San Antonio Express-News
July 15, 2003

Will Gift Avoid Estate Tax?

copyright 2003, Paul Premack

Federal estate taxes have been the subject of great debate in the last two years. The US House of Representatives recently voted to permanently repeal the estate tax, but the US Senate has not yet agreed with that course.

Assuming the federal estate tax stays as it is, there are two exemptions you need to be aware of. First, the "unlimited marital deduction" allows an unlimited amount of assets to pass between spouses with any estate tax. It appears the proposal to change your mother’s Will is rooted in the unlimited marital deduction which would, indeed, eliminate all estate tax at the time of her death.

But that does not go far enough. Also consider the second exemption, called the "exclusion amount" or the "federal credit" against estate tax. This year, the exclusion amount is $1 million. That means that your mother, at the time of her death, could leave up to $1 million to her children, grandchildren or others, without having to pay any federal estate tax.

Knowing that, let’s take a look at the proposal to change her Will. Her estate, according to your letter, is valued at $150,000. If she changes her Will, that $150,000 is free from the federal estate tax because of the unlimited marital deduction. If she leaves her Will alone (so that her assets pass to her children and grandchildren) the $150,000 is still free from the federal estate tax because of the exclusion amount. Her current plan does not trigger an estate tax, and the proposed plan also does not trigger an estate tax.

If there is no estate tax either way, she must decide which plan to use based on other considerations. Retaining her current plan means that her children and grandchildren are not exposed to the risk of dishonesty from her husband. That dishonesty, if it exists, could manifest itself after her death when he becomes owner of the $150,000. As the owner, he decides what to do with the assets. He might spend the money on himself, or he might break his verbal promise by leaving the assets to his own children. This can be avoided if she stays with her current Will.

One last warning: your mother could by-pass her Will if she adds her husband’s name to her bank or brokerage accounts with right of survivorship. The survivorship right would make him owner when she dies, and would supersede the terms of her Will. If she wants the assets to go to her children and grandchildren, she must be sure to avoid giving survivorship rights to her husband.