A Powerful Estate-Planning Tool for Married Couples

As with much of the economy—the talk of fiscal cliffs and all—there is uncertainly about taxation in 2013. I wanted to let you know about a planning strategy before time runs out.

The marital deduction (IRC Sections 2056 and 2523) eliminates both the federal estate and gift tax on transfers of property between a husband and wife, in effect treating them as one economic unit. The amount of property that can be transferred between them is unlimited, meaning that a spouse can transfer all of his or her property to the other spouse, during lifetime or at death, and completely escape any federal estate or gift tax on this first transfer. However, property transferred in excess of the unified credit equivalent will ultimately be subject to estate tax in the estate of the surviving spouse.

Through use of the unlimited marital deduction, a married couple’s combined assets are untouched by federal estate tax, meaning that the full amount is available for the surviving spouse’s support and maintenance after the first spouse’s death. At the surviving spouse’s death, the marital deduction may not be available, meaning that the full value of the surviving spouse’s remaining estate will be exposed to federal estate taxation.

The 2010 Tax Relief Act, however, provides for “portability” of the maximum estate tax unified credit between spouses. This means that a surviving spouse can elect to take advantage of any unused portion of the estate tax unified credit of a spouse who dies in 2011 or 2012 (the equivalent of $5 million in 2011). As a result, with this election and careful estate planning, married couples can effectively shield up to $10 million from the federal estate and gift tax without use of marital deduction planning techniques, but only if one of the spouses dies in 2011 or 2012. Property transferred in excess of the combined $10 million unified credit equivalent will be subject to estate tax in the estate of the surviving spouse. (You may want to consider life insurance to pay the tax bill due when the spouse dies.)

If the surviving spouse is predeceased by more than one spouse, the additional exclusion amount available for use by the surviving spouse is equal to the lesser of $5 million or the unused exclusion of the last deceased spouse.

IMPORTANT NOTE: Since the 2010 Tax Relief Act “sunsets” at the end of 2012, portability of the unified credit exemption between spouses will not be available beginning in 2013 unless Congress takes action in the future.

If you’d like more information on how to make best use of the marital deduction, please contact your agent or financial advisor.

  1. The IRS would only be going after you if distribution of the asstes was made without the tax debt being paid by the estate. The executor of the estate shouldn’t have given any asstes without a release from the IRS. You may have a case against the executor for breach of fiduciary duty but you’ll still have to pay the taxes owed. The IRS does offer Installment Agreements on tax debt for people in situations like yours. Definitely look into a penalty abatement to try to cut that down because in this may not be your fault.

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