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What Is the Unlimited Marital Deduction?
The unlimited marital deduction is part of the United States Federal Estate and Gift Tax law. The law allows married U.S. citizens to transfer an unlimited amount of property and money to their spouse at any time free of any taxation (both estate and gift taxes). These spouse-to-spouse transfers are not taxed. The largest transfers of property typically occur at the death of one of the spouses. For non-citizen spouses, the rules are different. The unlimited marital deduction is not allowed if the spouse receiving the gift, is a non-citizen. A citizen spouse may only gift a non-citizen spouse up to $164,000 in 2022.
What Happens When the Surviving Spouse Dies?
The unlimited deduction is no longer available after the second spouse (the surviving spouse) dies. If the value of the estate is greater than the applicable estate and gift tax exemption—and no advanced estate tax planning has been drafted—the estate may be subject to taxation when the property is passed to children. A surviving spouse may; however, use the unlimited marital deduction if she remarries. The surviving spouse may leave the entire estate to her new husband tax free. This is a nice windfall for the new husband, but not all at what the first husband would want especially if he has surviving children. With proper estate and tax planning, you can avoid estate and gift taxes while providing for surviving children, grandchildren, other loved ones and charitable institutions (if you so choose).
What is the Individual Estate and Gift Tax Lifetime Exemption?
In 2022, the individual estate and gift tax lifetime exemption is $12,060,000. For a married couple it is $24,120,000. This means that you and your spouse can transfer up to this amount to other individuals or entities (i.e., not each other because no tax applies to spouse-to-spouse transfers) tax free. There are 17 state that impose an estate or inheritance tax. California is not one of them.
The IRS does put an annual limitation on gifting. In 2022, there is a $16,000 annual gift tax exclusion. Each spouse can gift up to $16,000 annually per person tax free up to the lifetime exemption amount. Please note that the lifetime exemption is frequently adjusted by law. The lifetime exemption and applicable tax rates for amounts over the exemption has fluctuated dramatically throughout the last one hundred years.
| Timeframe | Applicable Federal Estate Tax |
| September 9, 1916, to March 2, 1917 | 10% of net estate over $5 million |
| March 3, 1917, to October 3, 1917 | 15% of net estate over $5 million |
| October 4, 1917 to February 24, 1919 | Basic estate tax of 15% of net estate over $5 million plus war estate tax of 10% of net estate tax over $10 million |
| February 24, 1919, to February 26, 1926 | 25% of net estate more than $10 million |
| February 26, 1926,to June 6, 1932 | 20% of net estate over $50 million |
| June 6, 1932 to May 10, 1934 | 45% of net estate over $50 million |
| May 11, 1934 to August 30, 1935 | 60% of net estate over $50 million |
| August 31, 1935 to June 25, 1940 | 70% of net estate over $50 million |
| Death after June 25, 1940, but before September 21,1941 | 70% of excess of net estate over $10 million1 plus a defense tax of 10% of the total tax computed under the basic and additional estate taxes (in effect, maximum tax was 77%) |
| Death after September 20, 1941, but before August 17, 1954 | 77% of excess of net estate over $10 million1 |
| Death after August 16, 1954, but before 1977 | 77% of amount over $10 million |
| Death after 1976 but before1982 | 70% of amount over $5 million |
| Death in1982 | 65% of amount over $4 million |
| Death in1983 | 60% of amount over $3.5 million |
| Death after 1983 and before 1988 | 55% of amount over $3 million |
| Death after 1987 and before 1998 | 55% of amount over $3 million (effectively 60% for estates over $10 million but less than $21,040,000 ) |
| Death in 1998 through 2001 | 55% of amount over $3 million (effectively 60% for estates over $10 million but less than $17,184,000) |
| Death in 2002 | 50% of amount over $2.5 million |
| Death in 2003 | 49% of amount over $2 million |
| Death in 2004 | 48% of amount over $2 million |
| Death in 2005 | 47% of amount over $2 million |
| Death in 2006 | 46% of amount over $2 million |
| Death in 2007 and 2008 | 45% of amount over $2 million3 |
| Death in 2009 | 45% of amount over $3.5 million |
| Death in 2010 | 35% of amount over $5 million and stepped-up basis for inherited assets, or election for no estate tax, but carryover basis for inherited assets |
| Death in 2011 | 35% of amount over $5 million |
| Death in 2012 | 35% of amount over $5,120,000 (as adjusted for inflation) |
| Death in 2013 | 40% of amount over $5,250,000 (as adjusted for inflation) |
| Death in 2014 | 40% of amount over $5,340,000 (as adjusted for inflation) |
| Death in 2015 | 40% of amount over $5,430,000 (as adjusted for inflation) |
| Death in 2016 | 40% of amount over $5,450,000 (as adjusted for inflation) |
| Death in 2017 | 40% of amount over $5,490,000 (as adjusted for inflation) |
| Death in 2018 | 40% of amount over $11,180,000 (to be adjusted for inflation) |
| Death in 2019 | 40% of amount over $11,400,000 (as adjusted for inflation) |
| Death in 2020 | 40% of amount over $11,580,000 (as adjusted for inflation) |
| Death in 2021 | 40% of amount over $11,700,000 (as adjusted for inflation) |
| Death in 2021 | 40% of amount over $12,060,000 (as adjusted for inflation) |
What Does this Mean for Couples Who have Taxable Estates?
If you have assets in excess of or that will be in excess of the estate and gift tax lifetime exemption before you die, you should engage the services of a qualified California estate planning attorney. With the help of an attorney, you can create a gifting strategy that may avoid estate and gift tax altogether saving your family millions of dollars in taxes that your estate otherwise would have paid.
Everyday there are news stories where this scenario plays out and dozens more that do not make the headlines. James Gandolfini, the star of HBO’s Sopranos, died suddenly of a heart attack at the age of 51. Mr. Gandolfini had a will but did not engage the services of attorney to perform any advanced tax planning. He died with an estate worth about $70 million of which about $30 million went to the IRS. Another tragic story involves the pop music icon, Prince. Prince died unexpectedly of a fentanyl overdose and without a will. If he had sought the advice of an estate planning attorney, his family could have avoided the $80 million dollar tax bill on his $165 million estate.
Advance tax planning’s return on investment for taxable estates is self-evident.
What Does this Mean for Couples Who Do Not Have Taxable Estates?
Every Californian should have an estate plan even if estate tax issues are not a factor. A properly drafted and funded estate plan will protect you, your family, and your legacy. In California, if you pass away with only a will and an estate worth 184,250 in 2022 (this amount changes every three years), you will be subject to the probate process. Probate is time-consuming and expensive. And, in most cases, absolutely in your best interest to avoid it.
Where Can I Get Help?
To get your estate plan started call the Law Office of Jonathan Alexander at (949) 334-7823 today. Mr. Alexander has 20 years of experience and is ready to help you establish a customized estate plan that avoids federal taxation, the perils of probate, and protects you, your family, and your property.
To learn more about Mr. Alexander, read his bio linked here.