01.21.15

Wealth Management Group Newsletter – Winter 2015
Dan Newman, Amanda Cenzer

Discussing Finances with Your Spouse
Dan Newman, CPA

When two spouses do not see eye to eye on money, it can trigger more than the occasional unpleasant conversation. According to a Utah State University study, married couples who reported disagreeing about financial matters once per week were significantly more likely to divorce than those who reported financial-related disagreements less often.

The secret to sidestepping financial conflict is the same as managing other sources of tension that might arise in a marriage. It involves frequent, open and honest conversations, while maintaining a shared commitment to a solution.

Action Steps
Developing communication strategies can bridge potential divides before they become chasms and can strengthen both your relationship and your finances. They include the following:

Discuss Finances Early On The best time for difficult conversations about money is before you commit to major life decisions with financial implications. Especially if you are relatively early into your marriage and have never shared finances before, you may not be fully aware of the potential sources of money-related conflict that can await you. Regardless of how long you have been together, it is imperative to discuss both your near and long-term financial goals.

Manage Spending Different spending and savings styles can be a big source of conflict among spouses. This is especially true if one makes big purchases without the other’s consent. To maximize each person’s independence while minimizing the potential for serious disagreement about his or her choices, consider implementing an automatic spending threshold. For example, anytime you want to spend $500 or more, talk it over with your partner first. The amount is not the important part — it is the principle that you are both in this together.

Share and Share Alike When it comes to your financial accounts, operate on a full-disclosure policy. You should both understand what you own and what you owe, how much you make, and how much you have saved. In addition, both of you should have equal access to bank, investment, mortgage and loan account statements.

Think About Education The type of education to pursue for your children and how much to spend are big financial decisions. But they can also be emotional issues, especially if you and your partner have fundamentally different views shaped by your own experiences. For example: Do you favor public or private elementary school? Would you prefer an in-state public college or an expensive private or out-of-state university? Will you pick up the full cost of college and/or graduate school, or should this be your child’s responsibility, at least in part? Rather than assume you and your spouse will be in agreement, discuss these issues well before it is time to begin paying tuition.

Consider Retirement Scenarios Successfully making it to retirement involves a series of important financial decisions. Will you and your spouse retire at the same time? How do you want your retirement to look? Do you both plan to continue working in some capacity? These are all lifestyle questions with big financial assumptions behind them. If you dream of leaving your job early to travel the world, while your spouse wants to earn more wealth to assure a comfortable old age or to give to future generations of loved ones, you will need to hammer out a compromise early enough to shape your retirement  plan accordingly.

Take the Numbers at Face Value If you are considering a major purchase, or wondering whether you need to save more to achieve your shared retirement goals, you may be able to sidestep emotional discussions by doing some simple math. Often it takes the cold, hard logic of a spreadsheet before you realize whether what you want is possible given your financial situation, or whether you will need to save more to make it so.

Go on Auto-Pilot Once you and your spouse agree about how often to save and invest, move that decision from theory to practice by automating as many of your financial decisions as possible. For example, if you both agree to save $2,000 per month, set up an automatic investment plan with your financial institution to ensure this agreement actually takes place.

Talk Having just the occasional conversation about your finances may not be enough. Your financial situation is constantly evolving, so planning regular discussions can help you both stay on the same page. Another worthwhile option is for you and your partner to attend regular meetings with your financial advisor, so that you both always know where you stand.

Make the Commitment
Money conflicts between spouses do not go away. If they are problems now, they will likely grow bigger over time until you are ready to address them together, openly and honestly. But the good news is that, when you do, you are setting the stage for a healthier financial plan and a healthier marriage.

For questions, contact Dan Newman at dnewman@orba.com or call him at 312.670.7444. Visit orba.com to learn more about our Wealth Management Group.


Exemption Portability vs. A Credit Shelter Trust
Amanda Cenzer

A major advantage of current federal tax law is that estate tax exemption “portability” is now permanent. Portability simplifies estate planning by allowing a surviving spouse to use the deceased spouse’s unused portion of the $5.34 million for 2014 ($5,430,000 for 2015) gift and estate tax exemption amount.

This means that married couples can maximize the benefits of their combined exemptions without the need for sophisticated estate planning involving multiple trusts. However, for many people, particularly the affluent, more-sophisticated strategies — such as a credit shelter trust — might still be more beneficial.

How Does Portability Work?
If one spouse dies and his or her estate tax exemption is not entirely used at death, the estate can permit the surviving spouse to use the deceased spouse’s remaining exemption. The surviving spouse can use that amount, in addition to his or her own exemption, to make tax-free transfers during lifetime or at death.

However, portability is not as simple as it may first appear. For one thing, portability is not automatic. The executor of the deceased spouse’s estate must make an election on a timely filed estate tax return, even if a return would not otherwise be required. Keep in mind that filing an estate tax return is a complex endeavor which will require additional time and consideration. Additionally, special rules apply to surviving spouses who are predeceased by more than one spouse.

Also, if your estate plan includes bequests to grandchildren, remember that the generation-skipping transfer tax exemption is not covered by the portability provision.

Benefits of a Credit Shelter Trust
While portability has its share of complexities, it is still simpler than a credit shelter trust (sometimes referred to as a “bypass” trust). Nevertheless, creating such a trust can be a better alternative. Why? Because a credit shelter trust offers a major advantage over portability: It can protect future appreciation on the trust’s assets from estate taxes.

If you and your spouse have estates that exceed the combined exemption amount threshold ($10.68 million for 2014 and $10.86 million for 2015) or may do so at some point in the future, a credit shelter trust remains the most effective strategy for minimizing estate taxes.

When assets are placed in a credit shelter trust on the first spouse’s death, their value is frozen for estate tax purposes. This means that any future appreciation on those assets bypasses your surviving spouse’s estate. But if you rely on portability, future appreciation will be included in your spouse’s estate. This could trigger significant estate tax liability.

Even if you and your spouse’s combined estate is unlikely to ever exceed your combined exemption, trust planning offers important benefits such as:

Asset Protection Portability allows you to leave your wealth to your spouse outright without wasting your estate tax exemption. But it does nothing to protect those assets from your spouse’s creditors or financial mismanagement. Well-designed and managed trusts remain the most effective way to protect your assets and preserve them for future generations.

Remarriage Protection Trust planning ensures that your children are provided for, even if your spouse remarries. A credit shelter trust can prevent your spouse from spending your children’s inheritance on his or her new spouse or on children from the subsequent marriage. It also avoids the potential loss of portability benefits in the event your spouse’s new spouse dies. Portability is available only for a person’s most recently deceased spouse. If your spouse remarries and his or her new spouse dies, portability will be limited to the new spouse’s unused exemption — which could be little or nothing.

Generation-Skipping Transfer (GST) Tax Planning The GST tax exemption ($5.34 million for 2014 and $5.43 for 2015) is not portable. So if you and your spouse wish to maximize your GST exemptions for bequests to your grandchildren, you will have another reason to consider trusts.

Do not forget state estate tax planning. Unless your state’s law recognizes portability for estate tax purposes, you may need to use trust planning to preserve your state exemption amounts.

Plan Carefully
Portability has the benefit of simplicity, but before you rely on it, review your situation and consider whether you would be better off with a credit shelter trust. If you decide to rely on portability, keep in mind that it is not automatic. A surviving spouse can take advantage of portability only if the deceased spouse’s executor makes an election on a timely filed estate tax return.

For questions, contact Amanda Cenzer at acenzer@orba.com or call her at 312.670.7444. Visit orba.com to learn more about our Wealth Management Group.

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