If your estate is worth $11.58 million or more, any dollar amount over that amount will be subject to federal estate tax of 40%. The threshold is likely to reduce in the future. If you are a high-asset couple, efficient estate planning could potentially save you millions of dollars. It is especially true if you or your spouse do not hold U.S. citizenship.
The unlimited marital deduction rule
For U.S. citizens married to other U.S. citizens, federal estate taxes can be avoided by bequeathing assets to their spouse or other family members. The law allows citizens to make “unlimited marital deductions” to their spouses, thus avoiding federal estate tax.
However, the rules are different if you wish to leave assets to a spouse who the U.S. tax authorities consider a resident alien. You can only give them $157,000 per year tax-free. So they would be paying 40% tax on all but the first $157,000 over the $11.58 million threshold.
How can you avoid this situation?
If your spouse can obtain U.S. citizenship, this would solve the issue. Transferring assets while you are alive can also reduce your estate to below the $11.58 million boundary. Alternatively, putting assets into a Qualified Domestic Trust can defer the federal tax payable. If your spouse then obtained citizenship, they could avoid the enormous tax bill.
Creating an estate plan can seem complicated, which is why many people put it off. However, dying without one can significantly reduce how much of your estate you pass to your family. If you want to avoid paying unnecessary fees or taxes, seek the advice of an experienced estate planning attorney.