Articles

Marital Deduction Estate Planning

Taxable Estate. A person's Taxable Estate is generally all property owned by the decedent less certain deductions. A Marital Deduction is allowed for property given to a spouse and property qualifying for a Marital Deduction is not part of the Taxable Estate of the first spouse to die.

Exclusion Amount. The maximum Taxable Estate a person can have before the person incurs a federal estate tax is the "Exclusion Amount". The Exclusion Amount for persons dying in 2006, 2007 or 2008 is $2,000,000. The Exclusion Amount for persons dying in 2009 will be $3,500,000. There will be no Federal Estate Tax for persons dying in 2010. Presently the Federal Estate Tax is scheduled to be reinstated for persons dying in 2011 and thereafter, with an Exclusion Amount of $1,000,000. The tax rates on amounts over the Exclusion Amount are significant. When the Exclusion Amount is $1,000,000.00, the federal estate tax rate on property in excess of the Exclusion Amount begins at 41%. The Exclusion Amount for an individual may be less because of excess gifts given by the individual during life.

Marital Trusts and Nonmarital Trusts. Property left in trust for a spouse may or may not qualify for a Marital Deduction depending on the terms of the trust. If the surviving spouse has general powers and rights with regard to the property in the trust giving the surviving spouse control of that property, it will qualify for the Marital Deduction ("Marital Trust"). If the surviving spouse only has certain limited powers and rights with regard to property in a trust, it will not qualify for the Marital Deduction ("Nonmarital Trust" also sometimes referred to as a "Bypass Trust" or "Credit Shelter Trust").

Taxation of Marital Trust and Nonmarital Trust on Death of Surviving Spouse. Property put in a Marital Trust, which remains on the death of the surviving spouse, is included in the surviving spouse's Taxable Estate. Property put in a Nonmarital Trust is not included in the surviving spouse's Taxable Estate on the death of the surviving spouse.

Marital Deduction Estate Planning. Marital deduction estate planning is used to make sure that a husband and wife get full benefit of the Exclusion Amount that is allowed to them, which in the years 2006, 2007 and 2008 is $4,000,000.00. ($2,000,000.00 each). This involves splitting the property between the spouses so that the order of death will not be a factor. The estate plan of each spouse provides that if that spouse is the first to die, a portion of that spouse's property equal to the Exclusion Amount is put in a Nonmarital Trust and the remainder of that spouse's property, if any, is put in a Marital Trust. The Taxable Estate of the first spouse to die, is the property in the Nonmarital Trust which is equal to the Exclusion Amount and there is no tax. When the surviving spouse dies, the surviving spouse's Taxable Estate includes the property in the Marital Trust established by the first spouse and whatever other property the surviving spouse has. The amount of the surviving spouse's Taxable Estate over and above the surviving spouse's Exclusion Amount is subject to Federal estate tax. The property remaining in the first spouse's Nonmarital Trust is not included in the surviving spouse's Taxable Estate and therefore escapes Federal estate tax.

QTIP Trusts. There are certain trusts where the surviving spouse has limited rights with regard to the property in the trust which include the right to receive income from the trust at least annually. These are known as Qualified Terminable Interest Property Trusts ("QTIP Trusts"). A QTIP Trust is a Nonmarital Trust and does not qualify for the Marital Deduction unless an election is made. The election is made after the death of the first spouse. If an election is made, the property of the QTIP Trust becomes a Marital Trust. The election can be made as to all or a portion of the QTIP Trust. The elected portion becomes a Marital Trust. The nonelected portion remains a Nonmarital Trust. A QTIP Trust can be used in cases where a Marital Deduction may be needed to prevent a married person from having a Taxable Estate but for one reason or another that person does not want his or her surviving spouse to have complete control of the property of the trust. QTIP Trusts may be appropriate in second marriages or where the property involved was received as a gift or inherited by the owner from the owner’s family, and the owner wants to provide, with some assurance, that his or her intended beneficiaries (usually his or her children) receive the property when the surviving spouse dies. A QTIP Trust allows the Personal Representative of the deceased spouse’s estate to consider the tax consequences of having the QTIP Trust property taxed in the deceased spouse’s estate. The Personal Representative can make the appropriate election to qualify that portion of the QTIP Trust property for the marital deduction as is necessary to reduce the estate tax in the deceased spouse’s estate to zero. Property for which the QTIP election is made will be taxed as part of the surviving spouse's estate when the surviving spouse dies. If an estate tax is owing, it is paid from the QTIP Trust property. Property of the QTIP Trust for which no QTIP election is made will not be subject to tax in the surviving spouse's estate, but is subject to tax in the deceased spouse’s estate. Usually property for which no QTIP election is made will be no more than the unused Exclusion Amount so no federal estate tax will be owing by the deceased spouse’s estate.

Post-Mortem Estate Planning. Presently the Federal estate tax laws are in a state of flux. There is uncertainty as to changes that will be made, particularly with regard to persons dying in 2011 and thereafter. If the federal estate tax repeal is extended or if the Exclusion Amount is increased, the need for marital deduction estate planning to save estate taxes will be eliminated or significantly reduced for most married couples. Many couples would like to avoid the hassles of funding and continuing a separate Nonmarital Trust for the life of the surviving spouse if such is not necessary to save estate taxes. There may be other reasons it would be beneficial to have the surviving spouse own property in a Marital Trust or outright, as opposed to having the property held in a Nonmarital Trust. To give the surviving spouse some flexibility with regard to this, an estate plan can be established which provides that the deceased spouse’s property goes to a Marital Trust (or outright to the surviving spouse) unless the surviving spouse disclaims the property or a portion thereof, in which case the property, or portion disclaimed, will go to a Nonmarital Trust. When the first spouse dies, the surviving spouse will consider the consequences of having the deceased spouse’s property go to a Marital Trust (or outright to the surviving spouse) and potentially be taxed in the surviving spouse's estate when the surviving spouse dies. The surviving spouse can then disclaim property to the Nonmarital Trust as determined to be appropriate to reduce the potential tax consequences. An amount up to the deceased spouse’s unused Exclusion Amount could be disclaimed without incurring any Federal estate tax in the deceased spouse’s estate. The surviving spouse has nine months from the date of death of the deceased spouse to disclaim the property.