2005-07-22 / Columnists

Spotlight

On Elderlaw Estate Taxes and Married Couples
By Nancy J. Brady, RN, Esq. And Linda Faith Marshak, Esq.

On Elderlaw

Estate Taxes and Married Couples


Many clients who come to see us own real property that has appreciated greatly in value over the original purchase price. In some cases the value of the real estate brings the total estate value over one and a half million dollars. An understanding of the estate tax consequences is crucial to avoid one’s beneficiaries losing part of the estate to estate taxes. This is most easily accomplished in the married couple’s situation.

Keep in mind, married individuals (who are citizens) can leave any amount to the surviving spouse tax free. This is called the unlimited marital deduction. If the first spouse to die leaves everything to the surviving spouse however, depending upon the value of the estate, on the death of the surviving spouse however, there can be tax consequences for the next generation. The amount of taxes due depends upon the year the decedent passes away. In 2005, an individual can pass an estate of up to $1.5 million (this is called the applicable exclusion amount) free of federal taxes. We know that this amount is increasing each year through the year 2009, when individuals can pass estates of up to $3.5 million free of federal estate tax. As of now, there will be no estate tax for individuals who pass away in 2010, and if Congress does not pass additional legislation, the estate tax will go back to $1 million in 2011.

One solution is to pass away in 2010- and if the laws don’t change by then, there will be no federal estate tax consequences. If you’re not sure that will work out for you, other alternatives should be considered.

The easiest solution for married couples can be a credit shelter trust created in the Last Will and Testament. Remember we said married couples can leave any amount to the survivor free of tax? Well, if the total value of the estate is $3 million, and the first spouse dies this year leaving everything to the survivor, the advantage of the applicable exclusion amount could be lost. For example, if the surviving spouse also passes away in 2005 passing the entire $3 million through the estate of the surviving spouse to the next generation, there will be over $800,000 in federal and New York State taxes due!

This can be avoided with the use of the credit shelter trust by allowing the surviving spouse to fund a trust up to the applicable exclusion amount (depending upon what year the first spouse dies) which will not result in any federal tax due on the death of the first spouse. The remaining estate can pass to the surviving spouse free of tax because of the unlimited marital deduction. Using the same example of an estate worth $3 million, if the first spouse dies in 2005, the surviving spouse can fund the trust with up to $1.5 million, and if the survivor passes away during 2005 also, there will be no federal estate tax consequences because $1.5 million passes through the estate of the first spouse, and $1.5 million through the estate of the second spouse.

Many times the assets of a married couple must be re-titled in order to achieve these estate tax savings. Where the value of a joint estate is $3 million this year for example, each spouse must have at least $1.5 million in his or her name in order to maximize the use of the $1.5 million federal exclusion amount in the estate of the first to die. The time and expense in reviewing and re-titling jointly held assets is well worth the potential estate tax savings- ask your children if they think it’s worth it!

Ms. Brady & Ms. Marshak can be reached at (516) 829-8265 or (718) 945-7777.

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