Estate Planning - Estate Tax Marital Deduction
Although you can leave everything you own to your spouse free of estate
tax, doing so can actually increase estate tax costs at your spouse's
death. The reason for this is that each person can leave up to $700,000
of assets (in 2002 and 2003, more in later years) to children or other
non-spouse beneficiaries without any estate tax liability. By leaving
everything to your spouse, however, you can waste your $700,000 estate
tax exemption. Coordinating the tax breaks and both spouses’ estates is
a cornerstone of successful estate planning.
As an example, say the husband has $1.1 million and the wife has
$250,000. The husband could leave everything to the wife without owing
any estate tax. However, the wife's estate would owe tax on $700,000 of
the $1.35 million (ignoring any growth in value for simplicity). She
could leave $700,000 to the children (or anyone else) free of estate
tax, but the husband's $700,000 exemption would be lost forever. That
could cost the family over $300,000.
This tax could be avoided by leaving $700,000 to the children and the
rest to the wife. The first estate would still owe little if no tax.
And the wife's estate also would owe little if no estate tax on her
remaining share.
If the concern is that a total of $700,000 would not be enough for the
wife, it's possible to also leave the income from the other funds to
her for her life, using what is called a credit shelter trust. The
husband's estate would be able to shelter the $700,000 that ultimately
will go to the children, and that amount won't be subject to tax in the
wife's estate.
Of course, if the spouse owning few assets dies first, he or she could
lose the opportunity to transfer $700,000 to the children free of tax.
This may be dealt with relatively easily by having the wealthier spouse
transfer funds tax-free during life to the other spouse.
There also are situations in which the marital deduction can be used to
save tax and at the same time address non-tax concerns. For example,
there are circumstances in which leaving all the funds outright to a
spouse may not be desirable. Typically, one or both spouses may be
concerned about the management of the property, or may want to make
sure that particular beneficiaries ultimately get the property. That
last concern probably arises most often when there are children of a
prior marriage.
In any of these situations, individuals often use what is technically
called a QTIP trust. While various requirements must be met to qualify
as a QTIP, the most important thing is that your estate can qualify for
the marital deduction without your leaving the property outright to
your spouse. You only need give the income from the property for the
spouse's life.
As you can see, the marital deduction is a powerful and flexible tool
that can yield great benefits when properly coordinated. However,
careful planning, including taking into account income tax
considerations and practical considerations is necessary.
If you have any questions, please do not hesitate to call.
|