Title transfers on death of spouse

Mybroker has recommended that I put all of my real estate and investment accounts in joint names to make it easy to transfer title to assets at the death of the first spouse.

My broker has recommended that I put all of my real estate and investment accounts in joint names to make it easy to transfer title to assets at the death of the first spouse. Recently, I heard this might not be a good idea from an estate-planning standpoint. Is this correct?

Yes. Under current tax law, each spouse can transfer up to $1,500,000 of assets, free of death taxes, to the next generation. However, if all assets are titled jointly, in most states, they will pass automatically to the surviving spouse at the death of the first spouse, and no assets would remain to utilize the tax-free transfer amount.

In most cases, doctors are better off establishing a revocable “living” A/B trust. Under this arrangement, at the death of the first spouse, the tax-free transfer amount ($1,500,000 currently) passes into a family credit shelter trust. Under the terms of this trust, the surviving spouse typically has the right to all of the income - plus whatever principal is required - to maintain his or her standard of living. At the death of the surviving spouse, the amount remaining in this trust passes tax-free to the children, at whatever ages you predetermine.

The balance of the assets in the estate typically goes into a marital deduction trust. Under the terms of this trust, the surviving spouse receives all of the income, plus whatever principal is required to maintain his or her standard of living. The difference is that at the death of the surviving spouse, any assets remaining in the marital deduction trust will be included in his or her estate for death tax purposes.

I have been in practice for three years, and I am now ready to set aside some money for retirement savings. I am interested in establishing a SIMPLE-IRA. I would like to know how much I can contribute to this plan for myself and my wife, who works in the practice with me.

The 2005 limit for salary-reduction contributions to a SIMPLE-IRA plan is $10,000. Doctors age 50 or older are allowed to make an additional “catch-up” contribution of $2,000 for a total of $12,000. In addition, the practice can make a matching contribution equal to 3 percent of your net practice profit.

Several years ago, we purchased a lot adjoining our current personal residence and have used it as a play area for our children. A few weeks ago, we received a very lucrative offer to sell this property. Is there any way that the gain from this sale can be excluded from tax as a gain from the sale of a personal residence?

Not unless you sell your personal residence within two years of selling this lot. In that situation, you can treat the two transactions as a single sale and escape tax on up to $500,000 of the combined gain, assuming you are married and have owned and lived in the home as your personal residence for at least two of the five preceding years.

In the event you sell your home within the two-year timeframe - but not during 2005 - you will first have to pay tax on the profit from the lot sale. Thereafter, if your personal residence is sold, you can file for a refund after selling this property.

I incorporated my dental practice last year, and elected to be taxed as a Subchapter S corporation. Now that I am incorporated, I understand that I should pay my disability insurance premiums personally. Then, after the close of the policy year, the practice should reimburse me for this expense, provided I am not disabled. In the event of my disability, the corporation would not reimburse me. By doing this, I could claim the disability insurance proceeds should be tax-free, since they were paid personally in the year of disability. My accountant says this is not correct. Is he right?

Yes, doctors who operate as unincorporated sole proprietors, Subchapter S corporations, in a limited liability company (LLC), or limited liability partnership (LLP), cannot deduct disability insurance premiums for their policies, even if they are paid through the practice. However, in the event of disability, the proceeds received will be tax-free.

The strategy which you described is only appropriate for doctors operating as a regular “C” corporation. “C” corporation doctors can deduct disability insurance premiums. However, if the premiums are paid by the corporation in the year of disability, the disability insurance proceeds received by the doctor will be taxable. That’s why the strategy described above - appropriate for only “C” corporation doctors - attempts to obtain the best of both worlds, tax-deductible disability insurance premiums and disability proceeds that are tax-free.

John K. McGill, MBA, JD, is a tax attorney and CPA. He is the editor of “The McGill Advisory,” a monthly newsletter that helps dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($199 a year) and consulting information are available from John K. McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217. Call McGill at (704) 424-9780, or visit his Web site at www.bmhgroup.com.

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