It can seem as though you are taxed in some way every time you receive an influx of income. You may also be taxed when you give away assets to others, because there is a gift tax, and there is an estate tax.
Given the above, it would be logical to assume that you have to take some special steps to leave assets to your spouse tax-free. In fact, this is not the case.
Most People Are Exempt From Estate and Gift Taxes
There is a gift tax and an estate tax. However, most people don’t pay these taxes because of the fact that they never make transfers that exceed the amount of the unified gift and estate tax exclusion.
In 2014 the amount of this exclusion is $5.34 million. Only transfers that exceed this amount would potentially be taxable.
So, you can leave assets to your spouse or anyone else free of taxation as long as the total transfers don’t exceed $5.34 million.
Unlimited Marital Deduction
Now let’s focus in on spouses specifically. Even if you do have assets in excess of $5.34 million, you don’t have to worry about the estate tax when you are transferring assets to your spouse. This is because of the existence of the unlimited marital deduction.
You may leave any amount of money and/or property to your spouse free of the estate tax. In addition to this, because the estate tax and the gift tax are unified, you can give lifetime gifts free of taxation as well.
Portability of Estate Tax Exclusion
The estate tax exclusion is now portable between people who are married to one another. This portability option became available for the 2011 tax year. Previous to this the estate tax exclusion was not portable.
What does portability mean in this context? In an estate planning context, portability refers to the ability of a surviving spouse to use the exclusion that was due to his or her deceased spouse.
Using the $5.34 million exclusion that is in place for 2014, a surviving spouse would have $10.68 million to utilize if his or her spouse was to pass away during this calendar year.
So, you can leave any amount of money to your spouse tax-free. In addition, you are leaving behind an additional exclusion that can be utilized when your surviving spouse is engaged in the process of estate planning.
It is important to plan your estate with the benefit of legal counsel so that you can be certain that you are positioning your assets optimally. If you decide that you will simply leave everything to your spouse tax-free, you are just postponing the inevitable, because your spouse’s estate will subsequently be subject to the estate tax.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.