The marital deduction is one of the most powerful estate planning tools. Any assets passing to a surviving spouse pass tax free at the time the first spouse dies, as long as the surviving spouse is a U.S. citizen. Therefore, if you and your spouse are willing to pass all of your assets to the survivor, no federal estate tax will be due on the first spouse’s death.
There is no limitation on the value of the property that can qualify for the marital deduction. By transferring sufficient assets to the surviving spouse in the proper manner, estate tax liability upon the first spouse’s death can be completely avoided.
At first view, the estate tax marital deduction may seem to be a government giveaway. It is not.
The advantage afforded is not the total avoidance of estate tax on the transferred property but, rather, the deferral of such tax. Estate tax must be paid on the death of the surviving spouse.
The obvious advantage of deferring the estate tax liability is that the surviving spouse will have the use of the tax dollars that would otherwise have been paid to satisfy the tax liability of the first spouse’s estate. The deferral of tax liability also postpones the possible need to sell off assets that the surviving spouse might wish to preserve in order to obtain funds to satisfy the tax liability.
But this doesn’t always solve your estate tax problem. First, if the surviving spouse does not remarry, that spouse will not be able to take advantage of the marital deduction when he or she dies. Thus, the assets transferred from the first spouse could be subject to tax in the survivor’s estate, depending on when the surviving spouse dies. Second, from a personal perspective, you may not want your spouse to pass all assets to a second spouse even if it would save estate taxes.
Coordination with the Unified Credit
Your estate planning attorney should coordinate the estate tax marital deduction with the unified credit, which is $5,490,000 for decedents who died in 2017. The unified credit against the federal estate tax allows an individual to pass a certain amount of assets free from estate tax liability regardless of the identity of the recipients. The unified credit adjusts every year for inflation. In a will or trust, the amount allowed to pass tax-free is normally transferred under what is known as a “credit shelter” or “by-pass” trust. Then, the transfer under the marital deduction rules is made so as to prevent the taxation of the remaining assets.
In conclusion, in the case of a married couple at risk of a hefty estate tax bill, estate planning must take into account the marital deduction rules and the associated tax savings. Given the complex nature of the many rules involved, you should always seek the guidance of a qualified attorney for any estate planning needs.