Unlimited Marital Deduction - San Diego Estate Planning Attorneys

· How much property can I leave to my spouse without my estate having to pay federal estate tax?
The federal estate tax law permits leaving an unlimited amount to one’s surviving spouse without incurring the immediate obligation to pay tax. However, to the extent that the surviving spouse owns this property at his or her death, it must be included in the surviving spouse’s estate.
If your spouse is not a U.S. citizen, the unlimited marital deduction is available only for property that passes by way of a qualified domestic trust, which is explained in later.

· Why, then, can’t I leave everything to my spouse and not worry about tax?
If you rely upon the unlimited marital deduction without thought, the applicable exclusion amount for the first of you to die will be wasted and result in unnecessary taxes. This happens because the marital deduction “swallows up” the deceased spouse’s applicable exclusion amount. If you take advantage of both the applicable exclusion amount and the marital deduction through proper planning, it is not difficult to save additional taxes. The amount of savings varies depending on the year of death. Table 1-4 shows the potential tax savings for each year as the applicable exclusion amount is being phased in.

· Can my husband and I combine our annual exclusions?
Yes, married individuals can combine their annual exclusions; strangely enough, this is called gift- splitting. For example, if you are married and have three children, you and your spouse can jointly give each child up to twice the annual exclusion each year. It does not matter from whose assets a gift is made. For example, if you give one child money or property that exceeds the annual exclusion and your spouse consents to split the gift on a federal gift tax return, then both your spouse’s annual exclusion and yours can be applied to the value of the gift.

· Are there other types of tax-free gifts that I can make in addition to annual exclusion gifts?
Yes. Payments of any amount for school tuition and medical expenses that are made directly to the school or medical provider are tax-free and are in addition to the annual exclusion.

· Can I use my annual exclusion to make gifts in trust?
The annual exclusion amount is only for gifts “other than gifts of future interests in property.” Gifts to a trust are gifts of a future interest and usually do not qualify. However, there are ways to qualify gifts in trust for the annual exclusion.

· How do I qualify gifts in trust for my annual exclusion?
To qualify gifts to a trust for the annual exclusion, the trust must contain “demand-right” language or instructions. This means that the beneficiaries of your trust must have the current right to withdraw the money given to the trust. If they do not request withdrawal of the money within a preset period of time, the trustee will then be able to use the money as you specified in the trust and the gift will qualify for the annual exclusion.

· When is a gift “complete” for federal gift tax?
A gift is complete when the donor gives up complete dominion and control over the property. The donor must give away the tree and the fruit that is produced by the tree before the gift is “complete” for gift tax purposes.

· How do I value gifts for federal gift tax purposes?
For gift tax purposes, you must value a gift at its fair market value as of the date the gift is transferred to the recipient. The same standards for valuing an asset in an estate apply to valuing a gift.

· Who pays the gift tax, the donor or the recipient?
The donor is responsible for filing a gift tax return and paying the tax. If the donor does not pay the tax, payment becomes the responsibility of the recipient. If the recipient does not, or cannot, pay the tax, the property will be used to pay the tax.

· Can we review the basic methods of making gifts?
There are five basic methods of making gifts without creating a gift tax:
1. You may give unlimited amounts to your spouse during your life or at death because of the unlimited marital deduction.
2. You may give the annual exclusion amount to any person in any calendar year. If you are married, you and your spouse, by “gift splitting,” may together give as much as twice the annual exclusion amount per year to anyone provided your spouse consents to the gift. A gift tax return (Form 709) must be filed for the spouse to consent to a split gift.
3. In addition to annual exclusion gifts, you may give your applicable exclusion amount, or any part of it, to any one person or to several people during your lifetime or at death.
4. You may pay school or college tuition for any person provided you pay the tuition directly to the educational institution. This, too, is in addition to the annual exclusion and the applicable exclusion amount.
5. You may pay medical bills of anyone provided you pay the sums due directly to the doctor or hospital. This is in addition to the annual exclusion and the applicable exclusion amount.