Estate Planning

The Marital Deduction and Estate Tax Law

By admin

The marital deduction is a wonderful thing, it allows the deceased spouse to transfer an unlimited amount of assets to the surviving spouse.  Bill Gates could pass his multi-billion dollar fortunte to his wife upon his death tax free!  But the fact that many people forget is that upon the death of the surviving spouse their estate will be taxed based upon all of the assets they hold.  In this situation Estate Planners would say that the first spouse to die wasted their tax credit.

The marital deduction is just one of many important estate tax concepts which include:

• Martial Deduction:  Unlimited
• 2008 MN Exclusion Amount:  $1 Million
• 2008 Federal Exclusion Amount:  $2 Million
• 2008 Gift Tax Credit:  $1 Million
• 2008 Generation Skipping Tax Credit:  $1 Million

These are a lot of concepts and numbers to keep track of, but these concepts can be implemented to save people enrmous amounts of tax.  We will tackle each of these concepts in upcoming posts but today lets look at how the unlimited marital deduction and the Minnesota and Federal exclusion amounts work together.

The $1 Million MN exculsion amount means that if the total value of your estate is less then $1 Million you will not have to pay any MN estate tax.  The same thing applies to the $2 Million Federal exclusion amount, if the total value of your estate is less than $2 Million then you will not have to pay federal estate tax.   Now here is where the unlimited marital deduction can alter the results. 

If you pass away with assets in your name worth $600,000 you can pass all of that to your spouse tax free due to the unlimited marital deduction.  In fact you could pass all of those assets to anyone tax free due to the $1 Million MN estate tax exclusion amount.  So say you passed all of that to your spouse, and she currently has $500,000 of assets in her name before you pass then she would have a total of $1.1 Million in assets after receiving the assets you passed to her.  That amount would cause her to have an estate worth more than the MN exclusion amount.  The problem with this is that currently MN estate tax rates are around 45%. 

This could be avoided with some careful planning with an estate planning attorney.  A trust called a “marital trust” could be created through your will that would include some of your assets and those assets would be used to provide income to your spouse for things such as health, support, education.  Since the assests in the trust would not be included in your spouses estate when she passes she would fall below the MN exclusion amount and avoid estate taxes.

This set up may sound complicated but an experienced estate planner can walk you though this process and explain why it is so beneficial.  The cost of the estate plan often pales in comparison to the taxes you might have to pay upon the death of the surviving spouse.  If you would like to learn more about this estate plan, and many others, contact an estate planner you can trust.  I am always happy to meet with people interested in learning about the benefits of estate planning.  You can contact me at james@jtandersonlaw.com or (952) 356-6470.

Full post as published by Minnesota Estate Planning Blog on April 15, 2008 (boomark / email).