What Is Northern California Federal Estate Tax Marital Deduction
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Transcript of What Is Northern California Federal Estate Tax Marital Deduction
What Is Northern California Federal Estate Tax Marital Deduction? www.norcalplanners.com 1
WHAT IS NORTHERN CALIFORNIA FEDERAL ESTATE TAX MARITAL
DEDUCTION? “We have a federal estate tax in the United States, and it
carries a 40 percent maximum rate. Given this hefty rate, the estate tax can significantly erode the wealth that
you are passing on to your heirs.”
TIMOTHY P. MURPHY NORTHERN CALIFORNIA CENTER FOR ESTATE PLANNING AND ELDER LAW
What Is Northern California Federal Estate Tax Marital Deduction? www.norcalplanners.com 2
As you make your way through life, you are faced with many different forms of
taxation. There are income taxes, property taxes, taxes on purchases, capital
gains taxes, and “hidden” taxes on everything from gasoline to hotel rooms.
Given the fact that you have paid all of these taxes throughout your life, you
would probably like to think that you can leave whatever is left to your loved
ones after you pass away free of taxation. Unfortunately, for the most part, this
is not the case.
What Is Northern California Federal Estate Tax Marital Deduction? www.norcalplanners.com 3
We have a federal estate tax in the United States, and it carries a 40 percent
maximum rate. Given this hefty rate, the estate tax can significantly erode the
wealth that you are passing on to your heirs.
FEDERAL ESTATE TAX MARITAL DEDUCTION
The estate tax is not applicable on asset transfers between spouses. There is an
unlimited federal estate tax marital deduction. You can use this deduction to
leave unlimited assets to
your spouse free of the
death tax.
However, this is not an
estate tax efficiency
solution in and of itself. If
you leave everything to
your spouse tax-free, your
spouse would be in
possession of an estate that is potentially taxable.
This unlimited marital exclusion is only available to citizens of the United States.
You cannot use this deduction to leave a tax-free inheritance to a spouse who is
not an American citizen.
What Is Northern California Federal Estate Tax Marital Deduction? www.norcalplanners.com 4
ESTATE PLANNING FOR NON-CITIZEN SPOUSES
If you are married to a citizen of another country, there is an estate tax
efficiency solution that many people embrace. You could convey assets into a
qualified domestic trust, commonly referred to as a QDOT. The trustee could
distribute the earnings from the trust to your surviving spouse after your
passing. These distributions would not be subject to the estate tax, but regular
income taxes would be applicable.
After your passing, assets that remain in the trust would be transferred to the
secondary beneficiaries that you name in the trust declaration. These
distributions would be subject to the death tax.
What Is Northern California Federal Estate Tax Marital Deduction? www.norcalplanners.com 5
ESTATE TAX EXCLUSION
Assets transfers to anyone other than your spouse are potentially exposed to the
estate tax. However, there is a relatively large estate tax exclusion. The tax is
only applicable on the portion of your estate that exceeds this exclusion.
During the current calendar year, the federal estate tax exclusion is $5.43
million. Each year there can be adjustments to account for inflation, so you will
probably see a different figure next year.
What Is Northern California Federal Estate Tax Marital Deduction? www.norcalplanners.com 6
GIFT TAX
When you first hear about the estate tax, you may consider lifetime gifting as a
way to avoid the tax. This makes sense on the surface; there is a gift tax that
closes this window of opportunity.
The federal estate tax is integrated with the gift tax, so the $5.43 million
exclusion that we touched upon previously is a unified lifetime exclusion. It
applies to your estate, but it also applies to taxable gifts that you give while you
are alive.
In other words, if you use all of your
$5.43 million exclusion giving tax-free
gifts during your life, there would be
nothing remaining to apply to your
estate after you are gone.
The unlimited marital deduction also
applies to lifetime gift giving. As long as
your spouse is an American citizen, you
can give your spouse any amount of money and/or property during your life free
of the gift tax.
What Is Northern California Federal Estate Tax Marital Deduction? www.norcalplanners.com 7
SUMMARY
There are transfer taxes on large asset transfers in the United States. We have a
federal gift tax, and there is
also a federal estate tax. These
two taxes are unified under the
tax code.
If you are married, you can take
advantage of the unlimited
marital transfer tax deduction.
You can transfer unlimited
assets to your spouse, either
while you are alive or after you
are gone, free of transfer taxes.
To use the unlimited marital
deduction, the spouses must be
American citizens. This
deduction is not available to
citizens of foreign countries.
Asset transfers to others are potentially taxable, but there is a $5.43 million
exclusion that allows you to transfer this amount before the transfer taxes would
kick in.
What Is Northern California Federal Estate Tax Marital Deduction? www.norcalplanners.com 8
If you would like to learn more about taxation and tax efficiency strategies,
contact an experienced and qualified estate planning attorney to set up a
consultation. He or she will answer your questions and help you to develop an
effective tax planning strategy.
REFERENCES Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-and-Gift-Taxes Cornell University https://www.law.cornell.edu/uscode/text/26/2056
What Is Northern California Federal Estate Tax Marital Deduction? www.norcalplanners.com 9
About the Author
Timothy P. Murphy
Timothy P. Murphy is an estate planning and elder law attorney whose practice emphasizes helping people to build, preserve and pass on their wealth. He works with his clients to accomplish their goals while avoiding unnecessary court proceedings and minimizing or eliminating exposure to death taxes. Mr. Murphy also assists families facing the myriad of
problems associated with dealing with a loved one’s declining health and rising needs for care. He has practiced law in the Sacramento area for over 32 years, first with a large firm, and then with his own firm since 1987.
Tim has written a regular column on legal issues for Senior Magazine. He also was a regular featured guest on the Money Experts radio program heard locally on KFBK (AM 1530). Tim has been featured in the Sacramento Bee, Sacramento Business Journal, Sacramento Magazine, Comstock’s Magazine and other publications on estate planning and related topics. He also assisted local Channel 3 (KCRA) in an investigative report on the trust mill problem in the Sacramento area and was featured on Channel 10 (KXTV) in its series on personal financial
planning.
Northern California Center for Estate Planning and Elder Law www.norcalplanners.com SACRAMENTO 2277 Fair Oaks Boulevard Suite 320 Sacramento, CA 95825-5599 Phone: (916) 437-3500 ROSEVILLE 3017 Douglas Blvd. Ste. 300 Roseville, CA 95661 Phone: (916) 437-3500