When a spouse dies, there are practical and legal considers that must be addressed amidst the grieving. The decedent’s estate must be probated, for example, and estate taxes paid, when applicable, to the federal government. In fact, one of the most important reasons to create a comprehensive estate plan is to decrease the estate’s exposure to both the probate process and the payment of estate taxes. People often wonder “What is the cost when one spouse dies?” The answer frequently depends on whether or not the deceased left behind a well drafted and current estate plan or not.
When an individual dies, all assets owned by the decedent, or in which the decedent had an ownership interest, must pass through the legal process known as probate. One reason that probate is required is to ensure that any gift and estate taxes due and owing are paid before estate assets are passed down to beneficiaries or heirs of the estate. All assets owned by you, along with the value of all gifts made during your lifetime, are potentially subject to gift and estate taxes. Uncle Sam wants to be sure that those taxes are collected when you die.
If your spouse dies the amount of gift and estate tax owed will depend on how the estate is distributed. Each taxpayer is entitled to exempt up to the lifetime exemption amount which was set at $5 million (adjusted annually for inflation) in the American Taxpayer Relief Act of 2013, or ATRA. For 2014, the lifetime exemption is $5.34 million. Therefore, the value of lifetime gifts and assets owned at death are exempt up to $5.34 million. The value of assets that exceed that amount are subject to gift and estate tax at the rate of 40 percent.
If your spouse has a large estate, this could result in a sizable tax liability. If, however, all assets were left to you there may be no tax owed pursuant to the unlimited marital deduction. As the name implies, a taxpayer may leave an unlimited amount of assets to a spouse tax-free, providing that the spouse is a U.S. citizen. Although this can eliminate most costs involved in the death of a spouse, it can over-fund a spouse’s estate. Eventually, those assets will be heavily taxed when the surviving spouse dies. In short, relying on the marital deduction to eliminate the costs involved when a spouse dies is simply prolonging the inevitable. A better approach is to sit down with an experienced Texas estate planning attorney an create a comprehensive estate plan that will permanently reduce your estate’s (and your spouse’s estate) exposure to federal gift and estate taxes.
Stephen A. Mendel, Estate Planning Attorney
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