Minnesota Estate Planning: What is the Marital Deduction?

Minnesota estate planning attorneys often advise clients who are in possession of a great deal of wealth. It is very important to understand the lay of the land thoroughly if you are engaged in the process of estate planning as a high net worth individual.

With this in mind, we would like to explain the estate planning benefits of the unlimited estate tax marital deduction. Before we get into the marital deduction, let’s take a look at the general parameters of the federal estate tax as they stand right now in 2017.

The estate tax carries a maximum rate of 40%, and the amount of the exclusion is $5.49 million. The estate tax is unified with the federal gift tax. This 40% top rate and $5.49 million exclusion applies to gifts that you give throughout your life that are taxable and the value of your estate.

To be clear, there is just one $5.49 million exclusion. If you use all of the exclusion while you are alive, the entirety of your estate would be subject to the estate tax after your death.

All of the above is true as it applies to asset transfers to people other than your spouse. Married people can take advantage of the unlimited marital estate tax deduction. There is no limit to the amount of property that you can bequeath to your spouse in a tax-free manner. You are not using any of your unified gift/estate tax exclusion when you transfer assets to your spouse, regardless of whether these transfers take place while you are living or after you pass away.

You have your own $5.49 million exclusion to utilize, and your spouse also has a $5.49 million personal exclusion. If you were to die first, your spouse would have a total of $10.98 million to apply to his or her estate. This is called portability in an estate planning context. To take advantage of portability, you do have to file Internal Revenue Service Form 706 within nine months of the passing of your spouse.  A six-month automatic extension is available if this is necessary.

Many people these days spend significant time abroad, and this can lead to relationships between people who are citizens of different countries. Sometimes these relationships culminate in marriage.

When you are engaged in your estate planning efforts, you should understand the fact that the unlimited marital deduction only applies on asset transfers to a spouse who is an American citizen. If you are married to someone who is a citizen of a different country, you cannot utilize the unlimited marital deduction to bequeath to this spouse assets in a tax-free manner.

In such a situation you could, however, gain tax efficiency by creating a qualified domestic trust.