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Financial Learning Center


Planning Steps for Your Estate

Saving Estate Taxes for a Married Couple

If you follow the estate plan that most married couples do, and leave your entire estate to your spouse, you will not pay federal estate tax when you die (assuming you die first, and your spouse is a U.S. citizen). You are allowed an unlimited deduction for assets passed to your spouse, see the section "Estate and Gift Taxes". But what happens if the second-to-die's estate is over the Applicable Exclusion Amount when he or she dies? Beginning January 1, 2011, estates of decedents survived by a spouse may elect to pass any of the decedent's unused exemption to the surviving spouse. This election is made on a timely filed estate tax return for the decedent with a surviving spouse. See the instructions to Form 706 for additional information. This election will help to reduce the surviving spouse's federal estate tax.

You may also consider leaving a certain amount directly to your children or other loved ones, up to the applicable exclusion amount. If you feel your spouse will need the money or the income it generates to lead a comfortable and happy life, then you may create a credit shelter trust (also known as a bypass trust). In this situation, a trust is created (and typically funded up to the applicable exclusion amount) whereby the trustee (the person you choose to supervise the assets) pays the trust income directly to your surviving spouse. In the event he or she needs extra money, the trust can supply this support subject to certain restrictions. Whatever is left goes to your children or other family members when the surviving spouse dies without further estate tax. The trust corpus is included in the first spouse's estate, but the applicable credit amount is available to apply against the tax. The trust is excluded from the surviving spouse's estate. The main benefit of using your applicable estate credit in conjunction with a credit shelter (bypass) trust is the ability to have future appreciation of assets removed from both your and your spouse's estates. As in the case of all trusts, you should consult with an attorney or estate planning professional for guidance.

SUGGESTION: If your spouse is older or very ill, talk to the attorney or other estate planning professional about setting up the trust in such a way that the trustee will not be forced to make distributions to him or her if he or she could get Medicaid or other government assistance for his or her long-term care. In this way, your spouse can receive the care he or she needs, while, at the same time, you are saving something for your other survivors.

Splitting Assets

Review the "What's Your Estate Worth?" worksheet. If your spouse does not own any assets outright (assets that your spouse has no title to), your estate plan may not be taking the most advantages of allowances to shelter your assets. In the past years, 'splitting assets' has been an important strategy to maximize the use of the Applicable Estate Credit. Under the new regulations, due to the ability to use the credit amount of a deceased spouse for the second-to-die spouse, this strategy becomes less efficient. However, this strategy continues to be effective for shielding assets from estate tax on future growth, protecting assets from creditors and protecting assets in case of divorce.

Separately owned assets can be designated to beneficiaries other than your spouse in order to provide for specific future needs. With separately owned assets, your spouse also gains the ability to make independent transfers to his or her family, friends, or favorite charities if he or she dies first. Separately owned assets can also be used to establish a credit shelter trust, thereby utilizing the applicable credit (see the section "Estate Planning Strategies - Using a Bypass Trust"). If your estate is sizeable, without separately owned assets you will be forcing more of your assets to the second estate and may end up paying at much higher tax rates.

Consider changing the way your assets are held so this situation does not occur. You can do this by changing the way accounts are titled (from joint to your spouse alone) or by making a gift to your spouse.

IMPORTANT NOTE: Before you consider making a gift or other transfer to your spouse, consider the strength of your marriage. Although splitting assets will help reduce estate taxes if you die married, you may be in a weakened position to get those assets back in a divorce battle.

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