If you are married, one of the primary goals of your estate plan is likely to ensure that your spouse is financially secure if something happens to you. Like many married couples, you and your spouse may create reciprocal estate plans wherein you leave your entire estate to your spouse and your spouse leaves everything to you. If you have a moderate to large estate, however, you may be concerned about the tax implications of leaving your entire estate to your spouse. Because every estate is unique, you should consult with an experienced estate planning attorney regarding specific questions and concerns. In the meantime, however, the Hartford estate planning lawyers at Nirenstein, Horowitz & Associates, P.C. discuss whether you can leave your estate to your spouse tax-free.
The Unlimited Marital Deduction
At first glance, it might seem as though leaving your entire estate to your spouse tax-free is easily accomplished through the use of the Unlimited Marital Deduction. As the name implies, the unlimited marital deduction allows a taxpayer to leave an unlimited amount of assets to a spouse tax-free at the time of death. There are two problems with depending solely on the marital deduction. First, any gifts you made during your lifetime remain subject to taxation. More importantly, leaving all of your assets to your spouse may only prolong the payment of taxes because doing so may overfund your spouse’s estate. Essentially, all this may do is prolong, not avoid, the payment of federal gift and estate taxes.
Federal Gift and Estate Tax Basics
The first potential obstacle to passing your estate to a spouse tax-free is the federal gift and estate tax. The federal gift and estate tax is effectively a tax on the transfer of wealth that is collected from your estate after you die. Every estate is potentially subject to federal gift and estate taxes. The tax applies to all qualifying gifts made during a taxpayer’s lifetime as well as all estate assets owned by the taxpayer at the time of death. Although the federal gift and estate tax rate fluctuated historically, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the rate at 40 percent. Without any deductions or adjustments, a $20 million estate would owe $8 million in federal gift and estate taxes.
The Lifetime Exemption
Fortunately, every taxpayer is entitled to make use of the “lifetime exemption” to reduce the amount of gift and estate taxes owed by their estate. ATRA set the lifetime exemption amount at $5 million, to be adjusted for inflation each year. For 2018, the lifetime exemption amount would be $5.49 million for an individual and $10,980,000 for a married couple; however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years after that. Under the new law, the exemption amounts increased to $11,200,000 for individuals and $22,400,000 for married couples. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation.
Another important change that ATRA made permanent was the concept of “portability.” Portability allows a surviving spouse to use any portion of a deceased spouse’s lifetime exemption that remains unused. In other words, If you leave your $10 million estate to your spouse using the marital deduction, and you made no lifetime gifts, you did not use any of your lifetime exemption. Therefore, the entire $11.2 million exemption can be passed to your spouse. He/she then has a combined total of $22.4 million to use at the time of his/her death. This considerably lessens the risk of overfunding a spouse’s estate by using the marital deduction.
Connecticut Gift and Estate Taxes
Another consideration when trying to leave your estate to your spouse tax-free is the impact Connecticut gift and estate taxes will have on the estate. Although numerous attempts to do away with the tax have been made in recent years, Connecticut continues to be one of a handful of states that also imposes a state level gift and estate tax. As of 2018, Connecticut also has its own version of the lifetime exemption which is at $2.8 million until 2019 at which time it will increase to $3.6 million.
Contact Hartford Estate Planning Lawyers
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about how to leave your estate to your spouse tax-free, contact the experienced Hartford estate planning lawyers at Nirenstein, Horowitz & Associates, P.C. by calling (860) 548-1000 to schedule an appointment.