When embattled former Penn State football coach Joe Paterno recently “sold” his home to his wife for $1, more than a few eyebrows were raised. The timing of the transfer, on July 21, has caused some to question, in hindsight, what he was trying to accomplish given the sexual assault scandal that he and the rest of Penn State football are currently embroiled in. Was he attempting to shelter assets from personal liability in case he becomes subject to civil lawsuits?
There is no way to know for sure, but as a recent New York Times article points out, Mr. Paterno’s transfer could simply be part of a well-crafted estate plan. As the Times noted, Mr. Paterno put his house – valued at $594,484.40 — in his wife’s name. While this may seem strange, transferring a home to one spouse is in fact one way to reduce a married couple’s estate tax liability.
Estate taxes are typically not paid directly by an individual, but rather by their estate, i.e. out of whatever inheritance they have to leave to their heirs. Right now, the Federal estate tax exemption is $5 million per person, while the Massachusetts estate tax exemption is $1 million.
People with more than this amount of assets (including home equity) will be hit with a hefty estate tax bill (10% in Massachusetts) without proper planning. When the first spouse dies, the surviving spouse does not have to pay an estate tax bill during their lifetime. But when the surviving spouse dies dies, their heirs would have to pay taxes for any inheritance beyond these exemption levels.
To avoid this outcome, Massachusetts couples with more than $1 million in assets typically create a marital trust for each spouse. This way, when the first spouse dies an amount equal to the current exemption goes into that person’s trust, while the rest passes to the surviving spouse.
When the second spouse dies, they too put an amount equal to the current exemption into their trust. This allows the couple to equalize their estate, putting half into each person’s name, so that they can both make good use of their estate tax exemption. This, in turn, preserves their estate to the fullest extent possible and greatly lowers the bill for their heirs.
While it is impossible to know Mr. Paterno’s true intentions, using your estate plan to reduce or eliminate estate tax liability is common and can save clients hundreds of thousands of dollars. If reducing your tax liability is something you want your estate plan to accomplish, call the Heritage Law Center for a free consultation to discuss your options.