If you have looked into the subject, you may hear a general statement with regard to asset transfers between spouses. The surface statement would be that you are allowed to transfer an unlimited amount of property to your spouse free of the estate tax.
In a broad sense, this is true, but there is a caveat, and there are intricacies to think about. We will look at the subject in this blog post.
The idea that you can transfer unlimited assets to your spouse free of taxation comes from the fact that there is an unlimited marital deduction. This deduction does allow for tax-free transfers between spouses.
However, what would happen if you transferred a large estate to your spouse free of taxation? Would that really solve the tax problem that your family would be facing?
The answer is that your spouse would be in possession of an estate that could be subject to the estate tax, so this course of action would just be postponing the application of the estate tax. There could be some advantages to the utilization of the unlimited deduction, but it is not a tax efficiency strategy in and of itself.
A couple that is exposed to the estate tax should sit down with an estate planning attorney to devise a long-term wealth preservation strategy that is comprehensive in nature. There are various different things that can be done, and the ideal strategy will depend upon the circumstances.
While we are on the subject of the marital deduction, we should point out the fact that the deduction is not available to people who are not American citizens. If you are married to a citizen of another country, the unlimited marital deduction is not available to you.
However, a widely embraced solution for people in this situation is a qualified domestic trust. The earnings from assets that have been conveyed into this type of trust can be distributed to a surviving spouse who is a non-citizen, and the estate tax would not be applied to the distributions.
High Net Worth Individuals
When it comes to transfers to anyone other than your citizen spouse, there is a $5.43 million exclusion that you could use to transfer a certain amount tax-free. The portion of your estate that exceeds this amount would potentially be subject to the estate tax, so it is something that only high net worth individuals have to be concerned about.
At the same time, your real property and your life insurance proceeds count, so you could face exposure even if you do not consider yourself to be among the super rich.
If you would like to discuss your tax situation with a licensed professional, contact us through the following link to set up a no obligation case evaluation: Indianapolis IN Estate Planning Attorneys.
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.