In the aftermath of your beloved partner’s passing, their final act of love surprises you – they’ve bequeathed their entire wealth to you. While your attorney assures you that you won’t have to pay a single dime in estate tax, there’s still an important task at hand – filing an estate tax return.
As you navigate this legal process, little do you know that this seemingly mundane task holds power to safeguard your family’s future, potentially saving them millions in estate taxes long after your own journey comes to an end.
Picture this – the estate tax, a single payment demanded nine months after one’s demise, lurks in the shadows, ready to claim its share if the deceased’s assets surpass certain thresholds. You get to then brace yourself for the federal threshold in 2023, a staggering amount of $12,920,000. But that’s not all – various states have crafted their own estate tax rules, with thresholds ranging from a modest $1 million in Oregon and Massachusetts to a jaw-dropping $12,920,000 in Connecticut.
Your attorney can provide guidance on which assets are included in the calculation of this amount. It’s important to note that some people are often surprised to discover that their life insurance proceeds are subject to taxation upon their death unless the policy is owned in an irrevocable trust.
In the event that you leave all your assets to your surviving spouse, you won’t owe any estate tax – thanks to the unlimited marital deduction. This deduction allows you to pass on any amount of your money to your spouse without incurring estate taxes, regardless of whether it’s $1 or $100 million. Therefore, if you possess $50 million and leave it entirely to your spouse, there won’t be any estate tax liability.
However, it’s possible that you may still be required or advised to file an estate tax return. Here’s an explanation for why that might be necessary.
When the value of your assets upon your demise surpasses a certain threshold (prior to any deductions being applied), you’re obligated to submit an estate tax return, regardless of whether the deductions bring you below the filing threshold. Think of it as a peculiar quirk of the law that demands your attention even if you manage to wiggle your way out of the tax net through various deductions.
When engaging in estate planning with your spouse, it is common for her to have a trust that will be divided into different sub-trusts upon her passing. As the surviving spouse, it will be then your responsibility to allocate assets to these trusts and ensure that they are properly funded.
This allocation and funding process will be established through the estate tax return, which determines the value of assets assigned to each trust.
When filing an estate tax return for your spouse, you will be required to make specific choices to elections that will impact the inclusion of assets in your own estate upon your passing. These elections play a significant role in determining which assets will be considered part of your estate for tax purposes.
If your spouse has not fully utilized their exemption of $12,920,000, you have the opportunity to preserve and transfer their unused portion to your own estate tax return upon your demise. This portability feature allows for potential estate tax savings for your children in the future, potentially amounting to millions of dollars.
Currently, the combined exemption for married couples stands at $25,840,000, and the maximum federal estate tax rates can reach 40%. By securing your spouse’s unused exemption, you can potentially save over $5 million in estate taxes that would otherwise be payable upon your passing.
It is worth noting that even if your assets do not fall within the $12 million to $25 million range, it is still advantageous to lock in your spouse’s unused exemption. This is due to the potential increase in the value of your assets or the possibility of lower estate tax thresholds which are set to occur in 2026 when the federal estate tax exemption is scheduled to decrease to $5 million adjusted for inflation unless actions are being taken to modify this.
That’s precisely why it’s absolutely crucial to pay close attention to the GST Tax. By taking the initiative to lock in your spouse’s unused GST Tax exemption, you will gain the power to leave a more substantial legacy for your grandchildren—be it through outright gifts or carefully crafted trusts. So, don’t let this golden opportunity slip through your fingers, and ensure that your loved ones receive the maximum benefit while keeping those menacing taxes at bay.
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