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Tagged: MarDed, Marital Deduction, Optimizer
Kathleen ReynoldsKeymasterOctober 18, 2022 at 6:02 pmPost count: 428
This calculation computes the optimum marital deduction when the decedent wishes to pay no federal estate tax, but also wishes to leave as little as possible to the surviving spouse in order to maximize the use of the unified credit and state death tax credit and when some federal estate tax is necessary, and the payment of federal estate tax results in a reduction of the marital deduction (and additional estate) because of a “circular” estate tax calculation.
There is an estate tax deduction for property passing to a surviving husband or wife, and so there is no federal estate tax if the entire estate is left to the surviving spouse. However, there is also a unified credit for each decedent that provides an exclusion from tax. For the year 2011, the unified credit exclusion amount is $5,000,000, and the tax rate is 35%, for both gift tax and estate tax purpose. The $5,000,000 exclusion amount is indexed for inflation after 2011, is $5,120,000 for 2012, $5,250,000 for 2013, $5,340,000 for 2014, $5,430,000 for 2015, $5,450,000 for 2016, $5,490,000 for 2017, $11,180,000 for 2018, $11,400,000 for 2019, $11,580,000 for 2020, $11,700,000 for 2021, and $12,060,000 for 2022. Future years (2023 and later) are estimates based on the Inflation Rate for Exclusion input.
An effective (and common) effective estate planning technique is to change the wills or revocable trusts of the married couple so that, on the first death, the unified credit exclusion amount does not pass to the surviving spouse but is held in a trust for the benefit of the surviving spouse. In this way, the surviving spouse can get the income and benefit of the property held in the trust without the property being part of the survivor’s estate. Upon the death of the surviving spouse, the property in the trust passes to (or in further trust for) the children or other intended beneficiaries free of tax. (See the Bypass Trust Computations to calculate the benefit from this trust arrangement.)
A separate (but related) problem is the federal estate tax that can result when there are gifts at death that do not qualify for the federal estate tax marital deduction and the non-deductible gifts exceed the applicable exclusion amount. Because federal estate tax that is paid out of the estate does not qualify for any deduction and reduces the amount available for the marital deduction, there is a resulting “tax on tax” because the tax that is paid increases the tax that must be paid. The program can solve this kind of recursive (or circular) calculation.
The estate tax calculations take into account the changes in rates and exclusions provided by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, as well as the American Taxpayer Relief Act of 2012.
- Projected Year of Death Enter the expected or projected year of death. Valid year inputs are 1997 or later.
- Adjusted Gross Estate in “X year” Enter the adjusted gross estate (the total gross estate less debts and funeral and administration expenses). Be sure to include all assets that are included in the gross estate for federal estate tax purposes, including jointly owned property, life insurance, and retirement plans.
- Adjusted Taxable Gifts in “X year” Enter the amounts of any adjusted taxable gifts (i.e., taxable gifts after 1976).
- Unified Credit Used by Gifts Enter the amount of unified credit used by prior gifts. If there are no prior gifts, then no unified credit has been used. Click the computer icon next to this field to calculate the maximum unified credit used by prior gifts.
- State Inheritance Tax (if any) Enter the amount of any state inheritance, succession, or estate tax that is independent of the state death tax credit and will be payable at death.
- Estate Passing to Spouse Outside of Formula Enter the amount of any assets included in the gross estate and passing outside of the will or revocable trust or otherwise not subject to any marital deduction formula. Examples include jointly owned property, life insurance and retirement benefits payable to the surviving spouse as beneficiary, and specific (pre-residuary) gifts under the will or revocable trust. Note: The dollar amount entered here should not be bigger than the Adjusted Gross Estate. If bigger, the program will change the amount to match the Adjusted Gross Estate.
- Estate Passing to Others Outside of Formula Enter the total amount of assets included in the gross estate and passing to beneficiaries other than the surviving spouse. Examples include assets jointly owned with children, life insurance payable to children, or business interests left to children who are active in the business. Note: The dollar amount entered here should not be more than the difference between the Adjusted Gross Estate and the Estate Passing to Spouse Outside of Will. If bigger, the program will change the amount to equal the difference between the Adjusted Gross Estate and the Estate Passing to Spouse Outside of Will
- Estate Tax Calculations In 2010, the user can select the 35% rate or No Estate Tax.
- Spousal Unused Exclusion Enter the amount of any “deceased spousal unused exclusion amount” to which the decedent/donor is entitled by reason of the death of a spouse after 2010 whose estate tax return did not use up the full unified credit exclusion amount. Click on the computer icon to the left of the entry field to calculate the maximum exclusion amount for the year of the spouse’s death, taking into account the inflation rate entered for the exclusion.
- Inflation Rate for Exclusion Enter the rate of inflation to be applied to increase the unified credit exclusion amount in future years.
- Sunset in 2026? Selects how future estate tax calculations will be handled.
The program calculates the maximum amount that can pass free of federal estate tax using the unified credit and state death tax credit or, if payment of federal estate tax is necessary, the amount of federal estate tax payable, taking into account the circular calculation that results if the federal estate tax (and state death taxes) reduces the marital deduction.
The “maximum amount sheltered by credits” is the largest amount that can pass free of federal estate tax, taking into account both the federal estate tax unified credit and the state death tax credit (if there is state inheritance tax payable). If there is no state inheritance tax payable, this amount is the unified credit applicable exclusion amount, less any adjusted taxable gifts.
In most cases, the marital deduction will be the adjusted gross estate less the maximum tax free amount. However, the marital deduction cannot be more than the adjusted gross estate less the assets passing to others and the death taxes payable, and it cannot be less than the assets passing to the surviving spouse outside of any formula.
The federal estate tax is calculated from the marital deduction, and the state death tax is either the state death tax credit or the state inheritance tax entered, whichever is more. (This program does not calculate any increase in the state inheritance tax that may result from the circular estate tax calculations.)
If lifetime gifts have used up all (or nearly all) of the unified credit and there is state inheritance tax payable or assets passing to beneficiaries other than the surviving spouse, or if the amount passing to persons other than the surviving spouse exceeds the remaining unified credit exclusion amount, there can be a sufficient taxable estate (and adjusted taxable gifts) to cause federal estate tax. In that case, the federal estate tax may further reduce the marital deduction and result in additional federal and state death taxes.
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