Estate Taxes and the Marital Deduction
Although the unlimited marital deduction allows you to transfer your entire estate to your surviving spouse, it may not be a good idea if doing so would increase the size of your surviving spouse’s estate in a way that creates a significant estate tax liability when your spouse dies. One factor to consider is whether the surviving spouse is likely to consume or use up enough of the estate so his or her estate would not be subject to significant estate taxes.
If your estate is large enough that estate taxes will still be a concern after passing your estate to your surviving spouse, you should review the unified credit. With the help of an experienced estate planning attorney, you may be able to create certain trusts as part of your estate plan to take advantage of the marital deduction and the unified credit. For example, you may be able to transfer property to a separate trust that allows your surviving spouse to use the assets during his or her lifetime and still keep them out of the surviving spouse’s estate for estate tax purposes.
The Marital Deduction and Your Estate Plan
For more information on the marital deduction and its role in your estate plan, get a copy of Plan Your Estate. This comprehensive estate planning guide provides an overview of estate taxes, bypass trusts for spouses, and other types of trusts married couples can use to reduce taxes and pass more property to their heirs. Plan Your Estate also features information on how to disclaim an inheritance, including the use of disclaimers in the context of marital bypass trusts.
The Unified Credit
Even if federal tax applies to your gifts or estate, the federal tax may be eliminated by the unified credit. The unified credit applies to both estate and gift tax. It may be used to reduce or eliminate applicable taxes. The amount of unified credit available to your estate to reduce estate taxes after your death is reduced by the amount of any unified credit you previously applied against gift taxes.
What is the Marital Deduction?
If you are married, you can pass your entire estate to your surviving spouse without paying estate tax due to the unlimited marital deduction. The marital deduction allows a deduction from a testator’s gross estate of all property passed to a surviving spouse. When the surviving spouse dies, his or her estate is taxed if it exceeds the exemption amount.
A married person can use the marital deduction to reduce or eliminate estate taxes. There is no federal gift tax on an actual gift of property to your spouse, provided your spouse is a U.S. citizen. Different gift tax laws apply to gifts made by a spouse to a non-citizen. The marital deduction is not available for property transferred or passed outright to a surviving spouse who is not a U.S. citizen, unless the property is placed in a qualifying domestic trust. A qualifying domestic trust is called a QDOT and must meet certain requirements to qualify for the marital deduction.
Joint Tenancy and the Marital Deduction
Many married couples own their homes and other property as joint tenants or joint tenants with right of survivorship so one spouse’s interest in the property will automatically pass to the surviving spouse upon death. However, in larger estates that may face estate tax liability, some estate planning lawyers suggest married couples avoid owning property as joint tenants. Instead, they recommend certain assets be owned by one of the spouses individually and transferred or passed into a separate trust designed to reduce estate taxes. Whether you need to take advantage of this type of trust depends on the value of your estate. Consult an estate planning attorney or tax advisor for more information.
Power of Appointment Trusts
To learn whether you should use a power of appointment trust in your estate plan, see our Power of Appointment Trust page.
The Terminable Interest Rule
The transfer of a terminable interest from a deceased spouse to a surviving spouse does not qualify for the marital deduction. Therefore, if you plan to pass a property interest that is considered a terminable interest to your surviving spouse after your death, it may be subject to estate tax.
What type of property interest is considered a terminable interest? A terminable interest is a property interest that has a fixed term, exists for a limited period of time or terminates upon the happening of a certain event. For example, if a surviving spouse receives the right to use property for life, such as in a life estate, but upon his or her death, it passes to your designated beneficiary, that property interest is a terminable interest.
There are several exceptions to the terminable interest rule. Consult a tax professional or estate planning attorney if you are concerned about the marital deduction and may be leaving a terminable interest to your husband or wife as part of your estate plan.
. This comprehensive estate planning guide provides an overview of estate taxes, bypass trusts for spouses, and other types of trusts married couples can use to reduce taxes and pass more property to their heirs.