Simone Lawson
Estate tax laws vary for married couples, non-spouse beneficiaries, and individuals in civil partnerships. The estate tax marital deduction, or unlimited marital deduction, allows a married couple to transfer an unlimited amount of assets to their spouse without incurring a tax. This deduction applies to both estate and gift taxes. The marital deduction only defers estate and gift taxes, meaning that while there are no taxes after the first spouse's death or transfer, taxes will apply when the surviving spouse passes. In 2024, estates that exceed $13.61 million for individuals and $27.22 million for married couples will be subject to estate tax. In the case of a deceased spouse, the surviving spouse can inherit any unused portion of their deceased spouse's estate and gift tax exemption, which is known as portability.
| Characteristics | Values |
|---|---|
| Estate tax exemption for spouses in 2023 | $12,920,000 |
| Estate tax exemption for married couples in 2024 | $27.22 million |
| Estate tax exemption for married couples in 2025 | $24.12 million |
| Estate tax exemption for married couples in 2026 | $6 million |
| Estate tax exemption for individuals in 2026 | $5.49 million |
| Estate tax exemption for individuals in 2023 | $11.7 million |
| Estate tax exemption for individuals in 2022 | $12.06 million |
| Estate tax exemption for individuals in 2018 | $10,000,000 |
| Estate tax exemption for non-spouse beneficiaries in 2013 | $5,000,000 |
| Portability of a spouse's estate tax exemption | Surviving spouse can use the deceased spouse's remaining exemption |
| Marital deduction | Surviving spouse inherits property without incurring estate tax |
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Marital deduction
The marital deduction is a valuable estate planning device for certain married couples. It allows for the transfer of an unlimited amount of assets from one marriage partner to their spouse without incurring a tax. This transfer can occur during the couple's lifetime or after one spouse's death, according to a will. The marital deduction applies to both estate and gift taxes.
The marital deduction is only applicable to surviving spouses who are US citizens. In the case of a remarriage, a qualified domestic trust (QDOT) may be created to provide unlimited marital deductions for non-qualified spouses. A QDOT defers estate tax until the principal is distributed by the trustee, a US citizen, or a corporation that also withholds the estate tax.
The marital deduction is an exception to gift and estate taxes for transfers made to spouses. While it does not completely avoid taxes, the spouse receiving the property must pay the eventual estate taxes. The deduction is particularly useful for wealthy spouses who must use both spouses' applicable exclusion amounts to avoid estate taxes. Most property interests qualify, but terminable property typically will not. An exception to this is qualified terminable interest property (QTIP), an irrevocable trust that allows the grantor to provide for the spouse while ensuring that the assets pass on to certain beneficiaries following the surviving spouse's death.
To preserve the portability of a deceased spouse's exemption, an estate tax return should be filed after the first spouse's death. This allows a surviving spouse to capture and use the first deceased spouse's remaining estate tax exemption in addition to their own exemption.
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Estate tax exemption
Marital Deduction
The marital deduction is a valuable tool for married couples, enabling one spouse to transfer assets to the surviving spouse without incurring estate or gift taxes. This deduction is applicable to assets passed on during the couple's lifetime or after the death of one spouse, as outlined in the Internal Revenue Code. The deduction applies to the overall gross estate, and the total value of assets transferred to the surviving spouse is subtracted, resulting in the marital deduction amount. It is important to note that this deduction only defers the taxes, which will need to be addressed when the surviving spouse passes away.
Portability
Portability is a critical concept that allows a surviving spouse to utilise the unused estate tax exemption of their deceased spouse. By filing a timely federal estate tax return, the surviving spouse can effectively combine their own exemption with that of their deceased spouse, providing a larger shield from estate taxes. This is particularly beneficial for larger estates, as it helps protect the combined assets. However, it is important to be mindful of the potential tax implications when the surviving spouse eventually passes away.
Exemption Trust
An exemption trust, also known as a bypass or credit shelter trust, is a strategic tool to minimise estate taxation. This type of trust limits the surviving spouse's control over the trust's assets, ensuring that any remaining assets after the surviving spouse's death are exempt from estate taxation. The beneficiaries of the exemption trust can receive income annually or at the trustee's discretion, while the surviving spouse's rights to the principal are restricted.
Lifetime Exemption
It is important to understand that the marital deduction comes with a trade-off. By utilising the marital deduction, the surviving spouse loses their partner's lifetime exemption. This consideration becomes crucial for larger estates, as the surviving spouse only has their own exemption value to offset the combined assets. Therefore, careful planning is necessary to balance the benefits of the marital deduction and the retention of lifetime exemption.
Planning Considerations
To make the most of estate tax exemption, married couples should explore various planning options. These include the all to spouse" plan, which leaves all assets directly to the surviving spouse, taking advantage of the unlimited marital deduction. Additionally, portability should be carefully considered, ensuring that the necessary IRS forms are filed to preserve the deceased spouse's exemption. Proper planning can help married couples maximise their tax benefits and effectively transfer their assets to their children or loved ones.
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Portability
To preserve the portability of a deceased spouse's exemption, an estate tax return should be filed after the first spouse's death. The estate tax return must be filed timely, generally within nine months after the decedent's date of death. An automatic six-month extension of time to file the return is available to all estates, including those filing solely to elect portability, by filing Form 4768 on or before the due date of the estate tax return. The estate's representative must file an estate tax return (Form 706) to elect portability of the decedent's unused exclusion amount (deceased spousal unused exclusion (DSUE) amount) for the benefit of the surviving spouse.
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Exemption trust
An exemption trust is a tool used by married couples to legally maximize their estate tax exemptions. It is designed to drastically reduce or eliminate federal estate taxes for a married couple's estate. This type of estate plan is established as an irrevocable trust that will hold the assets of the first member of the couple to die.
The primary goal of an exemption trust is to mitigate a couple's federal estate tax liability. With an exemption trust, the surviving spouse does not inherit the assets of the first member of the couple to pass away. The surviving spouse is "bypassed," and the deceased's assets are held in a trust. When the surviving spouse dies, the assets are distributed to the trust's beneficiaries (usually their children). Because the surviving spouse did not inherit the assets directly, the beneficiaries do not pay any estate taxes when they receive the trust assets after the surviving spouse dies.
The exemption trust is often used in conjunction with a marital trust, which allows the deceased spouse to provide for the surviving spouse while directing who inherits the remaining marital trust assets after the surviving spouse's death. This can help ensure that the assets eventually pass to the couple's children, even if the surviving spouse remarries. A marital trust also generally protects the trust's assets from creditors' claims during the surviving spouse's lifetime.
The exemption trust is funded with the deceased spouse's portion of the couple's property, up to the applicable exclusion amount. This trust is irrevocable and will pass to the beneficiaries other than the surviving spouse. The surviving spouse must follow the trust's plan without overly benefiting from its operation, but this trust often passes income to the surviving spouse to live on for the rest of their life.
The use of exemption trusts requires careful consideration, as the Internal Revenue Service (IRS) has specific wording requirements and limits on the surviving spouse's use of the trust. Additionally, the high fees involved in planning, managing, and paying for attorney services for exemption trusts can sometimes make them more costly than the estate tax itself.
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Marital trust
A marital trust is a legal relationship that allows a person to transfer assets to a surviving spouse or children and grandchildren. It is a fiduciary relationship between a trustor and trustee for the benefit of a surviving spouse and the married couple's heirs. It is also called an "A" trust.
A marital trust goes into effect when the first spouse dies, and assets are moved into the trust upon death. The income that these assets generate goes to the surviving spouse, and under some arrangements, the surviving spouse can also receive principal payments. When the second spouse dies, the trust passes to its designated heirs.
There are three types of marital trusts: a general power of appointment, a qualified terminable interest property (QTIP) trust, and an estate trust. A marital trust protects the assets and benefits of a surviving spouse and children. A QTIP trust is an irrevocable trust that allows the grantor to provide for the spouse but still ensures that the assets pass on to certain beneficiaries following the surviving spouse's death.
A marital trust can help a married couple's heirs avoid probate and reduce estate taxes. A couple can take advantage of the federal gift and estate tax exemption. This is the amount that can be passed on to heirs before estate tax is owed. The marital trust can be used in conjunction with a credit shelter trust or "B" trust.
A marital trust must have at least one named trustee to be valid. The trust document must specify all assets and property held in the trust, which can include stocks, bonds, mutual funds, cash, and physical property.
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Frequently asked questions
The estate tax marital deduction, also known as the unlimited marital deduction, allows one marriage partner to transfer an unlimited amount of assets to their spouse without incurring a tax. The deduction is calculated by subtracting the total value of the assets passed on to the spouse from the overall gross estate.
Portability allows a surviving spouse to inherit and use the unused portion of their deceased spouse's estate and gift tax exemption. This means that the surviving spouse can combine their exemption with that of their deceased spouse, effectively doubling their exemption amount.
A marital trust allows the deceased spouse to provide for the surviving spouse while directing who inherits the remaining trust assets after the surviving spouse's death. It also protects the trust's assets from creditors' claims.
An exemption trust, also known as a credit shelter trust, prevents estate taxation on the assets in the trust when the surviving spouse dies. The surviving spouse has limited control over the trust and limited access to its principal.
