Creating an estate plan can be an intimidating process for the uninitiated. There are so many goals you likely want to include, and factors to consider, that is can be mind-boggling. In addition, unless you have some experience in estate planning, there are likely a number of terms and concepts that are completely foreign to you. The best way to learn more about estate planning terms and concepts, and how they apply to your estate, is to consult with your New Hampshire estate planning attorney; however, it certainly doesn’t hurt to learn everything you can before sitting down with your attorney. One concept that is frequently used in estate planning for married couples is the unlimited marital deduction. Because it is relatively easy to explain, it is a good starting point for gaining a better understanding of how federal gift and estate taxes can impact your estate.
Probate Basics – What Happens after Your Death?
Almost everyone leaves behind an estate when they die. Your estate will consist of all assets owned by you, or in which you had an ownership interest, at the time of your death. Before most of those assets can be passed down to intended beneficiaries or heirs of your estate, they must first go through the legal proves known as “probate.” Probate serves several purposes, including:
- Authenticating the decedent’s Last Will and Testament
- Identifying, locating, and valuing the decedent’s assets
- Notifying creditors of the estate and allowing them the opportunity to file claims against the estate
- Ensuring that taxes owed by the decedent and/or the estate are paid
- Transferring estate assets to beneficiaries and/or heirs of the estate
Federal Gift and Estate Taxes
For anyone with a moderate to large estate, the impact federal gift and estate taxes may have on their estate should always be a primary consideration during the estate planning process. All estates are potentially subject to federal gift and estate taxes. The tax is levied on the combined total of the value of all qualifying gifts made during a decedent’s lifetime and the value of all estate assets owned at the time of death. Although the federal gift and estate tax rate was once subject to change on a yearly basis, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the tax rate at 40 percent. Without any additional deductions or considerations, that means a taxpayer could lose almost half of his/her estate to Uncle Sam! Fortunately, every taxpayer is also entitled to make use of the lifetime exemption which is essentially a deduction taken prior to calculating the tax. Like the tax rate, the lifetime exemption limit was also subject to change – and did change – on a regular basis prior to the passage of ATRA. In 2012, ATRA set the lifetime exemption limit at $5 million, to be adjusted annually for inflation. For 2017, the exemption is $5.49 million. By way of illustration, imagine you made gifts over the course of your lifetime valued at $3 million and left an estate valued at $5 million at the time of your death for a combined total of $8 million. After claiming the lifetime exemption, your estate would be left with taxable assets valued at $2.51, leaving a tax obligation of $1,004,000.
Where Does the Unlimited Marital Deduction Fit into the Picture?
If you are married at the time of your death, your estate has the option to make use of the unlimited marital deduction. As the name implies, the deduction allows a married taxpayer to leave an unlimited amount of assets to a spouse tax-free. The remaining $2.51 million in assets in the above example, for instance, could be gifted to a surviving spouse without incurring any tax obligation. Although this sounds like an awesome option, it often results in over-funding a surviving spouse’s estate. Ultimately, it only delays the payment of federal gift and estate taxes in that case. Consequently, the marital deduction should only be used when proper estate planning was not done prior to the decedent’s death. Ideally, your estate plan should include tax avoidance strategies that result in the transfer of wealth without incurring a tax obligation at all.
If you have additional questions or concerns related to the marital deduction or tax avoidance strategies, contact the experienced New Hampshire estate planning attorneys at DeBruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.