How to Leave Your Estate to Your Spouse Tax Free

One of the primary concerns in estate planning is taxes.  Your estate plan should be created with the goal of decreasing or eliminating taxes, to every extent possible.  The federal estate tax rate is currently at a hefty 40%.  It is not difficult to see how taxes can substantially erode the wealth you have spent your lifetime acquiring.  The good news is, there are ways to leave your estate to your spouse tax free.

Unlimited Marital Deduction

The estate tax applies, in most cases, to any asset transfers you make to your closest relatives.  There is one very important exception.  There is an unlimited marital deduction that applies to assets you transfer to your spouse.  The only requirements are that your spouse is a United States citizen, the property must be given to the surviving spouse without restrictions and the interest cannot be a “terminable interest.” This means that the interest cannot expire after a certain period of time or due to the occurrence or nonoccurrence of an event.  So, by leaving your entire estate to your surviving spouse, you can postpone the payment of estate taxes until the death of the surviving spouse.

Estate Planning Required to Leave Estate to Your Spouse Tax Free

Since the payment of estate taxes is merely postponed, the surviving spouse will ultimately be subjected to estate taxes at his or her death.  For this reason, estate planning is still necessary.  In addition to the unlimited marital deduction, every person is entitled to a lifetime credit or estate tax exemption, up to a certain amount.  If the value of the estate does not exceed the annual exclusion amount at the death of the surviving spouse, the estate will not be subject to taxes.

Lifetime Exclusion

The lifetime exclusion amount, as of 2014, is $5.34 million.  This is a per person exclusion, which means both you and your spouse each have a $5.34 million exclusion.  This exclusion is “portable,” which means if you predecease your spouse, your unused exclusion will be passed on to your spouse.  The surviving spouse could potentially have an exemption of $10.68 million.  However, you should know that, if you or your spouse want to take advantage of the portability option, you have to be proactive. The Internal Revenue Service does not automatically provide this additional exclusion if you are a surviving spouse.  You must, instead, file IRS Form 706 within nine months of the death of your spouse.

Gift Tax Exclusion

Whenever ownership of property is transferred from one person to another, the IRS imposes what is known as a “gift tax.”  There are only a few exceptions to the gift tax, including tuition or medical expenses that you pay for the benefit of someone.  Gifts to spouses, qualified charities and political organizations are not taxable.  For all other gifts, there is an annual gift tax exclusion of $14,000 per recipient.  If spouses choose to give a joint gift, the amount of the exclusion is doubled.  This is one more way that estate taxes can be avoided.

If you have questions regarding estate taxes, or any other estate planning issues, please contact Wilcox Attorneys, PA online, or by calling us at (479) 443-0062.