The federal estate tax is potentially applicable on asset transfers to anyone other than your spouse. It is possible to use the unlimited marital deduction to transfer any amount of property to your spouse free of the death tax.
There is a gift tax that exists to stop people from giving gifts in an effort to avoid the estate tax. This unlimited marital deduction also applies to lifetime gift giving.
The estate tax exclusion is $5.43 million. This is the amount you could transfer to anyone other than your spouse before the estate tax would be applied. Since we are looking at spousal relationships, we should point out the fact that the exclusion is portable between spouses.
In this context, portability is a term that describes the ability of a surviving spouse to use the exclusion that was afforded to his or her deceased spouse. As a result, if you combine the respective exclusions that were allotted to each spouse, a surviving spouse would have a total exclusion of $10.86 million (using the exclusion amount that is in place for 2015).
If you are legally married in the eyes of the law, unlimited transfers are allowed, as long as you are married to an American citizen. The unlimited deduction is not available to you if you are married to a citizen of another country.
This stipulation is in place because the tax man is not left out in the cold if you leave everything to your citizen spouse tax-free. The estate tax would still be looming after the death of your surviving spouse.
Conversely, the IRS could be out of luck if the marital deduction could be used by a non-citizen. The person in question could head for his or her country of citizenship with a tax-free inheritance, and the American tax man would have no recourse.
Qualified Domestic Trusts
Though the inability to use the unlimited marital deduction can be viewed as a negative, there is a strategy that can be implemented if you are a high net worth individual who is married to someone who is not an American citizen. You could establish a qualified domestic trust.
Your spouse would be the beneficiary at first, and inheritors of your choosing would be the secondary beneficiaries. If you die before your spouse does, the trustee that you name in the trust agreement could distribute the earnings from the trust to your surviving spouse throughout the rest of his or her life free of the estate tax.
After your surviving spouse passes away, your secondary beneficiaries would assume ownership of anything that is left in the trust, but the estate tax could be applicable depending on the extent of the assets in question.
Tax Efficiency Consultation
Contact us through the following link if you would like to discuss tax efficiency strategies with an experienced and qualified estate planning attorney: Sacramento CA Estate Planning Attorneys.
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