Like many married couples, you and your spouse may create reciprocal estate plans wherein you leave your entire estate to your spouse and your spouse leaves everything to you. If you have a moderate to large estate, however, you may be concerned about the tax implications of leaving your entire estate to your spouse. Because every estate is unique, you should consult with an experienced estate planning attorney regarding specific questions and concerns. In the meantime, however, the Grand Forks estate planning attorneys at German Law discuss whether you can leave your estate to your spouse tax-free.
Understanding the Unlimited Marital Deduction
At first glance, it might seem as though leaving your entire estate to your spouse tax-free is easily accomplish using the Unlimited Marital Deduction. As the name implies, the unlimited marital deduction allows a taxpayer to leave an unlimited amount of assets to a spouse tax-free at the time of death. There are two problems with depending solely on the marital deduction. First, any gifts you made during your lifetime remain subject to taxation. More importantly, leaving all your assets to your spouse may only prolong the payment of taxes because doing so may overfund your spouse’s estate. Essentially, all this may do is prolong, not avoid, the payment of federal gift and estate taxes.
Federal Gift and Estate Tax Basics
The first potential obstacle to passing your estate to a spouse tax-free is the federal gift and estate tax. The federal gift and estate tax is effectively a tax on the transfer of wealth that is collected from your estate after you die. Every estate is potentially subject to federal gift and estate taxes. The tax applies to all qualifying gifts made during a taxpayer’s lifetime as well as all estate assets owned by the taxpayer at the time of death. Although the federal gift and estate tax rate fluctuated historically, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the rate at 40 percent. Without any deductions or adjustments, a $20 million estate would owe $8 million in federal gift and estate taxes.
Understanding the Lifetime Exemption
Fortunately, every taxpayer is entitled to make use of the “lifetime exemption” to reduce the amount of gift and estate taxes owed by their estate. ATRA set the lifetime exemption amount at $5 million, to be adjusted for inflation each year. In 2018, however, President Trump signed tax legislation into law that changed the lifetime exemption amount for that year and for several years after that. For 2020, the lifetime exemption amount is $11.58 million. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation.
Another important change that ATRA made permanent was the concept of “portability.” Portability allows a surviving spouse to use any portion of a deceased spouse’s lifetime exemption that remains unused. In other words, if you leave your $10 million estate to your spouse using the marital deduction, and you made no lifetime gifts, you did not use any of your lifetime exemption. Therefore, the entire $11.58 million exemption can be passed to your spouse. He/she then has a combined total of $23.16 million to use at the time of his/her death. This considerably lessons the risk of overfunding a spouse’s estate by using the marital deduction.
Contact Grand Forks Estate Planning Attorneys
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about federal gift and estate taxes, contactthe Grand Forks estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.
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