If you are married, you can pass your entire estate to your surviving spouse without paying federal estate taxes in the U.S. due to the unlimited marital deduction. Currently, the marital deduction allows a deduction from a testatorís gross estate of all property passed to a surviving spouse. To qualify for the unlimited marital deduction, the surviving spouse of the decedent must be a U.S. citizen. When the surviving spouse dies, his or her estate is taxed if it exceeds the federal exemption amount. With portability, the estate of the surviving spouse may be able to use the first deceased spouse's unused federal estate tax exemption amount.
The unlimited marital deduction in the U.S. allows a married person to use this deduction to reduce or eliminate federal estate taxes. Under current tax laws and regulations, there is no federal gift tax on an actual gift of property to your spouse, provided your spouse is a U.S. citizen. Different tax laws apply to gifts made by a spouse to a non-citizen. The marital deduction is typically 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.Also, it is important to note that income from the gifted property is treated differently than the property itself. When you gift property to a spouse, income from that property will typically be taxable income. Consult a tax professional regarding your specific situation. Find a Tax Professional. Tax laws and regulations change frequently. Tax deductions and exemption amounts are subject to change at any time. The Tax Cuts and Jobs Act is a recent example.
Power of Appointment Trusts
A power of appointment presents issues in estate planning and death taxes. To learn whether you should use a power of appointment trust in your estate plan, review our section on Power of Appointment 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 estate taxes and gift taxes combined. 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.For an overview of how you and your spouse can take advantage of a gifting strategy as part of your estate plan, including current gift tax exemption amounts, see
gifts and gifting.For an explanation of how the unified credit applies to federal taxes that may be owed by a decedent's estate, refer to the
The Marital Deduction and Estate Taxes
By properly using the marital deduction, a married couple may be able to delay federal estate and gift taxes until the surviving spouse has passed. Instead of federal estate or gift taxes being due when the first spouse dies, effective use of the marital deduction may result in no federal estate or gift tax being due until the surviving spouse's estate is administered.Although the unlimited marital deduction allows you to transfer your entire estate to your surviving spouse if your spouse is a U.S. citizen, it may not be a good idea if doing so would increase the size of your surviving spouseís 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 the 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 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 your spouse's lifetime and still keep them out of the surviving spouseís estate for estate tax purposes.This article discusses the federal estate tax and the marital deduction. Some states also levy a state estate tax. The laws on deductions from state estate taxes and portability vary from state to state. In some states, an estate may be subject to state estate tax even when no federal estate tax is due. For information on state estate taxes, consult a lawyer.
Terminable Interest Rule
The transfer of a terminable interest from a deceased spouse to a surviving spouse does not qualify for the federal estate tax 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. If you are concerned about the marital deduction and may be leaving a terminable interest to your spouse or partner as part of your estate plan, get advice from a CPA or accountant.
Wills, Trusts, and the Marital Deduction
If you want to utilize the marital deduction as part of your estate plan, ask your estate planning lawyer whether your estate or trust was drafted in a way that will maximize the benefits of the marital deduction. To ensure your estate can take advantage of the marital deduction, your estate planning documents may need to be updated or revised.
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 spouseís 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 sometimes 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 several factors, such as the value of your estate, the value of your spouse's estate, and your
estate planning goals. Consult a lawyer or tax advisor for more information.Updated on April 11, 2019.
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