had three children. The husband said that, for now, the relationships were good between himself and the two sets of children. He was hoping that the fact that his wife's estate needed to be settled would not harm the relationships among all of the parties involved.

Usufruct To Spouse - Naked Ownership To Children

We discussed how her wife left a Will leaving him the lifetime usufruct of her estate, and she named her two children as the naked owners. He stated that he wanted his three children to inherit his estate when he dies.

He brought in a list of all of the various bank accounts and investment accounts. They had about five bank accounts, an investment account at Fidelity Investments, and they owned a home worth about $500,000. We discussed how important it is now to fully document all of the bank accounts, investment accounts, debts, credit card balances, funeral expenses, and medical bills outstanding, because when the husband later dies, the children of the two spouses will look back to how the assets were listed when the first spouse dies to determine who inherits what after the surviving spouse dies.

I gave the husband an example. I said, "Let's assume that the two of you owned bank accounts totaling $200,000 when your wife died. Let's also assume that the two of you had credit card and home equity debt of $40,000. Further, let's assume that there were $15,000 of funeral expenses. What all of this means is that when you die, your estate will owe your wife's children $65,000."

Usufructuary Accounting

He asked me how I came to that calculation. So I said, "Well the $200,000 of bank accounts are community property so you each own half of those accounts. As the usufructuary. you own your half of the accounts, and your estate will owe your wife's children her half of the accounts when you die. So, let's start with the fact that you will owe her children $100,000. Now, since there was $40,000 of community debt, your wife's share of that is $20,000, and you can deduct $20,000 from what you owe her children. And since there were $15,000 of funeral expenses, you can also deduct that amount from what you owe. So, $100,000 minus $20,000 minus $15,000 totals $65,000. That's the amount your estate will owe your wife's children when you die."

Then, we started talking about their home. The surviving husband said he intended to sell the home in a few months and move into something smaller. So I gave him another example regarding their home. I said, "Let's say you sell the home in six months for $520,000. At that moment, you converted a nonconsumable (the home) into a consumable (cash). If you sell the house for $520,000, you will get to keep all of the money, but upon your death, your estate will owe your wife's children $260,000 (one-half of the sales proceeds). 

The mistake many families make is that even though money typically does not go to the children upon the death of the first spouse, it is critical to properly document the assets as part of the Succession process. If things are accurately documented in the Succession (also known as "Probate") when the first spouse dies, it will make it much easier to accurately divide the assets after the surviving spouse dies. Shoddy records after the first spouse's death will likely lead to estate settlement disputes after the surviving spouse dies because the families will often have to "guess" at what assets and accounts existed years earlier when the first spouse died and there are no longer records from years earlier.

Louisiana Statewide Succession and Estate Planning Legal Services

If you want to set up an estate legal program and you live in Louisiana, whether you live in Baton Rouge, Covington, Metairie, Lafayette, Lake Charles, Shreveport, Monroe, or Alexandria, or if you've lost a family member and you want to make sure that the estate settlement is handled the right way to avoid disputes, now or later, among family members, give our Louisiana toll-free number a call at 866-491-3884, and we will be happy to have a conversation about how easy it is to do it the right way, the first time.

Interesting Louisiana Estate Planning Factoid About Leaving an IRA to Grandchildren

I met with a very nice couple last week that wanted to leave their investments to a trust for their grandchildren. One of the issues that we had to deal with was that the bulk of their investments were held in their IRA account.

I spent some time educating them about what their grandchildren would be facing from an income tax standpoint. The couple expressed that they did not want the grandchildren to get any of it until they were well into their adulthood.

I explained that since they were leaving an IRA to their grandchildren - even though it is going to a trust for the grandchildren, the grandchildren will be required to take distributions starting the year after the surviving spouse dies. I explained that the best we could do would be to set things up so that after the couple died, the grandchildren would be forced to follow the rules of an "Inherited IRA" and they would be required to take immediate distributions based on their life expectancy.

Nonetheless, we are still able to accomplish their objectives of providing an income to their grandchildren for many years, and then have the remainder turned over to the grandchildren when the grandchildren are nearing retirement age.

Anytime you name someone other than your spouse as the beneficiary of your IRA, be aware of the Inherited IRA rules that they will have to follow regarding their schedule for required minimum distributions. Their schedule will likely be very different than your schedule or your spouse's required minimum distribution schedule.

Fun Times at Estate Planning Luncheon Presentation in Madisonville

Wow! What a great crowd today at the lunch presentation that I gave today in Madisonville, Louisiana. We had future estate planning clients from Madisonville, Slidell, Mandeville, Covington, and Hammond in attendance. Virtually all of these fine folks will be meeting with me in the next couple of weeks at our estate planning law firm's office in Mandeville, Louisiana.

Here are a few issues that were brought up to me by the audience that I will be addressing with these fine Louisiana families as we work through establishing an estate legal program for them.

  1. Family Home. One person in attendance wants to make sure that his daughter inherit the right to live in the home when he dies, but when the daughter later dies, he wants his four grandchildren to own the home. He wants to make sure that his daughter's husband doesn't inherit the home.
  2. Owner Financed Home. Another gentleman financed the sale of one of his homes to his daughter. Now, the daughter is not making the payments on the home. So, the gentleman wants to make sure that the daughter does not take advantage of this when he dies.
  3. Six Children and 19 Grandchildren. One couple I'll be helping talked about making things easy when they die for their family. While they have considered leaving an inheritance to the grandchildren, they appear to have settled in on leaving their estate to their six children, and then letting the six children provide for their children.
  4. Blended Family. One other couple we will be helping married about seven years ago. They each have children. The children all get along well with each other, and the couple wants an estate planning program that can keep the family relationships strong even after the couple passes away.
  5. Wants To Trash the Handwritten Will. One couple realized that they want to get rid of the handwritten Wills they made in favor of having an entire estate legal program that avoids probate and makes matters easier for each other and their children.
  6. Avoid Nursing Home Poverty. One woman said her biggest worry is that she would hate to sell all of her assets depleted if she had to reside in a nursing home in the future. She said she was pleased to realize there was a way to set things up in a way that her home and her savings would be preserved for her and her family.
  7. No children. One couple with no children wants to have plan that keeps their options open in case the surviving spouse needs to move into a retirement village.
  8. Trust Account at Credit Union. We answered one question that enabled a family to set up a revocable living trust credit union account so that the account will never be frozen, even when the people who set up the account pass away.

As you can tell, there was a variety of estate planning legal issues that were brought up today at the presentation. I look forward to the opportunity help all of these fine Louisiana families put their estate legal affairs in order.

With our Louisiana estate planning law firm's offices positioned in Baton Rouge, Lafayette, Lake Charles, Metairie and Mandeville (with more to come later), we look forward to helping Louisiana families have peace of mind that comes from working with the right attorney to put your estate plan in order the right way the first time.

When an Estate Should Give Information to the IRS - Even When You Don't Have To

I've been working with a Baton Rouge family that had an estate plan set up. The wife died. Her separate property and her one-half of the community property totaled about $2 million. She owned property in Baton Rouge, Lafayette, and Gonzales.

After the wife died, I was working with the surviving husband and the children. They assumed, rightly so, that the wife's estate was not required to file a federal estate tax return because the gross value of her estate was less than $5.45 million.

While they were technically correct, they did not realize that the failure to file a federal estate tax return on behalf of the wife's estate could cost them millions in the long run. You see, the husband had a large estate of his own. He owned property in New Orleans, Shreveport, Alexandria, and near Monroe. He also owned a significant IRA. His total estate was about $7 million and likely to grow.

I explained to the family that while the wife's estate was not required to file a federal estate tax return with the IRS, they should do so and make the "portability election." Filing a U.S. Form 706 on behalf of the wife's estate, and making the appropriate portability election would allow the surviving husband's estate to use $3 million unused estate tax exemption that they wife's estate failed to use.

Had the wife's estate not filed an estate tax return, then the husband's estate would only be able to shield $5.45 million from the 40% estate tax. But since we are filing the return and electing portability (even though it is not required to file a return since her estate was less than the $5.45 million exemption), the husband will be able to shield at least $8.45 million from estate tax when he dies. The portability election allows his estate to use his full exemption plus use the amount of her exemption that her estate did not use.

Future appreciation of an estate after the first spouse dies, or a future change in the law which reduces the estate tax exemption, could cause families to incur estate tax when they did not think they would. Careful consideration should go into whether an estate tax return should be filed with the IRS after the first spouse dies, even if it is not required.

If you are concerned about the possibility of your survivors incurring a 40% federal estate tax when you pass, shoot me an email at, and perhaps we can discuss the simplest ways to preserve your estate from the government and for your family.