Marital Deductions in Estate Planning: Rules & Strategies

Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

When a person dies, the last thing the family wants to figure out is how much taxes they need to pay. In this lesson we will learn how a spouse can pass along an estate to reduce some of the tax burden.

Marriage and Deductions

There are many great benefits to being married. You have a friend to hang out with, a team partner to help raise children, and someone to turn to during both good and bad times. While the benefits of marriage can be unlimited, those benefits continue even in the unfortunate event that one of the spouses passes away.

You see, when people die they often leave their things to those they care about. Unfortunately, when we leave our estate to others, there is often taxes that have to be paid. Fortunately though, there are ways to plan out how to leave your estate and avoid paying a large amount of taxes or avoid paying taxes altogether.

In this lesson we will learn about the marital deduction and some strategies to consider when planning how to leave your estate.

The Basics of the Marital Deduction

So what is the marital deduction? Well, let's first define some key terms to better help us understand. First there is an estate. An estate is the total amount someone is worth and includes, cars, houses, land, possessions, and money. So, in order to figure the marital deduction the entire estate must be first be totaled.

Next, the value of everything being left to the living spouse is subtracted and therefore not taxed. Whatever's left can then be taxed. Thus, a spouse can leave the entire estate to the living spouse in which there would be not taxes owed at all. There is absolutely no limit to how much an estate can be worth either. So, basically, a spouse can leave their entire estate, regardless of size, to their spouse and no taxes will be due.

Now, while not having to pay taxes sounds like the ideal situation, there is a catch. You see, while no taxes are paid when leaving an estate to a spouse, when that last surviving spouse dies, all of the estate that was transferred will then have taxes due. So, essentially, taxes are just delayed when using the marital deduction.

So why would you choose this option? While taxes do have to be paid eventually, delaying it can help a spouse get their finances in order in the event that a spouse dies suddenly and or they were not prepared to pay taxes at the time of the death.

Keep in mind that once the two estates are combined at the death of the last surviving spouse, the marital deduction cannot be used because both spouses are no longer living. This means the last spouse needs to choose another option to pass the two estates along.

Often times the life exemption is used, which is the total amount of an estate that can be transferred to someone in a lifetime without paying taxes (about 5.4 million as of 2016). If the two estates once combined are small and under the limit allowed, taxes will not be due. If though, the two estates are large, because each person is only allowed one life exemption and cannot use the life exemption of the deceased spouse, it is likely that taxes will be due when the two estates are combined.

Strategies for Estate Planning

So what should a spouse do with their estate when they die? If leaving it to the surviving spouse can cause added taxes in the long run, what other options can be considered? Below are some strategies to consider.

1. Qualified terminable interest property trust - With a QTIP, the living spouse gets all of the income that the trust property generates for the rest of their life. The surviving spouse is paid annually and can even receive more if need arises. Then, when the surviving spouse dies, the property is again passed on, which in most cases is to the children. This option allows the surviving spouse to use the trust, avoid taxes, and leave the remainder of the trust to other beneficiaries, like the children.

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