When you begin estate planning, transferring wealth to your spouse may top your list of priorities. Many people who are making estate plans want to protect their spouses and provide for them in the future. Further, you can accomplish even more with your plan by reducing your taxable estate.
Spouses who are U.S citizens can take advantage of the marital deduction, which allows them to transfer assets tax-free to one another. The transfers can take place at any time, even after the death of one spouse through estate planning structures such as a will.
While making a transfer to your spouse will reduce the size of your own taxable estate, it might have unforeseen consequences too. The transfer will increase the size of your spouse’s estate, which could result in estate taxes owed later. However, this usually does not occur unless you and your spouse exceed the joint estate tax exemption ($22.36 for married U.S. citizen couples in 2018).
Qualified Terminable Interest Property Trust (QTIP)
A qualified terminable interest property trust (QTIP) allows you to control distribution of assets to your spouse after your death, while still taking advantage of the marital deduction. To use the marital deduction, the IRS requires that the recipient spouse have full ownership of the property he or she receives from the other spouse. A QTIP is an exception to this rule. You can place property in a QTIP, also place restrictions on its distribution to your spouse, and still receive the marital deduction as long as your spouse has a lifetime income interest in the property.
Qualified Domestic Trust (QDOT)
If you or your spouse is not a U.S. citizen or permanent resident, you may want to consider a qualified domestic trust (QDOT). Non-citizen non-residents cannot receive the same estate tax exemption amount as citizens; instead, they receive a total exemption of just $60,000. To protect a non-citizen spouse from expensive taxes, you can transfer property into a QDOT. Like a QTIP, a QDOT allows you to receive the marital deduction despite the property being held by a trust.
In short, you have many options to consider when trying to pass wealth to your spouse and reduce your taxable estate at the same time. Speak to a local, experienced estate planning lawyer to learn more.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.