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.
Life Insurance
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.
Disability Insurance
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.
Medical Insurance
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.
