When you create an estate plan, that plan should accomplish several interrelated goals. One of those goals should focus on tax avoidance. After all, no one wants to lose a significant portion of their estate to Uncle Sam. One common mistake you should avoid, however, is to rely too heavily on the marital deduction. With that in mind, a Long Island estate planning attorney at Eghrari Wealth Training Firm explains why you should not depend on the marital deduction alone to protect your estate from taxes.
Federal Gift and Estate Taxes
At the time of your death, your estate will be subject to federal gift and estate taxes. The tax is levied on the combined total of the value of all qualifying gifts made during a decedent’s lifetime and the value of all estate assets owned at the time of death. Although the federal gift and estate tax rate was once subject to change on a yearly basis, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the tax rate at 40 percent. Without any additional deductions or considerations, that means you could lose almost half your estate to Uncle Sam. Fortunately, you are also entitled to make use of the lifetime exemption which acts as a deduction taken prior to calculating the tax. Like the tax rate, the lifetime exemption limit was also subject to change on a regular basis prior to the passage of ATRA. In 2012, ATRA set the lifetime exemption limit at $5 million, to be adjusted annually for inflation. President Trump, however, signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years thereafter. Under the new law, the exemption amounts increased to $12.06 million for individuals in 2022, increasing to $12.92 million for 2023. 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 2017 levels, adjusted for inflation.
The Unlimited Marital Deduction
The “unlimited marital deduction” refers to the fact that gifts to a spouse, made during your lifetime or after death, are always exempt from the gift and estate tax. Moreover, there is no limit to the marital deduction. Although the marital deduction can be a helpful tax avoidance tool, relying too heavily on the marital deduction often results in over-funding a surviving spouse’s estate. Using the marital deduction may only delay the payment of federal gift and estate taxes instead of avoiding them. For example, if your spouse passed away in 2022 and left an estate valued at $15 million, almost $3 million will be subjected to taxation even after making use of the lifetime exemption. Those assets could be gifted to you tax-free using the marital deduction; however, your taxable estate would be increased by over $3 million. If the assets you already own were of equal value to those your spouse owned, your $15 million estate is now worth over $18 million. While you are also entitled to make use of the lifetime exemption, your estate would then owe federal gift and estate taxes on over $6 million. In short, relying solely on the marital deduction only prolongs the payment of gift and estate taxes.
The good news is that there are tax avoidance strategies that could potentially shelter your assets without relying on the marital deduction. Talk to your estate planning attorney to determine which tools and strategies are right for your estate plan.
Contact a Long Island Estate Planning Attorney
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding your estate plan, contact the Long Island estate planning attorneys at Eghrari Wealth Training Firm by calling us at 631-265-0599 to schedule your appointment.