Most people have heard of income tax deductions, and there are income tax issues that involve married couples specifically. However, the term “marital deduction” has relevance within the estate planning community. It has nothing to do with income taxes in this context.
What this refers to is the ability of a surviving spouse to inherit any sum of money from his or her deceased spouse free of the estate tax. There is a $5.25 million federal estate tax exclusion in place for 2013. It should be noted that this figure is updated annually to account for inflation. It may well be a bit higher next year.
You use this exclusion to arrange for tax-free bequests to your heirs when you are planning your estate. However, because of the marital deduction you don’t have to use any of this exclusion to leave behind an inheritance to your spouse.
We have a federal gift tax in the United States as well as an estate tax. The gift tax is unified with the estate tax. As a result, the aforementioned $5.25 million exclusion applies to the taxable gifts that you give throughout your life in addition to the value of your estate.
So if you give away $5.25 million in gifts while you are living using this exclusion you would have none of your exclusion left to apply to your estate.
The $5.25 million exclusion is a per person exclusion. A husband and a wife would have a total of $10.5 million if they were to combine their respective exclusions using the 2013 exclusion amount. Because the estate tax exclusion is portable, the surviving spouse would still have $10.5 million to apply to his or her estate once his or her spouse passed away.
This was not always the case. The estate tax was made portable for the 2011 tax year after a tax relief act was passed in December of 2010. Many people thought that the lack of portability was not fair. This is because it probably took the efforts of two people to create the wealth in question. Why should only one estate tax exclusion be allowed after the death of one of the marital partners?
In closing we would like to cover one last thing about the federal gift and estate tax marital deduction. Yes, it is true that you can leave any sum of money to your spouse free of the estate tax. You can give gifts to your spouse totaling any amount while you’re still alive without incurring any gift tax liability.
This is under the assumption that your spouse is in fact a citizen of the United States of America. If your spouse is a citizen of a different country, the unlimited marital deduction does not apply to asset transfers.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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