Can both spouses utilize the federal estate tax exemption?

Readers have likely heard about the spousal deduction, whereby a spouse can leave an unlimited amount of assets to a surviving spouse without triggering estate tax liabilities. However, does that mean that first spouse’s federal estate tax exemption is gone?

With the help of an experience estate-planning attorney, the answer to that question does not have to be yes. First of all, it is possible for a spouse to transfer his or her unused exemption to the surviving spouse. However, if the surviving spouse eventually remarries, that exemption might be lost.

A solution to the unused exemption issue is splitting an estate into two revocable trusts, to the extent that each is below the $5.43 million federal estate tax exemption for tax year 2015. When the first spouse dies, his or her trust can use the exemption. The exemption is preserved regardless of whether the surviving spouse remarries.

An attorney can help individuals value their projected estates, as well as pointing out commonly overlooked assets. For example, insurance proceeds generally count toward an estate’s value unless they have been titled in the name of a trust. In fact, an irrevocable life insurance trust can be both the owner and beneficiary of life insurance, allowing the proceeds to remain in the trust and only period distributions made to beneficiaries.

Real estate can also be titled in the name of a trust. A qualified personal residence trust sets up a transfer of real property to beneficiaries after a specified term, often between ten or fifteen years. The grantor can continue living in the home before the expiration of that trust term, and even after if he or she pays rent. Alternatively, a family limited partnership may also remove assets from an estate by giving ownership interests to one’s children.

Source: Market Watch, “4 tax issues to consider when you close an estate,” Bill Bischoff, Feb. 17, 2015

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