Joe Paterno Transfers Home For $1

Legendary Penn State football coach Joe Paterno passed away January 22, 2012, from lung cancer. Before he died, Paterno made the news for “selling” his home, valued at $594,484.40, to his wife for $1. While some alleged that Paterno was transferring assets to avoid personal liability in any civil suits stemming from the Penn State sexual abuse scandal, others suggested that Paterno was merely making some intelligent decisions in estate planning by taking advantage of the estate tax laws for married couples.

Using Trusts for Tax Exemptions

When a person dies, his or her assets pass to a surviving spouse without any estate tax. However, when the surviving spouse passes on, the heirs have to pay estate taxes. The law exempts estates from federal tax up to $5 million per person or $10 million for a married couple.

It is not uncommon for married couples to create trusts so that when one person dies, an amount of assets equal to the current estate tax exemption goes into the trust and the rest passes to the surviving spouse tax-free. When the surviving spouse dies, a similar situation occurs: an amount equal to the current estate tax exemption goes into a trust for heirs and the rest of the assets pass in other ways.

Using trusts in such a manner allows the couple to take full advantage of the estate tax exemption. Without using the trusts, heirs would have to pay estate taxes on anything over $5 million, rather than $10 million.

Paterno’s transfer of the house to his wife’s name equalizes their assets so his wife can fully use her $5 million exemption.

Portability of Tax Exemptions

In 2010, President Obama reformed the estate tax laws so that beginning in 2011 widows and widowers could add their spouses’ $5 million exemption to their own without the use of trusts. The transfer is not automatic; the executor needs to file an estate tax return within nine months of the deceased’s passing, even if no estate tax is due. In the return, the executor must transfer any unused exemption amount to the surviving spouse.

Portability Not Permanent

Unless Congress acts to extend the measure, this “portability” of estate tax exemptions expires December 31, 2012. Experts suggest that Congress is likely to renew portability of estate tax exemptions. However, it is wise to seek the assistance of an experienced estate planning attorney to discuss strategies to use the exemption fully and create a plan in the event Congress does not extend portability

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