Estate and Tax Planning for Married Couples

With the recent changes to the tax law for 2011, there is now a $5M unified tax exemption for individuals who pass away in 2011 or 2012.  This has created an opportunity to avoid the payment of Federal estate taxes over the next few years.

If you and your spouse are U.S. citizens, you can leave each other any amount with no Federal estate tax exposure.  This is referred to as the unlimited marital deduction privilege and provides a significant Federal estate tax shelter.  It is especially advantageous with the current high unified credit over the next two years.

However, if you have a large estate, leaving everything to your spouse may result in your spouse having an estate that exceeds the Federal estate tax exemption when he or she dies.  In that case, there are a number of other estate tax saving strategies you should consider, some of which are set forth below.

Giving money to charities is always an approach to lower or reduce your taxable estate.

A frequently used approach is to utilize the annual Federal gift tax exclusion ($13,000 per person) by making yearly gifts up to the exclusion amount which will reduce the taxable value of your estate without reducing your lifetime Federal gift tax exemption.  Both you and your spouse can make an annual gift of $13,000 per person.

You can contribute to the education of your children or grandchildren by making payments directly to a school as a method to reduce your estate.  Direct payments to the school will not impact your unified estate and gift tax exemption.

Appreciating assets are always a little tricky but with the relatively significant unified estate and gift tax exemption, you can give away up to $5M worth of appreciating assets (stocks, real estate, etc.) without triggering any Federal gift tax.  Your spouse can do likewise.  Although this reduces your unified exemption and is taken against your lifetime exemption, the gifts are valued on the date of the gift and if they continue to appreciate for years while you are still alive you have avoided that additional appreciation being captured in your estate for estate tax purposes.  There are other important considerations when contemplating gifting versus passing assets on your death such as utilizing stepped up basis.

An irrevocable life insurance trust (ILIT) can be an important estate planning tool and assist in paying estate taxes.  An ILIT is not in your control and thus not a part of your estate and thus is not taxable upon your death.  With a typical life insurance policy, although perhaps income tax free, the proceeds are included in your estate for Federal estate tax purposes.

If you have questions regarding estate and tax planning, please contact the experienced estate planning attorneys at Lonich Patton Erlich Policastri for further information.  Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results.  While this post may include legal issues, it is not legal advice.  Use of this site does not create an attorney-client relationship