Updated: Jun 26
There are many complexities in the estate tax system, but two opportunities for reducing taxes will impact most people. First, the unlimited marital deduction eliminates estate tax on all assets passing to your surviving spouse. There is no dollar limit on the deduction. However, it must be used correctly to avoid bumping the survivor’s estate into a higher tax bracket.
Second, the unified credit eliminates estate or gift taxes on up to $600,000 of assets passing to anyone other than your surviving spouse.
By carefully combining the two rules every estate smaller than $1.2 million can avoid estate taxes.
Let’s look at two examples:
John and Mary have assets of $800,000. They have wills leaving all assets to the surviving spouse. When John dies, the unlimited marital deduction eliminates the possible 30 % estate tax on the transfer of his half to Mary. When Mary dies (owning her $400,000 and the $400,000 she inherited from John) the estate tax bracket is 33 % — but Mary’s unified credit of $192,800 reduces the estate tax to $75,000. This totals 9.4 % of the combined assets.
John and Mary’s wills contain “Credit Shelter Trusts”. When John dies, his half of the assets are left to the trust for Mary’s benefit. His unified credit eliminates the possible 30% estate tax on the transfer. When Mary dies sometime later, her estate is $400,000 (because John’s half went to the trust). Her unified credit eliminates all estate tax. This eliminates estate taxes totally.
By using the Credit Shelter Trust, John and Mary saved $75,000. Larger estates save even more, but estates above $1.2 million must also use other tax saving techniques.
Using the unified credit in both estates saves much money. Considering that estate tax rates are the highest of any federal tax, it makes sense to reduce the tax in any way Congress allows. Contact your legal advisor for more information.
[PLEASE NOTE: in the years since this article was published there has been a great deal of change to the federal estate tax. View this article as historical only, not as currently applicable.]
Original Publication: San Antonio Express News, November 17, 1989