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How To Effectively Use the Marital Tax Deduction to Maximize Savings for Your Children?

Did you know that getting married can also save you money? The marital deduction is a part of U.S. tax law that allows you and your spouse to transfer an unlimited amount of assets to your spouse at any time- with no tax consequences. This marital deduction is a part of the world of estate planning because it allows you to be able to transfer property without having any gift tax attached to it. In other circumstances, there are consequences for having transferred the property to another person via gift.

What is an estate tax?

An estate tax is a tax on your ability to transfer property at your death. Everything that you own or have certain property rights concerning on the date of your death must be made known to the IRS. Once a fair market value for this property can be calculated then this is the amount that will be used to determine any tax liability for that property which is transferred. Investments, real estate, trust income, businesses, and cash are all examples of property that could be transferred to another person at your death.

You can also deduct certain kinds of expenses which will reduce the value of your estate. The new figure once expenses are removed is known as your taxable estate. Debts like a mortgage on real estate and administrative expenses are common types of expenses that can reduce the overall value of your estate at the time of your passing. Gifts that you have made will be added to this number, as well. The additional income will be added to your estate. This is where the martial tax deduction can come into play for your family and make a tremendous difference when it comes to saving money for your spouse and your children.

What is the marital tax deduction and why does it matter?

Married people can exempt roughly $25 million from estate and gift taxes when transferring property to one another. For 99.9% of us, that means that you can leave all your property to your surviving spouse and not run afoul of any laws covering gift taxes or estate taxes on the federal level. If you end up using your spouse's unused exemption you must file a tax return at their death to notify the IRS of your having done so. This is true even if the value of your estate is below the $25 million level that we discussed earlier in this blog post. Even if you end up incurring no taxes on the transfer or use of the exemption this must be done.

The circumstances we just described relate to portability. Your spouse's exemption is portable and can be used for the transfer of assets. If you do your taxes, then you need to know about this when it comes to the IRS and your estate planning matters. A tax professional should be aware of this requirement and you should contact the person that you work with when your spouse passes. There can be significant tax consequences to your not filing this tax return.

Whoever is the representative of your spouse's estate- in many cases, it is you as their spouse- will need to file a tax return for federal estate tax purposes. This is done to take advantage of your spouse's unused gift/property transfer exclusion. This must be done within nine months of your spouse's death. You can request an extension for time and gain an additional six months to perform this action. The failure to do so could be taxes and penalties that have built up over time.

Let’s stay that the person who is representing your spouse’s estate does not file an estate tax return quickly. In that case, the ability to request an extension to do so would be dependent upon whether there is a requirement that the estate file. This can be determined by looking at the federal estate exemption for the year that your spouse passed away. If your spouse’s estate is required to file an estate tax return due to the value of their estate, then there will not be an extension that is granted. For most people, however, federal law allows for a return to be filed within two years of your spouse’s death.

What has the filing requirement looked like over time?

The requirement to file an estate tax return depends on the value of your estate at the time of your death. Valuing your estate means taking into consideration your assets as well as gifts that you made during your life minus whatever gift tax exemption you were able to take advantage of. In 2017 the filing threshold for an estate tax return was $5,490,000 but jumped up to $11,180,000 in 2018. This is a more than 100% increase in the value of the estate which must now file an estate tax return at the time of your spouse’s passing. What this does on a practical level is make it even less likely that you will need to do so. However, if you are close to these numbers it pays to investigate the matter further and to speak with your tax professional about it.

What is the process like for electing to use the unused spousal exclusion for gifts?

For you to be able to elect portability for your deceased spouse's unused exclusion amount for your benefit then your spouse's estate representative needs to file an estate tax return within nine months of your spouse's passing. An extension for time may be allowed for an additional six months. The tricky part to all of this will be keeping your wits about you during an incredibly difficult time. Without a doubt, your mind will not be functioning as it normally would immediately after your spouse passes away. This is why it may be wise for you and your spouse to appoint someone else as each other's estate representative or executors of your wills. That other person will not be as acutely impacted by the passing of your spouse as you will be.

What types of property are not included in your estate for tax purposes?

Your estate does not include property that is owned solely by your spouse or other people. If someone gifted, your property in a life estate or something similar then that gift would also not be included in your estate because of the lack of control that you would exercise over the property. Gifted property of other sorts will be included in your estate for tax purposes.

Can you choose to make deductions on your taxes when it comes to reducing your estate tax bill?

The marital deduction is one that you need to be most aware of. All property that you can include in your estate and passes to your spouse who survives you can be deducted from your taxes. Otherwise, charitable deductions, mortgages, debt, expenses of the estate, and losses on investments during the estate administration can all be deducted from your tax return.

What kind of person do I need to hire to help me in a situation like this?

It is reasonable to expect that you may find yourself in a situation where you are overwhelmed by the responsibilities of filing a tax return and handling matters related to your finances. For one, this is a complex material that is not easily digestible. Second, when your spouse passes you will be understandably grief-stricken and not fully capable of focusing on the material that is involved in this process. Last- your spouse may have been the person who has always handled financial matters. All the information contained in a tax return and associated with your estate may make it seem like we are speaking Greek rather than English.

When you are considering whether to hire a representative to help assist with estate tax issues then there are several issues for you to consider firsthand. The complexity of your spouse's estate should be considered. If you are a millionaire, then you should think long and hard about hiring someone to help you figure out all the financial issues brought out by the passing of your spouse. It is not enough to simply hope that it all turns out ok. As we have seen in today's blog post it can be easier said than done to ensure that the tax planning matters related to the passing of your spouse.

A millionaire is defined as a person whose asset minus their debts equals at least a million dollars. You and your spouse do not have to earn one million dollars per year to be millionaires. Keep this in mind as you consider your options when it comes to representation in a situation like this that involves your estate and that of your spouse. You may not feel like a millionaire, but being a millionaire is not a “feeling” it is a function of arithmetic. However, beyond calculating whether you are a millionaire not much about this decision-making process is simple.

Having a large but complex estate is not a bad thing. Money gave you and your spouse options while he or she was alive. You had the option of where to live, what schools to send your children to, where to vacation, and what charities to donate to. Options are good things. Those options extend into older age and now into what you want to do as far as representation is concerned. You are free to elect not to work with another person, but it may also be in your best interest to do so.

However, with those options usually comes some degree of complexity. We have discussed in some detail how gifts and a gift tax exclusion apply to individuals in your shoes. As a married person, there are ways that we spelled out today which can limit your exposure to taxes in end-of-life and estate planning. Those benefits are muted when you are not intentional about your actions and take advantage of the circumstances that you find yourself in. Hiring someone to help you with these sorts of matters at the time of your spouse's passing- or doing so ahead of time when you are estate planning can be a way to ensure that you are mission focused on getting the most out of your estate and that of your spouse as possible.

The size of your spouse's estate, and yours, is another factor that you should consider. Having a will is a great way for you to anticipate any issues that may come up in other areas of your estate planning. The will means that you should have already planned out where the property is going to go when either you or your spouse pass away. In making these sorts of determinations you probably did an inventory of all the property that you own as well as a rough appraisal of what the property is worth.

Another consideration to give at this time is how good of a record keeper was your spouse when it came to your finances. Some of us are great at keeping track of our financial documents and were meticulous about record keeping. Others of us focused on our work and family life and left the details of record keeping to another person. At the end of the day, nobody keeps track of documents for our information and assets as we do. As a result, if your spouse was not a great record keeper then you will probably have some issues on your hands when it comes to looking through all your documents and other tax-related information when your spouse passes away. This is a good reason to hire an attorney for estate planning/probate to help your spouse's estate representative (or you) to look through this information and help you make sense of it. A forensic accountant is another professional who could be of some assistance to you all during a time like this- especially if there are questions about the origins of an asset or other property item.

What we at the Law Office of Bryan Fagan recommend is that you speak with an experienced estate planning professional as well as a tax professional to see if you have any issues that can be sorted out. You can speak to one of our attorneys for a free-of-charge consultation. We are also happy to provide you with referrals so that you can hear from a prior client how we helped them plan their estate and what sort of questions that person may have had at the beginning stages of the estate planning process. Whether your goals are to conserve your property, prepare your estate for probate, save money on taxes, or secure a favorable "handoff" of your estate to the next generation, we are here to help you learn as much as possible about this area of the law so that you can make better decisions for yourself.

It is also a good idea to investigate tax professionals who can help you with your estate tax and gift tax questions. Texas does not have an estate tax but there is one on the federal level. Again, for most people reading this blog post, there is not going to be an issue with estate taxes given the large amount of wealth that must have been built up in your estate for this to become a relevant concern for you. You can walk with the tax professional through your situation and then see how you feel about their response. You don’t need to know much about taxes to determine if the professional has the heart of a teacher. A teacher will educate you on a subject before you decide on how to proceed in a certain regard. If the tax professional tells you what to do instead of helping you learn more then you may need to back away from the situation.

Another benefit to working with a tax professional (or an attorney who handles estate planning matters) is that you can have someone to communicate with about the problems that you have experienced and any questions that you may have. Make sure that once you hire a lawyer or tax professional you are clear about what your expectations are regarding communication moving forward. The clearer you are the better the person that you hired will understand how to communicate with you moving forward and what the standards will be regarding communication. Returning phone calls, making sure the other person knows whether you can be better reached by phone or email and other concerns like this are just the tip of the iceberg when it comes to making sure that your needs are being met.

Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan

If you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed estate planning attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to find out more about the world of Texas estate planning as well as how your family may be impacted by the filing of a probate case.

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