Avoiding Passing Assets to Spouse on Death

Question:  I wish for my estate to pass to my children upon my death and bypass my spouse.  Are there any obstacles I need to be aware of?

Answer:  Various laws create rights for surviving spouses upon death.  While a complete discussion of this subject is beyond the scope of this excerpt, there are steps you can take to accomplish your objective.

Assets titled in an individual’s name, so-called probate assets, pass pursuant to the individual’s Will upon death.  The State of Illinois grants a surviving spouse the right to renounce a deceased spouse’s Will and receive a portion of the deceased spouse’s estate.  That is, even though your Will may leave assets to persons other than your spouse, your spouse can renounce the Will and claim his or her “forced share right” and receive a portion of your estate.  The forced share right extends to one-third of your probate assets if you have descendants and one-half of your probate assets if you do not have any descendants.

One would hope that your spouse will respect your testamentary wishes and not seek to thwart your intentions upon your death. If you do not wish to leave this to chance, you can circumvent your spouse’s forced share right through the creation and funding of a so-called living trust.  Basically, a living trust is a trust which you create during your lifetime and over which you retain full control of the trust assets while you are alive and able to manage your affairs.  Upon your demise, your living trust serves as a Will substitute and passes your assets to your beneficiaries just as would be the case with a Will.   However, Illinois law provides that living trust assets are not subject to a spouse’s forced share right.  Although based on a dated court decision, the case has not been overruled and is still the law of the State of Illinois.  Therefore, by retitling your assets in the name of your living trust, your spouse will not have the right to claim a share of these assets upon your death.

Generally speaking, the same concern does not apply to non-probate assets or assets which do not pass by virtue of your Will.  Life insurance policies and assets held in an individual retirement account (“IRA”), for example, pass to beneficiaries that are designated by the policy or IRA owner and generally do not pass pursuant to probate.  If you fail to designate a beneficiary of a life insurance policy or IRA, however, the policy proceeds or IRA assets may by default be paid to your estate and pass by your Will, subject to your spouse’s forced share right.  A properly-prepared beneficiary designation will avoid this consequence.

Assets held in the form of ownership known as “joint tenancy” also pass upon your death outside of your Will. By law, assets which are held in joint tenancy pass to the surviving joint owner upon the death of one joint owner, regardless of what your Will provides, thereby creating an opportunity to pass assets to someone other than your spouse. Bear in mind that there are concerns with the use of joint tenancy assets for this purpose.  There is a body of law which holds that assets that are titled in joint tenancy, particularly bank accounts, may be deemed to be so titled merely for the convenience of the decedent and therefore pass pursuant to the decedent’s Will. Another concern with the use of joint tenancy ownership is that both joint tenants are deemed to be owners and a person listed as a joint tenant owner may be able to take ownership of some part or all of such asset.  Creditors of a joint tenancy owner may also assert a claim to such funds which may be problematic for you if the other joint owner has significant creditors.

Challenges also arise with respect to assets held in qualified retirement plans such as profit sharing plans, 401(k) plans and pension plans.  The law generally provides that upon the death of the plan participant, the plan assets of the deceased participant must be paid to the plan participant’s surviving spouse unless the surviving spouse executed a written waiver of the right to such payment during the participant’s lifetime.  If the surviving spouse did not waive such payment right, then all qualified retirement plan assets must be paid to the surviving spouse upon the participant’s death.

One means of avoiding this consequence is for assets held in a participant’s qualified retirement plans to be transferred to an IRA upon the participant’s retirement or other termination of employment during the participant’s lifetime.  Some qualified retirement plan assets require a spouse’s consent to transfer such assets to an IRA although most profit sharing and 401(k) plans do not. Once the assets find their way into an IRA, they can be paid to the IRA owner’s designated beneficiary upon death generally free from the claims of the surviving spouse.

There are many laws that create rights for surviving spouses that could prevent you bypassing your spouse as a beneficiary of your estate. A comprehensive, well-designed arrangement can be implemented which will largely permit you to accomplish your objective.

The Tax Corner addresses various tax, estate, asset protection and other business matters.  Should you have any questions regarding the subject matter, you may contact Bruce at (312) 648-2300 or send an e-mail to [email protected].

CIRCULAR 230 Notice:  In order to comply with requirements imposed by the Internal Revenue Service, we wish to advise you that (a) any U.S. federal tax advice contained in this communication is not intended and cannot be used for the purpose of avoiding tax-related penalties, and (b) no one, without prior written consent, may use any advice contained in this transmission in promoting, marketing, or recommending any entity, investment plan, or arrangement to another taxpayer.

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