Your taxable estate: Less obvious assets.

There are several other assets that many people creating an estate plan fail to consider. The most commonly overlooked asset included in a person’s estate is life insurance, perhaps because the value of that insurance is not realized until after death. However, even though the death benefits are payable only upon your death, if you have life insurance, you must include its value in your estate for tax purposes. If that doesn’t seem logical to you, think of it this way: You could make your death benefits payable to your own estate. This would make them subject to your own debts, taxes, and expenses of administration.

EVEN LESS OBVIOUS ASSETS
Aside from the obvious and less obvious things people own, there are other assets not readily identifiable as part of a person’s estate, including what are known as retained interests, contingent interests, and reversionary interests.

RETAINED INTERESTS—LIFE ESTATES
Retained interests are “strings of ownership” that still attach to property that is titled in another’s name. The most common example of this type of interest is a life estate.

A life estate is the right of the original owner to live on and enjoy real estate for his or her entire life, even though the real estate has been deeded to another owner.

Putting real estate into a life estate often is used as a means of avoiding pro-bate. For example, Bob and his wife Mary own their home. They have one child, Susan. As Bob and Mary get older, they become increasingly concerned that upon their deaths their home might be sold to pay for estate expenses, nursing home care, or taxes.

Bob and Mary meet with their lawyer and subsequently deed all of their ownership interest in the home to their daughter, Susan. Susan now owns the property. However, Bob and Mary do not wish to be at the mercy of Susan or her creditors. Therefore they state in the deed to Susan that they retain the right to remain living in the home for their natural lives, which is called “reserving a life estate.”

Although this type of conveyance changes ownership, it does not transfer control. Bob and Mary have the exclusive right to live on the property for so long as either of them lives. There is nothing that Susan can do to evict them from the home. Even if Susan sold the home to another, she cannot remove Bob and Mary from the home without their consent—and neither can the new owner.

Because title will always control disposition of the asset at death—and neither Bob nor Mary owns the property—neither of them include the home in the probate estate. However, because Bob and Mary retained the right to live on this property until death, they have a retained life estate on this property, which means that the entire value of the home will be included in their taxable estates at death.

To legally remove any interest in the property held by Bob and Mary as life tenants, they would both be required to sign a deed conveying their life estates.

Since title will always control disposition of the asset at death, the home will not be included in the probate estate of either Bob or Mary since neither of them owns the property. However, since Bob and Mary retained the right to live on this property until death, they have a “retained life estate” on this property, which means that the entire value of the home will be included in their taxable estates at death for federal estate tax purposes.

PROCEED WITH CAUTION
When making a transfer to a child as described above, this constitutes a taxable gift. As a result, the cost basis for Bob and Mary is transferred to Susan, which will result in the property being subject to capital gains tax upon the sale of the property.

The importance of title

How you own property controls everything from whether the asset is a pro-bate asset to whether the asset will be included in your taxable estate.

Your first step in estate planning is to determine how you own each and every one of your assets. Remember: Nothing is more important than title. The manner in which you own an asset has priority over any direction contained in your will or trust.

Title to an asset usually is determined by the actual title document, referred to as documents of title. The following are examples of documents of title:

• Deeds to real estate
• Signature cards on bank accounts
• Certificates of deposit
• Savings bonds
• Brokerage account application forms
• Stock certificates
• Life insurance declaration pages
• Annuity declaration pages

However, keep in mind that not every asset has a document of title. For instance, personal belongings don’t have documents showing ownership, nor do most household goods unless you consider sales receipts to be documents of title. If a piece of property does not have a document of title, title (owner-ship) usually is determined by possession, which is where the saying “Possession is nine-tenths of the law” comes from. However, possession is not always conclusive. If assets are borrowed or taken without their owner’s permission, the person who took them does not have legal possession or title.

Sales receipts do not represent ownership of an asset, unless the receipt clearly identifies the item and the owner’s name.

What you must remember is that title to an asset will dictate how you should handle that asset in your estate plan. Indeed, title is more important than the nature of the asset itself. Therefore, to figure out whether an asset is a probate asset or a taxable asset, look not to the type of asset (real estate, personal property, bank account, certificate of deposit, and so forth); instead look to the document of title to that asset. This is where you’ll find the answer.

Your estate consists of everything that you own, including the obvious— your home, real estate, bank accounts, investments, stocks, bonds and certificates of deposit. However, this also includes the less obvious, such as retirement accounts, life insurance, and annuities.

Matters of children in a family

Decision to Have Children

Q. Who makes the decision to become a parent?
A. The Supreme Court in Roe v. Wade and other cases has declared that the decision of whether or not to have a child is a very personal one and that the decision is protected by the right of privacy under the United States Constitution. This means that individuals who wish to have a child cannot be barred from doing so (unless perhaps they are incarcerated). Individuals who do not wish to have a child have a legal right to obtain and use contraceptives.

Q. What if one spouse wants children and the other does not?
A. This is a significant emotional issue that, of course, can be very difficult. If one member of the married couple wants a child and the other does not, that could be a basis for a divorce. A disagreement on such a fundamental issue could be an "irreconcilable difference" under the no-fault divorce laws of most states. In states that have grounds for divorce based on someone being at fault, a disagreement on the question of whether to have children could be viewed as "mental cruelty," and thus a basis for ending the marriage.

Beyond divorce, remedies are limited. The courts cannot force a pregnant woman to stop the pregnancy, nor does the law require a wife to have her husband's permission for an abortion.


Abortion

Q. What is the current status of abortion law?
A. As of the year 2000, women still have a right to an abortion. In the 1992, the U.S. Supreme Court in the case of Planned Parenthood v. Casey reaffirmed its 1973 decision in Roe v. Wade that women have a constitutional right to seek an abortion during the early stages of pregnancy. States, however, do have a right to regulate how abortions are performed and states may ban abortions after the fetus is viable (able to live outside the womb) unless the mother's life or health is endangered. The scope of regulation and funding of abortions by the government varies from state to state. In Casey, the Supreme Court held it was permissible for states to impose a 24-hour waiting period on obtaining abortions and to require a minor to have consent of one parent or a judge for an abortion.


Childbirth

Q. Are there any rules prohibiting parents from having their children born at home?
A. No, at-home births generally are an option for parents. The mother should have good prenatal care, and she should make sure the health care provider believes the delivery will not pose significant risks to the mother or child. If the delivery is risky for the mother or child, it is much better to use a hospital. Some states allow nurse-midwives to deliver children at the parents' home or at a birthing center. Other states allow nurse-midwives to practice only at hospitals or under the direct supervision of a physician.

Q. If the delivery is at a hospital, may the father or a sibling be present?
A. At most hospitals, the father may be present at birth. Hospitals often prefer that the father and mother have gone through some training before the delivery. Parents should check with their hospitals about other rules and about whether siblings would be allowed in the delivery room.

Issues concerning domestic violence

Q. What are legal remedies for domestic violence?
A. State legislatures and courts have been paying increasing attention to domestic violence. Many states have elaborate laws designed to protect spouses from domestic violence by their spouses or other family members. In many states, protection also is available for people in dating relationships that have become abusive. A common remedy is for a court to issue a "protective order" ordering the alleged abuser to stop abusing or harassing someone else. In addition, the orders often will order the abuser to stay away from the spouse, the spouse's home, or place of work. If the person continues to abuse his or her spouse (or another person protected by the order), the abuser can be charged with a criminal violation of the order in addition to being charged with other offenses, such as battery.

Q. What kind of actions are considered domestic violence?
A. Domestic violence statutes in most states apply not only to physical attacks, but also to other types of conduct. Some examples of conduct that could be considered domestic violence: creating disturbance at a spouse's place or work, harassing telephone calls, surveillance and threats against a spouse or family member (even though the threat may not have been carried out).

Q. Do protective orders actually protect the victim of domestic violence?
A. In many cases, yes. Studies have shown that issuing a protective order or arresting a person who commits an act of domestic violence does reduce future incidents of domestic violence. When perpetrators of domestic violence see that the police and court system will treat domestic violence seriously, many persons who commit domestic violence may be deterred from future violence. But orders of protection are not guarantees of protection or safety. For some individuals with intense anger or rage, no court order will stop their violence, and a court order might even add to the rage. Newspapers periodically carry stories of women murdered by their husband or boyfriend despite numerous arrests and orders of protection. The legal system cannot offer perfect protection, although it can reduce violence.

Q. Where does one turn for help in cases of domestic violence?
A. In a crisis situation, a call to the police is a good place to start. Many people complain that police do not take accusations of domestic violence seriously. That can be true in some circumstances, but on the whole, police are treating domestic violence situations more seriously, and police officers are receiving increased training on the subject. The local state's attorney or district attorney also may be able to offer some help. An increasing number of hospitals, crisis intervention programs, and social service agencies have programs to help victims of domestic violence. Agencies offering help in cases of domestic violence might be found in the Yellow Pages under "Domestic Violence Help," "Human Services Organizations," or "Crisis Intervention."

Doing business as a married couple

Q. May husbands and wives go into business together?
A. Certainly. Wives and husbands can be business partners, just as any other two people, whether related or not. They could set up a corporation and both be owners and employees of the corporation; they could form a partnership; or one could own the business and employ the other. Wages and benefits can be paid, just as they would for any other employee. If wages and benefits are being paid to a spouse or child, the amount usually should not be more than what is reasonable or a fair market value. If artificially high payments are made, the business could get into trouble with the Internal Revenue Service.

Q. Is a wife or husband liable for the other's business debts?
A. Usually, no--unless the husband or wife had co-signed on the debt or they reside in a community property state. It is common, however, for institutions that lend money to small businesses to want personal guarantees of payment from the owner of the business, and not just from the business itself. In the event the debt is not paid, lenders would like as many pockets to reach into as a possible. If the owner of the business owns a home, the lender may want to use the home as collateral for the business loan. That means that the spouse of the business owner may be asked to sign a paper allowing use of the home as collateral. Thus, the home could be lost if the business cannot pay off its debts. As long as a spouse does not co-sign for the business debts, the spouse normally will not be liable for business debts incurred by his or her mate. An exception may exist in community property states.

Q. May a couple file jointly for bankruptcy?
A. Yes. Bankruptcy provides relief for people who have more debts than they can pay.

Q. Must a working spouse provide a pension for a dependent spouse?
A. The law does not specifically require this, but most pension plans provide for it. Also, depending upon the type of pension plan, a dependent spouse is given certain rights under federal law regarding the working spouse's pension benefits.

About debt and taxes in marriage

Q. Is a husband or wife responsible for debts incurred by the other?
A. That depends on the nature of the debt as well as where the couple live. If both husband and wife have co-signed for the debt, both will be responsible for paying it. For instance, assume the husband and wife apply together for a charge card. If both sign the application form and promise to pay the charge bills, both will be responsible for paying off the balance to the credit card company or store, even if only one of them made the purchases and the other disapproved. Similarly, if a husband and wife co-sign on a mortgage for a home, both of them are potentially liable to the mortgage company, even if one of them no longer lives in the home. In community property states, a husband and wife may likewise be responsible for debts incurred by the other.

Q. Is a husband or wife liable for the debts of the other without co-signing for the debt?
A. That again depends on the nature of the debt and where the couple lives. Some states have "family expense statutes" that make a husband or wife liable for expenses incurred for the benefit of the family, even if the other spouse did not sign for or approve of the expense in advance. Still other states impose this family expense obligation by common law without a statute. Thus, if the wife charged groceries at a local store or took the couple's child to a doctor for care, the husband could be liable because these are expenses for the benefit of the family. On the other hand, if the wife runs up bills for a personal holiday or the husband buys expensive coins for his coin collection, the other spouse normally would not be liable unless he or she co-signed for the debt. Again, in community property states, a husband or wife is generally obligated for the debts of the other.

Q. Is one spouse responsible for debts the other spouse brought into the marriage?
A. Not in most states. In states that do not recognize community property, such debts belong to the spouse who incurred them. But in community property states, a spouse may, under special circumstances, become liable for the other spouse's premarital debts.

Q. Do a spouse's credit rights depend on marital status or the other spouse's financial status?
A. The law forbids denying credit on the basis of marital status.

Q. Which spouse is responsible for paying taxes?
A. If each spouse's name appears on a state or federal personal income tax return, both parties signing the return are liable for the taxes. If a couple files jointly, the Internal Revenue Service generally holds each one responsible for the entire debt. A spouse who files as married filing separately is not responsible for the other's debt.

Q. Do the tax laws penalize married couples?
A. That depends on the tax bracket of each person. If one has a high taxable income and the other a relatively low taxable income, they will generally pay less income tax if they are married and filing a joint return than they would pay if single and filing as single persons. They also will pay less by filing a joint return than by filing separate returns (as married persons). For couples in which both wife and husband have a high income, the total tax will be higher for those who file jointly.

Years ago, there were stories about financially well-off married couples who would go to the Caribbean each December, obtain a divorce, file tax returns as single persons for that year to save money, and then remarry in the new year. Such a practice could be regarded as tax fraud. In any case, the savings are not as great as they were in years past.

Q. May one spouse make a tax-free gift to the other spouse?
A. A person may give his or her spouse any amount of money without paying federal gift taxes if the spouse is a U.S. resident. However, it must be an outright gift or set up as a proper trust. Most, but not all, state laws have done away with taxes on gifts between spouses. But the same is not true with respect to gifts to other family members. Gifts to children or other relatives may be taxable if they exceed a certain amount per year.

Your non-taxable estate

A person’s non-taxable estate consists of assets over which the decedent had no control at death. This includes assets transferred before death, with the exception of life insurance policies transferred within three years of death.

As you will learn in the following section of this topic, your taxable estate is a broader category than your non-taxable estate. Basically, the only assets that would be included in your non-taxable estate would be those assets exempt from taxation by either state or federal law.

Sometimes life insurance death benefits are not taxable for state inheritance tax purposes if payable to someone other than your estate. Indiana has a statute that makes this provision for inheritance tax purposes.

Another example is property transferred less than three years before your death. Federal law will not count property as part of your taxable estate for estate tax purposes unless the property transferred is a life insurance policy (unless you retained some interest in the property). Indiana, however, will include the value of assets transferred within one year of death for purposes of Indiana inheritance taxation.

YOUR TAXABLE ESTATE: OBVIOUS ASSETS

A person’s taxable estate consists of assets over which the decedent had a specific degree of control. Whatever property you control or have a degree of control over is part of your taxable estate. Let’s look at these examples:

• If a husband owns a home in his name alone, the home is probate property, because he has not designated a beneficiary on the title and a probate court will have to determine who becomes the beneficiary. The house also will be a part of the husband’s taxable estate to the extent of 100 percent of the house value, because the husband owned 100 percent of the house.
• If a husband and wife jointly own the home, the home is not considered probate property because the surviving spouse will own the property when the other dies. The house will be included in the taxable estate of the first to die to the extent of just 50% of the house value because the surviving spouse owns the other 50%. As a result of the unlimited marital deduction, however, this transfer will be tax-deferred.

Notice how the title to the house is the controlling factor when it comes to deciding whether or not the house is in the taxable estate of the owner and whether it is in the owner’s probate estate.

Probate and non-probate estates compared

When planning your estate, you need to be mindful of which assets will be passing at your death through the probate court system and which will pass directly to some other person without court involvement. These two categories, probate and non-probate, are of fundamental importance in estate planning. The following definitions and examples will help you see the difference between these two categories of property.

YOUR PROBATE PROPERTY

Probate is a process created by state law that determines heirship, provides a means for paying creditors, and provides for an orderly distribution of assets. A person’s probate estate consists only of assets owned by the person that must pass through the probate court system to eventually reach the heirs. The assets included in this system include property that is:

• Individually owned.
• Owned jointly as tenants in common, which is property held by two or more owners without rights to survivorship.
• An asset payable to no designated beneficiary.
• An asset payable to the owner’s estate.

You’ll read more about these various types of assets in subsequent posts. What they all have in common is that you haven’t designated anyone to inherit the asset or designated a joint owner and thus you’ve left it to the probate process to determine ownership after your death.

YOUR NON-PROBATE PROPERTY

By contrast, non-probate property consists of everything else, including the following:

• Assets held as joint tenancy with right of survivorship, which is a form of ownership in which, upon the death of one co-owner, the surviving named co-owner(s) shall become full owner(s) of the asset.
• Assets payable to a named beneficiary other than the estate. Many people are confused because they think the term “estate” refers to both probate and non-probate. They also think it describes both a taxable and non-taxable estate. As you’ll come to understand, each term refers to a different category of property.

FInancial matters during marriage - Ownership of property...

Q. Which spouse owns what property in a marriage?
A. Most property that is acquired during the marriage is considered marital or community property. For example, the wages earned by both husband and wife during the marriage are considered marital property. If one or both spouses buy a house or establish a business during the marriage, that usually will be marital property, particularly if the house or business is purchased with the husband's and wife's earnings.

Separate property is property that each spouse owned before the marriage. It also includes inheritances and gifts (except perhaps gifts between spouses) acquired during marriage. During the marriage (and afterwards), each spouse usually keeps control of his or her separate property. Each spouse may buy, sell, and borrow money on his or her separate property. Income earned from separate property, such as interest, dividends, or rent are generally separate property. However, in some states that recognize community property, these profits may become marital property.

Separate property can become marital property if it is mixed with marital property. If, for example, a wife owned an apartment building before the marriage and she deposited rent checks into a joint checking account, the rent money probably would become marital property, although the building is likely to remain the wife's separate property as long as she kept it in her name. If the wife changed the title on the building from her name alone to the names of both herself and her husband, that probably would convert the building into marital property. In addition, if one spouse put a great deal of work into the other spouse's separate property, that could convert the separate property into marital property, or it could give the spouse who contributed the work a right to some form of payback. A later section in this chapter will discuss how courts divide marital property in a divorce.

Q. May a couple own property together?
A. Yes. In community property states, this occurs automatically. Ten states—Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, as well as Puerto Rico—use the community property system. These jurisdictions hold that each spouse shares equally the income earned and property acquired during a marriage. This is true even if one spouse supplied all the income. In the other states, spouses probably share property under one of the following three forms of co-ownership:

• Joint Tenancy. A form of ownership that exists when two or more people own property that includes a right of survivorship. Each person has the right to possess the property. If one partner dies, the survivor becomes the sole owner. Any two people--not just spouses--may own property as joint tenants. A creditor may claim the debtor's interest in joint tenancy property.
• Tenancy by the Entirety. Allowed only in some states, this is a type of co-ownership of property by a husband and wife. Like joint tenancy, it includes a right of survivorship. But a creditor of one spouse may not "attach" (seize) the property. Each party usually must consent to the sale of the property. Divorce may result in a division of the property.
• Tenancy in Common. This form of co-ownership gives each person control over his or her share of the property, and the shares need not be equal. The law does not limit tenancy in common to spouses. A tenancy in common has no right of survivorship; when one spouse dies, his or her share passes to the heirs, either by will or state laws.

Tenancy rules vary from one state to another. Some tenancies are complex and must be created in a precise manner, otherwise the courts may not enforce them.

Living together outside of marriage

Q. Can two people live together without being married?
A. Of course. The Census Bureau reports that such arrangements are quite common. Some zoning laws do prohibit more than three unrelated persons from living together in one house or apartment, but two unrelated people generally can live together anywhere they want. A few states still have laws on the books prohibiting "fornication"--sexual relations between a man and woman who are not married--but such laws are virtually never enforced. Some states also have laws against "sodomy" which, among other things, prohibit sexual relations between people of the same sex. Those laws are rarely enforced if the conduct is private, consensual, and between adults (although in 1986, the United States Supreme Court in a divided decision did uphold a Georgia law criminalizing private sexual relations between two men.)

Q. May two people who are living together enter into agreements about sharing expenses or acquiring property?
A. Yes. The law allows people to enter into many types of contracts. If two people want to agree about who will pay what and how they will share in property that they might acquire, such an agreement can be valid and enforceable by courts in most states. From a legal standpoint, it is best to make the agreements specific and in writing. An oral agreement might be enforceable, but it is more difficult to prove. Each party to the agreement should give some benefit to the other party, such as agreeing to pay a certain portion of expenses. If an agreement looks as though it is only creating a gift from one party to the other with the recipient giving nothing in return, the agreement might not be enforceable.

Q. Will a court enforce an agreement by which one unmarried partner agrees to keep house and the other promises financial support?
A. Probably not. To begin with, such agreements rarely are in writing, so they are hard to prove in court. Second, to the extent that one person is promising financial support to the other, that promise usually is contingent on a continuation of the relationship. If, for example, one partner says, "I'll take care of you," the statement may be too vague to be enforceable; if it means anything, it probably means something along the lines of "I'll support you financially as long as we are living together." So, if the couple breaks up, a court probably would not find an enforceable promise for continued support.

There is a potential third problem: if a court thinks an agreement amounts to providing financial support in exchange for sexual relations, the court will not enforce it. Such an agreement is uncomfortably close to a contract for prostitution.

Courts are more inclined to enforce agreements for tangible items, such as payments of expenses or rights to property. A promise of housekeeping services or emotional support for a partner may be sincere, but it is much more amorphous than a promise to pay half the phone bill or share the proceeds of a condominium sale.