Estate planning typically requires a consideration of a number of factors that will ultimately impact the plan, including the tax implications of a proposed estate plan. Federal gift and estate taxes, for example, can diminish the value of an estate considerably if tax avoidance strategies were not incorporated into the individual’s estate plan. What is the marital deduction though? Can that resolve the tax issue? Although the marital deduction does dodge the gift and estate tax bullet, it only prolongs the bullet.
Federal gift and estate taxes are potentially levied on an estate at the time of death. To determine if an estate owed gift and estate taxes the value of all assets owned by the decedent at the time of death is combined with the value of all gifts made during the decedent’s lifetime. Each taxpayer is entitled to exempt assets valued at up to the lifetime exemption limit which was permanently set at $5 million and is adjusted annually for inflation. For 2015 the lifetime limit amount is $5.43 million. The value of assets above the lifetime limit is then subject to gift and estate taxes at the rate of 40 percent.
The marital deduction, however, allows you to leave an unlimited amount of assets to a spouse tax-free. While this may be a solution if no estate planning was done ahead of time, it can result in over-funding the estate of a spouse, effectively doing no more than prolonging the inevitable. By way of illustration, assume that you are married and that you own assets valued at $8 million and your spouse owns assets valued at $4 million. Assume further that you were to die tomorrow. Your lifetime exemption allows your estate to exempt the first $5.43 million worth of estate assets. That leaves you with $2.57 million in estate assets subject to gift and estate taxes. If you left all of your assets to your spouse your gift of $2.57 million would not be subject to gift and estate taxes pursuant to the unlimited marital deduction. Your spouse’s estate, however, would then be worth $6.57 million, pushing his/her estate over the lifetime exemption limit. Therefore, all you have really done is put off the payment of gift and estate taxes instead of actually decreasing them or avoiding them altogether.
The key to decreasing an estate’s exposure to gift and estate taxes is proper estate planning. While the unlimited marital deduction works in the short run it does not truly address an estate’s tax liability in the long run. Only a well thought out estate plan can do that.
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.