Financial & Estate Planning For The Dual Income Family
By William K. Hayes
In today’s world, it is more common than ever to find dual income households. Recent
estimates by the Department of Labor find that women comprise around 47 percent
of the American workforce. Compare this percentage to 1960 accounts estimating women
in the workplace at around 33 percent. Because of the proliferation of working women,
special planning is necessary to properly address the issues faced by households
where both spouses work.
Although also true for single income households, the need for life insurance should
particularly be evaluated when both spouses work. Life insurance can provide a means
to replace a wage earner’s salary in the event of an untimely death. The necessity
becomes even more evident in the case of a simultaneous death. Life insurance could
be the only means of providing income to dependent children for their own care,
replacing their parents’ incomes.
Additionally, it is common for both spouses to share childcare and household responsibilities.
Upon the death of one spouse, the survivor may need to hire additional help to care
for dependent children and perform everyday household duties, in order to be able
to continue working. Proceeds from the deceased spouse’s life insurance policy can
provide added funds to pay the cost of such extra costs while allowing the surviving
spouse the freedom to continue working.
Life insurance can also provide estate liquidity upon the death of one of the spouses.
In the typical estate plan, no federal estate taxes are due upon the first spouse’s
death because of the Unlimited Marital Deduction. However, federal or state estate
taxes may be due, such as in a simultaneous death situation, or when a large amount
of assets are given to the children of a prior relationship. In these and other
similar situations, life insurance combined with an Irrevocable Life Insurance Trust
can provide a way to pay the federal and state government, while not forcing your
heirs to sell off assets to pay taxes.
Irrevocable Life Insurance Trust
The creation of an Irrevocable Life Insurance Trust is vital considering the many
important uses of life insurance in a dual income household. This is an estate planning
technique used to ensure that life insurance proceeds will not be subject to federal
estate tax. Quite simply, a trust (or multiple trusts) is created to be the owner
of any insurance policies on the spouse’s lives. As the insured spouse no longer
owns the policy, the policy is not taxed in his or her estate. It can be used effectively
to reduce the size of the taxable estate and to provide a source of tax-free funds
that may be used to pay any death taxes due at the death of the insured.
Similar to the need that arises with the death of a spouse, where one spouse becomes
disabled, the family unit ends up losing that spouses income, possibly replaced
only partially or temporarily by government assistance. Additionally, added expenses
will oftentimes be incurred due to the disability, such as the need to hire in-home
care for the disabled spouse. Disability insurance can be a source of income replacement
allowing the survivor to continue paying the family expenses, and can provide added
income for new expenses that may arise from the disability.
Where both spouses work, it is generally more economical to choose to participate
in only one employer’s medical plan, rather than purchase potentially duplicative
coverage through both spouses’ employers. Therefore, it is necessary to thoroughly
evaluate the scope and cost of each plan and to choose the one that more appropriately
meets the family’s particular needs. It is important to keep in mind that once participation
is declined, there usually are specific windows of time in which an employee can
enroll in the medical plan (except where due to the death or unemployment of a spouse).
Therefore, switching between providers may cause a delay in coverage and could possibly
subject you to health screenings and pre-existing condition limitations.
“Sprinkling” Credit Shelter Trust
A Credit Shelter Trust (also called a Family Trust or the “B” Trust) is commonly
used in tax planning. As its name suggests, it shelters the amount (termed the Applicable
Exclusion Amount, or “AEA”) that a person may transfer estate tax-free ($675,000
in the year 2001, escalating to $1,000,000 by the year 2006). Without this or a
similar type of segregation of the AEA, a married couple could lose the AEA of the
first spouse to die.
Generally, the Credit Shelter Trust is created with the surviving spouse as the
beneficiary, with the remaining assets going to the deceased spouse’s heirs upon
the survivor’s death. However, in households where both spouses work, upon the first
spouse’s death the survivor may not need all the assets from the deceased spouse.
This could occur because the survivor continues to work after the decedent’s death,
earning enough income to fulfill his or her needs, or because the survivor has built-up
his or her own wealth throughout the years. Whatever the reason, proper planning
takes this into consideration.
Where this is the case, the Credit Shelter Trust can be structured to provide the
survivor with access to the decedent’s funds, yet allow the funds to accumulate
should the survivor not need them. This is accomplished through the use of a “Sprinkling”
power. The Trustee of the Credit Shelter Trust is granted the power to distribute
assets to the Survivor as he or she deems necessary. Upon the death of the survivor,
the assets are distributed according to the deceased spouse’s wishes. The survivor
is left with the security of knowing that the deceased spouse’s assets are available
to him or her, should the assets be needed, while at the same time, having the discretion
to let the assets accumulate in the trust for the heirs if the assets are not needed.
There are many planning options available and necessary for the dual income household.
Inaction could prove costly to you and your loved ones, especially in households
that rely upon both spouses’ income. To discuss these and other areas of concern,
contact a qualified attorney specializing in estate planning. Don’t be caught unprepared.
William K. Hayes is a member of the prestigious American Academy of Estate Planning
Attorneys and has been engaged in the practice of law for the last 31 years. The
Hayes Law Firm specializes in Trusts, Probate and Asset Protection Planning for
professionals and small business owners.