The marital deduction provides a way for married couples to transfer their property to each other, during life or at death, while avoiding federal estate or gift taxes. Under federal tax law (26 USC § 2056), married couples can give an unlimited amount of assets to their spouses, either as a gift or as part of an inheritance. When the spouse giving the assets dies, the value of the property which passes to the surviving spouse is then deducted from gross estate of the deceased spouse. The amount of this deduction is unlimited, but there are some requirements.
Requirements for Marital Deduction in Arkansas
The marital deduction in Arkansas is unlimited and straightforward. The executor must establish the value of the interest. The executor of the estate simply determines the total value of all assets owned by the deceased spouse. This is known as the “gross estate.” From this amount, the value of the property left to the surviving spouse is subtracted. However, there are specific requirements for the marital deduction to be valid:
- the surviving spouse must be a U.S. citizen.
- The interest cannot be a “terminable interest,” (i.e., one that expires after a certain period of time or due to an event, such as remarriage, or the nonoccurrence of an event).
The Benefit of a Marital Deduction
A married person can easily eliminate estate taxes by leaving the entire estate to his or her surviving spouse. The benefit of the marital deduction is that couples with substantial assets are able to postpone the payment of estate taxes when the first spouse dies. Then, at the death of the surviving spouse, all assets in the estate that exceed the applicable exclusion amount are included in the survivor’s taxable estate. If the estate does not exceed that amount, the estate will not be subject to any taxes. The current exclusion amount is $5,250,000.
Don’t Forget the Lifetime Exemption
In addition to the marital deduction, every person has a lifetime credit or estate tax exemption. This credit allows an individual to avoid estate taxes on property left to non-spouses. However, when the entire estate is left to the surviving spouse, the lifetime exemption amount of the first spouse is lost except when the procedures and rules for “portability” are met. If the marital deduction is not used by the estate of the first spouse to die, it cannot be transferred to the surviving spouse. If the procedures and rules for “portability” are not met, the surviving spouse has only one lifetime exemption to shield what is now the combined estate of both spouses. The surviving spouse must then perform all of the estate and tax planning for the combined estates.
The value of the estate at the time of the surviving spouse’s death determines the tax burden. Loss of the life exemption is not a problem when the combined estates are less than $5.25 million. Remember, though, that an estate might be less than the exempt amount when it is inherited but exceed that amount when the surviving spouse dies. All in all, the marital deduction is a valuable estate planning tool and there are certain estate planning strategies that can be combined with the deduction to make it more valuable.