The primary purpose of most estate plans is to provide for loved ones after the death of the individual creating the plan. Like most people, however, you will likely include additional objectives and considerations in your estate plan as well when you create yours. For example, tax avoidance is a common consideration when creating an estate plan. If you are married, therefore, you may wish to know “ How can I leave my estate to my spouse tax-free? ”
The reason tax avoidance is a common consideration when estate planning is that all estates are potentially subject to federal gift and estate tax after the death of a decedent. When you die, the value of all estate assets owned by you at the time of your death, together with the value of all gifts made during your lifetime, is calculated to determine if your estate will owe gift and estate taxes. All taxpayers are entitled to exempt assets valued at up to the lifetime exemption limit which was permanently set at $5 million (adjusted annually for inflation) by the American Taxpayer Relief Act of 2013 (ATRA). The value of your estate that exceeds the lifetime exemption amount will incur gift and estate taxes at the rate of 40 percent, providing ample incentive for employing tax avoidance strategies in your estate plan.
If you are married, you may leave an unlimited amount of assets to your spouse pursuant to the unlimited marital deduction; however, doing so may result in over-funding your spouse’s estate. For example, assume that the value of your estate and lifetime gifts is $8 million and that your spouse has an estate valued at $4 million. With the 2015 lifetime exemption set at $5.43 million your estate could exempt up to that amount, leaving a taxable estate of $4.57 million. You could leave your entire estate to your spouse and avoid gift and estate taxes upon your death: however, you have now increased the value of your spouse’s estate to $7.57 million. After your spouse uses his/her lifetime exemption that leaves $2.13 million subject to gift and estate taxes. Had you not left everything to your spouse though his/her estate would not incur gift and estate taxes. For this reason, it only makes sense to include tax avoidance strategies in your estate plan early on. For example, the annual exclusion allows each taxpayer to make gifts to an unlimited number of beneficiaries of assets valued at up to $14,000 each year tax-free. Moreover, these gifts are not counted when calculating your lifetime gifts for the purpose of determining gift and estate taxes when you die.
If you have additional questions or concerns about estate planning, contact the experienced South Carolina estate planning attorneys at Kuhn & Kuhn Law Firm by calling 843-577-3700 to schedule your appointment.