You must be aware of the lay of the land when it comes to the federal estate tax when you are planning your estate. This tax is a very big deal to people who have been able to accomplish an extraordinary level of financial success.
There is a line in the sand that is drawn between those who must pay the tax and those who are exempt. It exists in the form of the federal estate tax credit or exclusion. For the rest of 2014, the federal estate tax exclusion stands at $5.34 million.
Under existing laws there are ongoing adjustments to account for inflation, so you may see a figure that is slightly higher in 2015.
If the value of your estate exceeds $5.34 million in value, the portion that you are transferring that is in excess of this amount would potentially be subject to the estate tax. The top rate of the tax is 40 percent.
Unlimited Marital Deduction
There is an unlimited marital estate tax deduction. When you look at this $5.34 million exclusion, it is only used to give tax-free bequests to people other than your spouse. Because of the existence of the unlimited marital estate tax deduction, you can leave any amount of money and/or property to your spouse free of the estate tax.
This is assuming your spouse is a citizen of the United States. The unlimited marital estate tax deduction is not available to a spouse who is a citizen of another country.
This stipulation is in place to prevent a foreign citizen from returning to his or her country of citizenship with a tax-free inheritance. The IRS would not be able to levy a tax after the death of the surviving spouse, because he or she would be in another country.
Qualified Domestic Trusts
If you are married to a citizen of another country, you could make your spouse the initial beneficiary of a qualified domestic trust. After your death, the trustee that you name in the trust agreement could distribute the earnings of the trust to your surviving spouse. These distributions would not be subject to the federal estate tax.
Under some circumstances, the surviving spouse could receive distributions from the principal, but these distributions would be subject to the estate tax unless there was a hardship waiver granted by the IRS.
After the death of the surviving spouse, the secondary beneficiary that you name in the trust agreement would inherit the remainder, and the estate tax would be applicable at that time.
A qualified domestic trust can be a good solution if you are a high net worth individual who is married to a citizen of another country. If you would like to learn more about these trusts, contact us through this link to schedule a free consultation: Grand Forks ND Estate Planning.