How Would You Leave Your $3 Million Estate For Your Spouse?

So Jack and Jill are 64 years old. They’ve been married for 40 years and they have two adult children. Jack and Jill have a $6 million total estate and the way their estate is arranged, Jack and Jill each have an estate of $3 million.

Jack and Jill have an important estate planning decision to make regarding how they leave their estate to each other when the first spouse dies. During an estate planning design zoom meeting that Jack and Jill have with their estate planning attorney, Jack confirms his options by saying, “So if I die before Jill, one of my options is to leave my $3 million in trust for Jill’s lifetime. Jill can be the trustee of that trust after I die, and Jill can make distributions to herself, out of my share, for her health, education, maintenance and support. What I like about leaving my portion of the estate in trust when I die is that I have assurance," Jack says, "that when Jill later dies, my remaining assets will immediately revert to our two children. Because I’m leaving my portion of the estate to a trust, Jill won’t be able to leave my portion of the estate to her next husband or anyone else."

Jack says, “Leaving my assets in trust when I die provides more protection for my children than just leaving my estate to Jill outright. Even if I leave my portion of the estate in trust, Jill will be able to do whatever she wants with her $3 million, but I’ll know that what’s left of my estate when Jill later dies is going to go to our children, which is exactly what I want. I really like the protection aspect for our children, but from a tax perspective, if I go that route, my assets will not get another step-up in basis when Jill dies. Only the assets that Jill owns when she dies will get a step-up in basis when Jill later dies, and Jill might live for 20 or 30 years after I die - that could be a lot of appreciation that would be subject to the capital gains tax when our kids later sell assets! That’s the one piece of leaving it to a trust that I don’t like because I’d like to keep as much of my estate in the family and out of the government’s hands. I’m not crazy about the fact that the trust assets would not get another step-up in basis when Jill later dies."

"So," Jack says, "I think I understand that my second option is to just leave my portion of the estate to Jill outright." Jack says, “I like the simplicity of that. I also like," Jack says "that, because everything will be included in the estate of the surviving spouse, our entire estate will get a step up in basis when the surviving spouse dies - that could save our kids a lot of capital gains tax. But I’m a little reluctant to just leave my estate outright to Jill when I die because if, in her remaining years she gets influenced by a suitor or a swindler, Jill could leave our entire estate to people other than our kids." Jack continues, “I love the double step-up in basis that results from leaving ownership of the entire estate to the surviving spouse, but if Jill makes a mistake after I die, either intentionally or unintentionally, our kids could wind up with nothing, and I’d roll over in my grave if that were to happen. What should Jack and Jill do? Put your answer in the comments. And let's assume that this isn’t a federal estate tax question. Under either option along with the use of something called a portability election, Jack and Jill, either way, will be able to shield two times the current $13.61 million estate tax exclusion amount from the 40% federal estate tax.

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