Types of exemptions
There are two types of exemptions from federal estate tax. One is the unlimited marital deduction, and the other is each individual’s $600,000 credit shelter amount. Husbands and wives can leave an unlimited amount of wealth to each other without owing any estate tax whatsoever as long as the surviving spouse is a U.S. citizen. (If you’re married to a non—U.S. citizen, you need to consult an estate lawyer now! Page 109.) Each individual can also pass on $600,000 to his or her beneficiaries, free of estate tax. This is called your credit shelter amount. The portion of your estate beyond that $600,000 is subject to estate tax.
When Pop, Sherry’s father-in-law, dies, assuming he dies first, and all the assets are passed to Mom, she would owe nothing in estate taxes. She receives the million-dollar estate and owes nothing. But when Mom dies, she has the whole million dollars on her side of the balance sheet but can only leave $600,000 to her kids without them having to pay tax. No one ever got the benefit of Pop’s $600,000 credit shelter amount because he just passed everything to Mom.
So when Mom dies, the kids will have to pay estate taxes of
$150,000.
If, howevei before either Mom or Pop dies, $1 million is separated into two shares, each for $500,000, and Pop’s share is held in trust for the benefit of Mom when he dies, and the family follows certain rules, then the IRS will see the money as if it never left Pop’s side of the balance sheet. The $500,000 that’s Pop’s “half” can be passed down free and clear of taxes when Mom dies, because it’s less than $600,000. As for Mom, the $500,000 on her side of the balance sheet can be passed down in the same way when she dies. Remember, you each get this $600,000 credit shelter amount. But most of us who are married don’t take full advantage of it. We just simply leave everything to a spouse who was able to get everything anyway, so in effect the first spouse to die wastes that $600,000 exemption. To take full advantage of it, use a bypass trust. The deceased’s half of the money goes into the trust, preserving this exemption.
Tags: Financial