Marital Exemption
Every person who dies must go through an estate taxation evaluation. If you die leaving personal property, one-half of your community property and separate property that has a value in excess of the Exclusion amount will be taxed for the year in which you die, and your estate will have to pay taxes. If you do not know what the Exclusion is, please see this link first (Exclusion).
However, married couples and domestic partners may have the ability to use a Marital Exemption to avoid any taxes on any amounts over the Exemption. Should you give all your property by a will to your spouse? It can be done, but a trust offers so much more protection from creditors, taxes and attorney fees. Here are the ways a trust can add value to your estate and estate planning.
1. A will can leave your estate to your spouse, and avoid taxation through the marital exemption, but the second spouse to die will pay those taxes. The will must go to probate and extensive attorney fees will be paid in probate. This can be avoided with a trust.
2. A will can give your estate to others and not your spouse, but any amount over the exemption is taxed and the tax could have to be paid by your spouse even though you gave a gift to another. The will must go to probate and extensive attorney fees will be paid in probate. A trust can avoid this complication.
3. A will cannot give assets to another person and allow your spouse to claim the marital exemption. A trust can!
These are complex ideas so let’s take the time to show an example of how this works so that you can understand it.
Example for #1. Above. You and your spouse have a will and all your assets go to your spouse:
| You and your spouse have 5 million in assets equally owned and community property to both. Your spouse dies unexpectedly in 2008. Here is the tax on the estate calculation: | |
| ½ estate is allocated to your deceased spouse $5 Million / 2 | = $2.5 Million |
| Exempted amount (See Exemption link) | - $2.0 Million |
| Taxable estate that must pay taxes | .5 Million |
| The surviving spouse can use the marital exemption to claim that portion over the Exemption to avoid paying taxes at all. That is good news. There is only one catch, the surviving spouse has to claim the excess in her or his estate, and if she dies, the government will get their taxes if any is left. Take a look if the surviving spouse died 2 weeks later and was given the entire estate of the deceased spouse: | |
| Surviving spouse estate is $2.5 Million + $2.5 Million (his and hers) | = $5 Million |
| Exemption | - $2 Million |
| Taxable Estate | $3 Million |
You see that without a trust and improper protection, the estate will face significant taxes on the remaining amount (almost half goes to taxes) if you simply give your estate by a will and rely on the marital exemption. How can a trust help?
| If we arrange a trust, that allows the deceased spouses estate to remain the property of the deceased spouse, but the surviving spouse can use this money any way she wants during her lifetime, claiming the marital exemption on the excess that would be taxed, then when the second spouse dies, no estate taxes are paid if the exempted amount was spent first. But if the spouse died shortly after (as assumed above), look at the tax savings. Here is the calculation with the same numbers above: | |
| First spouse to die Trust keeps the assets exempted | $2.5 Million Estate |
| Exemption | $2.0 Million |
| Taxable Estate of First Spouse | .5 Million |
| Second spouse to die | $2.5 Million Estate |
| Exemption | $2.0 Million |
| Taxable Estate of Second Spouse | .5 Million |
| Total taxable estate .5 Million + .5 Million | = 1 million |
Savings on taxation 3 Million – 1 Million = 2 Million Savings
As you can see, setting up a trust can save you substantial estate taxes because the trust can hold property after you die. By giving your estate to your spouse in a will, you give up that right. If you give it to another, you cannot avoid the taxes by use of a marital exemption. A trust always works to your advantage if set up properly.
Don’t be fooled by the size of the estates above. Don’t think, “Well I don’t have 5 million dollars so I do not need a trust.” Even if you have a smaller estate, you can benefit from a trust. This is only an example of a simple use of a trust to magnify the benefits offered by a trust. Call us to discuss your trust needs at 1 888 752-7474 or Contact Us online.
As a spouse, you may claim a part or all of your deceased spouses assets as a marital exemption and pay no taxes at that time. However, the surviving spouse must take possession of all the assets and the assets are then a part of his or her estate. The taxman will get theirs if you do not set up a trust. Plan ahead and your hard earned money will benefit those you care about and not just Uncle Sam.