You can feel a sense of security when you have accumulated a significant quantity of wealth. As an individual, you have a lot of freedom, and you don’t have any worries from a financial perspective. Plus, you can go forward with the knowledge that you will be able to make things easier on your loved ones after you are gone.
While all of the above is true, you do have to be aware of the potential impact of the federal estate tax. This tax packs a wallop, because it carries a 40 percent maximum rate.
Everything that you are transferring is not necessarily subject to the death tax, because there is a credit or exclusion. The exclusion represents the amount that can be transferred before the estate tax would be applied. For the rest of 2015, the exact amount of this exclusion is $5.43 million. There are annual inflation adjustments, so in a few months, the number may be a bit larger.
Marital Estate Tax Deduction
Transfers to anyone are potentially subject to the estate tax, with one exception. There is an unlimited marital estate tax deduction. If you are legally married in the eyes of the law, regardless of your sexual orientation, you can transfer unlimited assets to your spouse free of the federal estate tax.
That is, as long as your spouse is a citizen of the United States. The unlimited marital deduction cannot be utilized if you are married to someone who is a citizen of a different country.
This arrangement is instructive, even if you are married to an American citizen, if you look under the surface. The tax man wants to get take his bite eventually. Allowing for an unlimited marital deduction is not necessarily a hindrance to this objective, because a surviving spouse would still be facing estate tax exposure if he or she was to receive a tax-free inheritance.
As a result, simply leaving everything to your spouse tax-free would not really provide long-term estate tax efficiency.
On the other hand, if a non-citizen could use the exclusion, this person could sidestep the tax by returning to his or her country of citizenship.
Providing for a Non-Citizen Spouse
If you are a wealthy individual who is married to a citizen of another country, you can gain estate tax efficiency through the creation of a qualified domestic trust. If you die before your spouse, earnings from the trust could be distributed to your surviving spouse throughout the rest of his or her life. These distributions would not be subject to the estate tax, but regular income taxes would apply.
A secondary beneficiary of your choosing would assume ownership of the remainder after the death of your surviving spouse, and the estate tax would be a factor at that time.
Our Firm Can Help
We can help if you are a high net worth individual who is exposed to the estate tax. Our firm offers free consultations, and you can contact us through this page to set up an appointment: Sacramento CA Estate Planning Attorneys.