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Marital Deduction as an Estate Planning Tool

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The marital deduction continues to be the go-to tax reducer for many. If it’s not used properly, it could result in the very thing you’re trying to avoid: higher taxes. For this reason, working with an experienced legal team of financial planning experts is strongly encouraged. This week, we delve into the marital deduction as an estate planning tool and take a look at its limitations and benefits.

It’s true that the marriage deduction is just one way of offsetting higher taxes and it also offers flexibility in your estate planning efforts. It’s not difficult to understand – though it’s important to keep in mind the tax exclusions change every year.

How Marital Deduction Works

The gross estate is calculated after the estate executor takes over. This is calculated by totaling the value of all of the assets owned by the deceased. The value of all property left to the surviving spouse is then deducted and with charitable contributions, the taxable estate is then determined. One especially important benefit is the absence of marital deduction limits. The estate taxes can be eliminated in their entirety by leaving the whole estate to the spouse. That seems like the best path for anyone – but it’s also one that can cause regrets if it’s not properly presented.

There is no limit to the amount of the marital deduction. A married person easily can eliminate estate taxes by leaving the entire estate to his or her surviving spouse. Many people do just that, and it can be a mistake. It’s important to know that the marital deduction simply defers taxes, not eliminate them. Property transferred to a surviving spouse is taxed at death, but only if it remains in the estate.

Lifetime Credits

We all have “lifetime credits”, which is basically the estate tax exemption equivalent. The basic federal estate-tax exclusion amount for estates of people who die in 2013 is $5,250,000. That, according to the IRS, is up from $5,120,000 in 2012. Keep in mind that the federal exclusions on estate taxes are locked in at $5 million; however, taking inflation into consideration, for calendar year 2013, the amount comes to $5,250,000.

The marital deduction only defers taxes, it does not eliminate them. All the property transferred to the surviving spouse is taxed at that spouse’s death if it remains in his or her estate. But – and this is important – the value of the estate at the time of the surviving spouse’s death determines the tax burden. An estate might be less than the exempt amount when it is inherited but be above the exempt amount when the surviving spouse passes away.

Because there are so many potential scenarios, there are also plenty of opportunities for your heirs to not follow through with your wishes. Those you wanted to ensure received property in your will may not get it by the time your spouse passes. There are those instances when the surviving spouse remarries and with the passage of time, the new spouse and possibly even his or her children could end up with the lion’s share of the estate. And if you’re no longer with the same spouse you had children with, it could be the stepparent leaves none of your estate to your own children, but instead, opts to leave it to his or her children from a previous marriage. In order to take advantage of the marital deduction, you have to be willing to let it go with no restrictions.

For these reasons and many more, working with an experienced financial and estate planning attorney can provide guidance so that you minimize future problems.

Stephen Unsworth
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