As a married person who is interested in wealth preservation you should know about the estate tax marital deduction. We have an unlimited federal estate tax marital deduction in the United States. While there is an estate tax that is imposed on asset transfers that exceed a certain amount in total value, the estate tax is never going to be levied on a transfer of assets between spouses.
There is no limit to the amount of property that you can leave behind to your spouse free of the federal estate tax as long as your spouse is a citizen of the United States. If you’re married to someone who is not a citizen of the United States you cannot use the unlimited marital deduction. You could however benefit from the creation of a qualified domestic trust, and this is something that you should discuss with a licensed estate planning lawyer.
While we are on the subject of transfer taxes we would like to touch upon the gift tax, because it is quite relevant. When the estate tax was first put into place back in 1916 there was no gift tax. The legendary John D. Rockefeller saw an opening. He decided to give a significant percentage of his wealth to his son as a gift to avoid the estate tax.
About eight years after originally enacting the estate tax the powers that be put a gift tax in place to close this tax loophole. It is currently unified with the estate tax. The unified exclusion that applies to taxable gifts that you give during your life and the value of your estate sits at $5.25 million in 2013.
It should be noted that you do not start using any of your $5.25 million unified exclusion giving gifts until you have exhausted your $14,000 per person annual gift tax exclusion. This is an exclusion that exists outside of the unified exclusion.
To clarify, you can give as much as $14,000 to any number of individuals during a particular tax year completely free of the gift tax. If you were to give a gift to someone that exceeds this amount in a year you would be using a portion of your unified exclusion to give the gift tax free.
Getting back to the subject of spouses and federal transfer taxes, the estate tax exclusion is portable. You are entitled to a $5.25 million exclusion, and your spouse is entitled to his or her own $5.25 million exclusion. If your spouse was to predecease you, you would be able to use his or her exclusion in tandem with your own exclusion, making the total amount available to you $10.5 million.
This portability option is not something that is automatically bestowed by the Internal Revenue Service when someone passes away. If you want to take advantage of the portability of the federal estate tax exclusion you must file IRS Form 706 within nine months of the decedent’s passing.
Mark S. Eghrari, Estate Planning Attorney
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