As you are likely aware, gift and estate taxes are potentially levied against a decedent’s estate after death. Concerns about the impact of gift and estate taxes may lead you to ask “ What is the cost when one spouse dies? ” Although there is no simple answer to that question given the individual nature of a decedent’s estate, there are some common factors that impact the amount of gift and estate taxes due when a spouse dies.
When an individual dies, the individual’s estate is typically required to pass through the legal process known as probate. During probate, assets of the decedent are located, inventoried, valued and eventually passed down to the intended beneficiaries or heirs. Before assets can be transferred, however, gift and estate taxes must be calculated and paid out of the estate assets. Gift and estate taxes are due on the value of all gifts made during your lifetime as well as the value of all gifts made at the time of death. At a rate of 40 percent, gift and estate taxes can quickly diminish the value of an estate. Fortunately, each taxpayer is allowed a lifetime exemption of $5 million, adjusted each year for inflation. For 2014, the lifetime exemption limit is $5.34 million. If the estate assets exceed that limit, gift and estate tax is calculated on the value in excess of the limit.
If your spouse dies and his or her estate assets exceed the lifetime exemption limit the unlimited marital deduction can be used to avoid the payment of gift and estate taxes; however, that often results in over-funding the estate of the surviving spouse. If, for example, your spouse leaves you $5 million in assets, but you already own $5 million in separate assets, your estate is now worth $10 million, almost double the lifetime exemption limit. Therefore, you have just prolonged the payment of gift and estate taxes instead of limiting or avoiding them altogether.
By utilizing estate planning strategies aimed at limiting an estate’s exposure to gift and estate taxes you can protect estate assets and decrease the cost when one spouse dies. Using the yearly exclusion, for example, can result in the transfer of a significant amount of assets tax-free if incorporated into your estate plan early on in your life.
Because each estate is an unique at the estate owner, it is best to consult with an experienced Missouri estate planning attorney to determine how best to decrease your estate’s exposure to taxes.