NEW YORK (CNNfn) - To love, honor and cherish till death do you part. You took the vows. You meant them. But that doesn't mean you should fork over every penny from the pot your parents leave you.|
In fact, it might be smart if you didn't.
Otherwise your heirs might have to pay more in estate taxes than they should. And, unless you plan carefully, you may forfeit control over money you want to leave to your kids if your spouse remarries after you die.
For many couples, inherited money can vastly improve their quality of life and relieve some of their financial burdens. If that's the case, it may make sense to throw that money into the marital pool -- to pay for your kids' college education, for instance.
But sometimes, it pays to keep some or all of the money in your own name.
"Very often people put things in joint name. ... But when you put things in a joint account, you lose control of them. It becomes tainted," said lawyer Charles Nance.
Obviously this becomes an issue if you get a divorce, because tracing who owns what becomes that much more difficult. When that's the case, "the advantage goes to the lawyers in the end," said Shiel Edlin, an attorney in Georgia.
But sharing-and-sharing-alike also can be a disadvantage for couples that stay together, especially if there is an unequal distribution of assets between them.
"Equalize your estates to minimize your estate taxes," certified financial planner Sheryl Rowling advised.
Why it sometimes pays to separate
Say a couple with two kids has $500,000 in joint assets and the husband holds another $500,000 in his own name. Under property law, when one spouse dies, all assets held jointly go directly to the surviving spouse tax-free and become part of his or her estate.
Thus if the wife, who has no solely owned assets, inherits $675,000 from her parents, it makes sense for her to keep it in her own name. That way, if she dies first, her estate would be worth the full lifetime credit amount of $675,000 that is exempt from estate taxes. And, in her will, she can earmark that money to be put in a Bypass Trust, which can be used by her husband and kids free of estate taxes, said estate planning attorney Roger Levine.
If the wife puts her inheritance into a joint account and dies before her husband, the full amount would roll into his estate -- making it worth $1,675,000.
Then, if her husband dies soon after her, the taxable portion of his estate would total $1 million -- his $500,000 in assets plus their jointly held $500,000 plus her $675,000 inheritance minus the $675,000 exemption. Had his wife kept her inheritance, the taxable portion of his estate would only be $325,000.
The benefits of trusts
There's another advantage to keeping your inheritance separate from the family pool. You have greater say over how the money is distributed after you die.
Simply leaving money to your wife in a will, for instance, may mean her second husband's children receive it after she dies instead of your own. However inadvertent, "it's one way you get disinheritance of people," Nance said.
But, he added, if you set up a few trusts, you can "give care and feeding instructions," specifying who gets what and when.
If your assets far exceed $675,000, to protect your family you can specify that a living trust split into a Bypass Trust as well as a Marital Trust at the time of the first spouse's death, experts said.
The Bypass Trust can contain assets up to the lifetime exemption amount, which will increase gradually to $1 million by 2006. That way it will be entirely exempt from estate taxes, even after the second spouse dies.
A Marital Trust can be created to safeguard assets for your kids, meaning your spouse would be prohibited from using them for the purposes of, say, a second marriage.
As with all estate planning, the best rule of thumb is: Don't try this at home.
Inheritance laws can vary from state to state and the best solutions require the services of a good estate lawyer and financial planner.
Preserve the money and your relationship
It also pays to remember that inheritances, like most things financial, may bring up strong emotional responses in partners, even if intellectually they want what's best for the family.
"All sorts of issues of trust, values and priorities come up," said Katherine Gibson, co-founder of The Inheritance Project.
An inheritance, particularly a sizeable one, can drive an emotional wedge between a couple, especially "if they've been mix-and-merge all along," Gibson cautioned.
But remember, she said, money doesn't cause problems -- "it becomes a magnifier of issues that already exist in a marriage."
That's why it pays to talk about inherited money with your spouse and let him or her have input as to how it's handled, even if the final call is yours. This is especially the case if you want to leave some of the money to the children you've had together.
"The more you can include the people who'll be affected, the more you reduce the chances of emotional fallout," Gibson said.
And if you're in a good marriage, marked by respect and trust, the decision to keep the money in one person's name or in a trust can be viewed as the business decision that it is.
"View this as a technical decision that has financial benefits," Gibson said.