Estate Tax Marital Deduction

A major issue for retirees is avoiding paying estate tax especially if the estate tax exemption limit is reduced back to a level of $1,000,000 - $1,500,000. It may be easier than you think to reach a $1,000,000 estate especially for a married couple. Consider the value of your home, personal property, life insurance proceeds when a spouse dies, IRAs, Annuities, 401(k)s, and future inheritance from your parents and other family members.

Once you reach the exemption limit, your estate will pay at least 41% in tax to the government. As the size of the estate grows so does the tax rate and tax burden.

Married couples have an option to reduce the amount of estate tax called the unlimited marital deduction. A spouse can give the entire estate to a spouse without paying estate tax if 3 requirements are met:

1. The property left to the surviving spouse must be included in the gross estate of the first spouse to die.
2. The property must actually pass to the surviving spouse.
3. The property must not constitute a terminable interest when ultimately received by the surviving spouse.

Even with the unlimited marital deduction, paying of estate tax can not be avoided. Once the surviving spouse passes the estate tax is calculated.

To minimize the amount of estate tax liability a dual approach is often used. The estate is divided into 2 parts, an amount of the estate equal to the exemption limit is given to the surviving spouse and the remainder is put into a trust. In this manner, the number of exemptions can be increased from 1 to 2. Saving 45% on $1,000,000 means that $450,000 is given to an entity you choose rather than the government.

Options exist with the design of the trust. This is a complicated topic and getting professional assistance may be extremely beneficial.

An option to reducing estate tax is to take advantage of the charitable deduction. This is the topic for the next blog.