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Jewish World Review
Jan. 17, 2006
/ 17 Teves, 5766
Consider the risks of premarital agreements; the charitable remainder trust is underutilized planning tool
Jan L. Warner & Jan Collins
Q: I'm thinking about getting married to a man who has been married twice before. This would be my third marriage, as well. Each of us has grown children. Although he has had some financial reversals, including a bankruptcy and tax liens, he appears to be doing fine now. Since we met last year, he has been very generous to me financially, and says he will continue to be. When we decided to marry, I became nervous and thought it would be a good idea to get a premarital agreement, but he has balked. He says we don't need one, and has threatened to walk away if I don't trust him. Is there any way, short of an agreement, for me to protect myself? I am 71 and he is 64.
A: While premarital agreements may be binding between husband and wife, third parties like the IRS are not bound. In addition, there are other potential problems, including: (1) Without a waiver of estate rights, your spouse will be entitled to receive an "elective share" generally one-third of your estate, no matter what your will provides; (2) If you file joint income tax returns with your spouse during your marriage, you could well be signing a note to be responsible for past due taxes, interest and penalties that you may not even know about; (3) Under the "necessaries doctrine," you will probably be responsible for your spouse's medical and other bills when his funds run out; (4) If your spouse enters a nursing home and spends all of his assets before he will be able to qualify for Medicaid you will be required to spend down your assets to the maximum allowed in your state; (5) By being financially generous to you during marriage and possibly before he could be gaining an equitable interest in your property. If you live in a community property state, different rules may apply.
Bottom Line: If your husband-to-be has had tax liens and a bankruptcy, we think you are getting yourself into a risky situation, with or without a premarital agreement. We strongly suggest that you contact an experienced lawyer in your state to help you make some decisions. However, based on your boyfriend's track record and, frankly, yours when it comes to marriage our gut reaction would be to let him walk away.
Q: Like many middle-class seniors who are on fixed incomes, my wife and I are having difficulty making ends meet. We own our home and have liquid resources of $150,000. We also have my IRA of $75,000, one automobile, and some antiques that we inherited.
We don't want to withdraw our cash to pay current bills because we may need it later (we are in our early 70's), but we do need more cash flow every month. We had our antiques appraised at $150,000 and while we don't want to sell them, it looks like that is our only choice. However, we are told that if we sell the antiques, we will have to pay federal and state capital gains taxes which we don't want to do. Are there other alternatives for us?
A: Aside from a reverse mortgage on your home that could be used to create an equity line to draw on to pay extra expenses (such as annual insurance premiums, property taxes, etc.), an underutilized planning tool when folks need more cash flow and have appreciated assets is the charitable remainder trust.
Long used to reduce estate taxes, these trusts can be used in appropriate circumstances to create additional cash flow without payment of capital gains taxes through the sale of appreciated assets. The charitable remainder trust provides the donor with an income tax deduction, to boot!
There are two types of charitable remainder trusts a unitrust (CRUT) and an annuity trust (CRAT). In a thumbnail sketch, here's how a charitable remainder trust works:
If you decide to sell $150,000 worth of antiques that have a cost of, say, $50,000, you could contribute the antiques to the irrevocable charitable trust and, in turn, the trustee would sell the antiques without paying capital gains taxes on the $100,000 gain. The trustee would then invest the total sales proceeds of $150,000. Each year depending on whether you prefer to receive the same amount every year (CRAT), or a percentage of the value of the trust assets each year (CRUT) you would receive distributions based upon the life expectancies of you and your wife, or of just one of you. The trust does not pay income taxes, and you will be able to deduct the value of the remainder interest as a charitable contribution. After the death of the last beneficiary, the balance remaining in the trust called the remainder would be distributed to the charity you choose. Once you contribute to the trust, you can't take back your property. You can act as grantor, trustee and beneficiary.
Taking the NextStep: This is a rather complicated process, and you should consult with qualified lawyers and tax professionals and understand all ramifications before you act. In addition, if either you or your wife enters a nursing facility in the future and all assets are used up and an application for Medicaid is made, the gift to the charity may result in a period of disqualification, especially under the draconian bill now before the U.S. House of Representatives.
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JAN L. WARNER received his A.B. and J.D. degrees from the University of South Carolina and earned a Master of Legal Letters (L.L.M.) in Taxation from the Emory University School of Law in Atlanta, Georgia. He is a frequent lecturer at legal education and public information programs throughout the United States. His articles have been published in national and state legal publications. Jan Collins began co-authoring Flying SoloŽ in 1989. She has more than 27 years of experience as a journalist, writer, and editor. To comment or ask a question, please click here.
© 2006, Jan Warner