Married couples can engage in estate planning to minimize estate taxes. As explained in an earlier article, estate taxes for larger estates can be significant. Married couples, through estate planning, can eliminate estate tax on the death of the first spouse, and lessen or eliminate any estate tax on the surviving spouse’s death.
In 2007, one can leave as an inheritance $2,000,000 without incurring an estate tax. However, after $2,000,000, the federal government taxes one’s estate at 45%.
Significantly, under current federal estate tax laws, an unlimited estate tax deduction is available for property transfers to a surviving spouse. There can, however, be a significant estate tax due on the second spouse’s death.
Although the unlimited marital deduction is wonderful, it can pose a trap. What happens if a husband and wife have combined assets (including life insurance, annuities, retirement accounts, business interests, real estate, etc.) in excess of $2,000,000 and their wills or trusts give all their assets to the other spouse?
As previously explained, due to the unlimited marital deduction, there will be no estate tax on the first spouse’s death regardless of the amount passing to the surviving spouse. However, if all the deceased spouse’s assets go to the surviving spouse, the surviving spouse will have “too much” in his or her estate. This is the trap. It can be prevented, however by estate planning to save estate tax.
The trick to estate tax savings for a married couple is to not “directly” give the surviving spouse all the assets. Instead of directly giving the surviving spouse the assets, the couple’s estate planning documents (either a will or revocable trust) should provide that part of the assets are held in a trust for the surviving spouse’s use. By so doing, the surviving spouse can use the assets but does not own the assets for estate tax purposes. In conclusion, married couples with assets in excess of $2,000,000 should engage in estate planning that incorporates a shelter trust to take advantage of both spouses’ estate tax exclusion amounts and thereby reduce or eliminate estate tax upon the death of the second spouse.
Jeffery J. McKenna is a local attorney serving clients in Nevada, Arizona and Utah. He is a shareholder at the law firm of Barney, McKenna, and Olmstead with offices in Mesquite and St. George. He is a founding member of the Southern Utah Estate Planning Council. He can be reached at 346-1615.