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At Bascom Law, we've seen firsthand how the loss of a spouse brings not only emotional turmoil but also potential financial challenges, particularly concerning estate taxes. Without proper planning, the transition can lead to unexpected tax liabilities that may diminish the legacy intended for loved ones. Proactive estate planning is essential to safeguard assets and ensure a smooth transfer of wealth.
Understanding Estate Tax Implications for Surviving Spouses
The federal estate tax exemption allows individuals to transfer a certain amount of assets tax-free upon death. As of 2025, this exemption is set at $13.99 million per individual. However, this exemption is scheduled to sunset after December 31, 2025, reverting to approximately $6–7 million per person (adjusted for inflation) unless new legislation is enacted. Assets exceeding the exemption amount may be subject to federal estate tax rates, which top out at 40%.
For married couples, the unlimited marital deduction permits the transfer of assets to a surviving spouse without immediate estate taxation. While this provision offers initial relief, it can lead to a larger taxable estate upon the surviving spouse's death if no further planning is undertaken. This scenario underscores the importance of strategic estate planning to mitigate future tax liabilities.
Strategies to Minimize Estate Tax Burdens
Electing Portability of the Deceased Spouse's Unused Exemption
Portability allows a surviving spouse to inherit any unused portion of their deceased spouse's federal estate tax exemption. To elect portability, the estate's representative must file IRS Form 706 within nine months of the decedent's death, with a possible six-month extension. If the estate was not required to file a return, the IRS now allows a late portability election for up to five years under Rev. Proc. 2022-32. This election can effectively double the surviving spouse's exemption amount, offering significant tax-saving potential.
Implementing Bypass and QTIP Trusts
Trusts are instrumental in managing estate taxes and ensuring assets are distributed according to the decedent's wishes:
- Bypass Trusts: Also known as Credit Shelter Trusts, these are designed to utilize the deceased spouse's estate tax exemption by holding assets up to the exemption limit. The surviving spouse may receive income from the trust, but the principal bypasses their estate, thereby reducing future estate tax exposure.
- Qualified Terminable Interest Property (QTIP) Trusts: These trusts provide the surviving spouse with income for life, with the principal passing to other designated beneficiaries upon their death. While QTIP trusts qualify for the marital deduction and defer estate tax until the surviving spouse's death, the assets in the trust are included in the surviving spouse’s estate for estate tax purposes.
Steps to Take Now
Begin Estate Planning Early
Proactive planning is crucial. Regularly review and update your estate plan to reflect changes in tax laws and personal circumstances. This includes assessing asset ownership, beneficiary designations, and the potential impact of state estate taxes.
Consult with Estate Planning Professionals
Navigating estate tax laws requires specialized knowledge. Engaging with experienced estate planning attorneys ensures that strategies like portability elections and trust formations are correctly implemented, aligning with your overall financial goals.
Conclusion
The passing of a spouse is a profound life event accompanied by complex financial considerations. At Bascom Law, we are dedicated to guiding families through these challenges with comprehensive estate planning services. By understanding and utilizing tools such as portability and strategic trusts, you can protect your assets and provide for your loved ones as intended.
To discuss your estate planning needs, visit BascomLaw.com or call 770-285-5493.
Sources
IRS
Schwab
Fidelity
Western & Southern Financial GroupPlanning
The Private Trust Company
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