Do you and your spouse still have "I Love You" wills? If so, then you are missing out on some incredible estate planning opportunities, including estate tax planning, asset protection planning, and keeping your property in your family instead of allowing it to get into the hands of a second or later spouse's family.
What Is an I Love You Will?
An "I Love You" Will is a simple type of Last Will and Testament that is commonly used by married couples when their financial situation does not warrant the need for estate tax planning through the use of AB Trusts or ABC Trusts.
For example, each spouse's Last Will and Testament will contain the following type of language:
"Upon my death, I leave my entire estate to my spouse, outright and free of trust."
Advantages of Going Beyond Simple I Love You Wills
For married couples with taxable estates, planning beyond simple I Love You wills is recommended in order to minimize or completely avoid estate taxes at the state and/or federal level. Instead of leaving all of the deceased spouse's assets outright to the surviving spouse through an I Love You will, estate tax reduction or elimination can be achieved through the use of AB Trust or ABC Trust planning.
But with the federal estate tax exemption currently sitting at $5 million, the values of estates shrinking, and the new concept of "portability" of the estate tax exemption between spouses, many people are falsely being led into believing that AB Trust or ABC Trust planning is no longer a necessary part of their estate plans. Aside from the obvious disadvantages of eliminating AB Trust or ABC Trust planning in states such as Maryland, New Jersey, New York and Ohio that collect state estates taxes and have very low estate tax exemptions, there are several other reasons why going beyond basic I Love You Wills should be considered by married couples:
- Asset Protection Planning - Using AB Trusts or ABC Trusts does not mean that you have to fill up the A, B, and/or C Trusts (how much will need to be funded into each separate trust will depend on the value of the estate of the first spouse to die). What it does mean is that the A, B, and C Trusts are all irrevocable trusts, and so any assets owned by the A, B or C Trust will not be considered the surviving spouse's own separate property and will therefore be protected from creditors and lawsuits. What this means is that if the estate of a married couple is not taxable, then they can still take advantage of the asset protection benefits of the B Trust even if it is the only trust that needs to be funded after the first spouse dies.
- Divorce Protection Planning - What can happen if the surviving spouse is left everything through an I Love You will and then the surviving spouse ends up remarrying without entering into a prenuptial agreement? Then the initial couple's assets will become vulnerable to the new spouse's claims if the second marriage ends in divorce. This can be avoided through the use of AB Trusts or ABC Trusts for the same reasons that these trusts provide asset protection - these trusts are irrevocable and are not considered the surviving spouse's own separate property, so the assets held in trust will not be subject to division in a divorce settlement.
- Keeping Assets in the Family - What else can happen if the surviving spouse is left everything through an I Love You will and then the surviving spouse ends up remarrying without entering into a prenuptial agreement? Then the surviving spouse is free to make a new I Love Will with their new spouse and leave everything to the new spouse instead of to the initial couple's own children or other beneficiaries. This can be avoided with the use of AB Trusts or ABC Trusts since these trusts can be drafted to take care of the surviving spouse during his or her remaining lifetime but also to protect the principal for the benefit of the deceased spouse's children or other beneficiaries after the surviving spouse dies. This is particularly important when each spouse has a different set of final beneficiaries.
- Estate Tax Planning - Who knows what will happen with the federal estate tax and this new concept of "portability"? While the federal estate tax exemption is currently sitting at $5 million, it is scheduled to decrease significantly to a $1 million exemption on January 1, 2013, and "portability" of the estate tax exemption between spouses is also set to disappear on this date too. Even with all of this uncertainty, the B Trust will not be subject to estate taxes when the surviving spouse dies regardless of what the estate tax exemption is at that time or whether portability of the exemption will still be available, so the B Trust will be important if the estate tax exemption is allowed to revert back to $1 million - then there will not be any possibility that an estate tax will be due on the B Trust even if the surviving spouse's own estate ends up being taxable.
What You Should Do
For all of these reasons, "I Love You" Wills should only be considered by married couples in very limited circumstances. So if you and your spouse still have "I Love You" Wills, then you should meet with an estate planning attorney to discuss all of your options.
