The amount of what is taxable for gift and estate tax purposes is reduced by a marital deduction. It allows a person to pass any properties to his or her partner without incurring estate or gift taxes.
The IRS allows a person to leave a sum of money to their partner without having to pay taxes on it. This deduction is a tax break that reduces the amount that is taxable in regards to gift and estate taxes. Keep reading to learn more about what marital deduction is and how it works.
What Is the Purpose of a Marital Deduction?
Marital deduction essentially eliminates inheritance tax when one’s partner passes away, considering spouses as a single party. Under this provision, spouses are allowed to transfer assets to one another as much as they please and at a reduced tax rate or can be completely eliminated.
This benefit and others makes marital deductions a great tool to utilize when estate planning.
Federal Transfer Tax
Estate, gift, and generation-skipping taxes are all forms of federal transfer taxes. The federal estate tax is imposed on one’s assets, upon death. However this is only applicable to those assets over a certain amount ($11.58 million in 2021).
Generation skipping taxes refer to an additional tax put on transfers of land, skipping a generation. Transfers to a deceased parent, to charities, or to help a minor child are both eligible for an unlimited deduction under the estate and gift tax provisions.
Gift Tax
This is a tax that you would pay anytime you transfer a gift to someone else. You may give up to $15,000 to anyone without having to worry about the IRS and taxes.
According to the IRS, a gift is a swap in which the giver does not accept money that is equal to the market value of the assets being given. In most cases, you won’t have to pay taxes on donations you get from family and friends; unless of course the transfer exceeds $15,000.
When a person gives a gift to their partner, it is covered by the unlimited marriage deduction, and it rarely requires the payment of a gift tax.
Rules on Marital Deduction
With marital deductions it’s important to consider the U.S. citizenship of the spouses, when the spouses died, and what would happen if you remarried.
U.S. Citizenships
Traditional wealth planning plans assume that all family members concerned are residents of the United States. Gifts or inheritances to non-citizens are not eligible for the unlimited marital deduction.
Death of a Spouse
Any properties in the trust, above the specified exclusion limit, will be counted in the survivor’s taxable estate until that surviving partner dies. Transfers to a living partner at death must be registered, but they are usually entirely deductible on an estate tax return
What If I Remarry?
If a spouse remarries, the unrestricted marital deduction will cause the assets to transfer to the new spouse without estate and gift taxes being applied.
Unlimited Marital Deduction
This deduction is available to all U.S. citizens who transfer property to their partner. The allowance is available on both inheritance and gift taxes. You can give your spouse up to $159,000 without having to worry about paying any gift taxes.
Unlimited marital deduction enables a person to give money to their partner with minimal or no tax consequences. As well as, to make unlimited interspousal property transactions without paying taxes.
Estate Tax
The estate tax is a tax imposed following a person’s death on their possessions. The federal estate tax is imposed on properties valued at more than $11.58 million. This estate tax rate varies between 18% and 40% for citizens of the United States.
Qualified Domestic Trust
A qualified domestic trust (QDOT) enables non-U.S. beneficiaries of a deceased partner to claim the marital deduction on their estate taxes. If a partner passes away and their spouse/beneficiary is not a U.S. citizen, a QDOT allows them to take advantage of the unlimited marital deduction.
What Is a Marital Trust?
A marital trust is used to transfer properties to a living partner, children, or grandchildren. Upon death, properties are transferred to the trust, and the money earned from these assets is distributed to the living beneficiary.
Key Terms
The principal includes the properties that were originally placed in the trust. The grantor is the one who establishes the trust and has ownership over the assets in it until they pass away.
Upon the grantor passing away, the trust will be transferred to the beneficiary. The trustee is the one in charge of and manages the trust.
How Does It Work?
With the assistance of a lawyer who specializes in property ownership, you can establish a marital trust. All assets must be listed and divided up under each spouse.
When one spouse passes, those asset’s under their name will be transferred to the living spouse tax free. There are different types of marital trusts that will impose different rules however this is typically how it works.
A well written marital trust will offer substantial tax benefits to a couple.
Can My Spouse Be the Beneficiary of an Irrevocable Trust?
Yes, in most cases your spouse is eligible to be the beneficiary of an irrevocable trust. With an irrevocable trust the conditions of the trust cannot be changed, altered, or terminated without the consent of the grantor’s designated beneficiary. A beneficiary is anyone who is qualified to receive the trust’s benefits.
Benefits & Downsides of a Irrevocable Trust
Benefits:
- When correctly drafted, enables persons to continue passing properties to heirs over their lifespan without having to pay estate and gift taxes
- You will be able to avoid mismanagement of the trust’s assets if you create the conditions for allocation of assets
Downsides:
- You have no authority to reclaim or otherwise handle properties that you have transferred to an irrevocable trust.
- If you are the grantor of an irrevocable trust, you have no flexibility. You no longer have power over the properties once they are placed in an irrevocable trust.
Financial Advisors Can Help You Understand Marital Deductions
A marital deduction allows a person to pass any properties to his or her partner without incurring estate or gift taxes. A financial advisor can help you set up a trust or help to explain all of the ways you and your spouse can benefit from marital deductions.
They will work in your best interests to help you prepare for any events in your life that may impact your finances or assets. You should consider consulting a financial advisor to help you manage your finances and plan out your goals.
