One of the most common concerns in estate planning is tax avoidance. One of the primary goals for estate plans should be decreasing or eliminating taxes, whenever possible. With the current federal estate tax rate at 40%, it is easy to see how taxes can substantially reduce your wealth. Luckily, there are easy ways to leave your estate to your spouse tax free.
The Marital Deduction is Unlimited
Estate taxes apply to any asset transfers you might make to your closest relatives, with a few exceptions. One very important exception is the marital deduction, which is unlimited. With this deduction, none of the assets you transfer to your spouse are taxed. The only requirements are that your spouse is a United States citizen, and the transfer must be without restriction. In other words, the interest you transfer cannot, for example, expire after a certain period of time, or upon the occurrence of some event. So, you can leave your entire estate to your surviving spouse, and essentially postpone the payment of estate taxes until your spouse’s death.
An estate plan is still essential
The payment of estate taxes, even with the marital deduction, is only postponed. The surviving spouse will eventually be subjected to estate taxes upon his or her death. This is why estate planning is still necessary. We all receive a lifetime credit, or estate tax exemption, as well. So, if the value of your estate is less than the annual exclusion amount, the estate will not be subject to taxes, even at the death of your spouse.
An Explanation of the Lifetime Exclusion
This year, 2014, the lifetime exclusion amount is $5.34 million. Since, this exclusion is available for each person, both you and your spouse each have a $5.34 million exclusion. Because this exclusion is “portable,” meaning one spouse can pass the unusued portion of the exclusion on to the surviving spouse, the surviving spouse could potentially have an exemption of $10.68 million. Beware, though, that the portability option is not automatic. If you want to take advantage of this provision, you or your spouse must be proactive. IRS Form 706 must be filed within nine months of the first spouse’s death.
The Gift Tax Exclusion
Whenever you give a gift to someone, which means transferring ownership of property from one person to another, the IRS will impose a “gift tax.” Tuition and medical expenses paid for someone else’s benefit, are two of only a few exceptions. Also, gifts to qualified charities or political organizations are not taxed. The good news is, there is also an annual gift tax exclusion for each gift recipient, of $14,000. If spouses give joint gifts, the amount of the exclusion can be doubled. The gift tax deduction is yet another way to avoid estate taxes.
If you have questions regarding estate taxes, or any other estate planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.