Tax Planning: The Unified Tax Credit and The Marital Deduction

In order to minimize the estate taxes your heirs will pay upon your death and maximize the amount they will inherit, two basic tax concepts must be understood: The unified tax credit (UTC) and the unlimited marital deduction (UMD).

The UTC offers individuals a credit against federal estate taxes in an amount equal to the tax that would otherwise be due on a $2.0 million estate. Simply stated, you can transfer $2.0 million to your heirs tax-free. If you are married, your spouse also has the same credit, so that as a couple, you can transfer a total of $4.0 million to your children tax-free.

The individual exclusion amount will remain constant through 2008, increases to $3.5 million in 2009, and is unlimited for 2010 (the so-called "best year to die" in terms of federal estate taxes since no tax will be due regardless of the size of the estate). These may sound like high levels and for the next few years, they are. However, in 2011, the exclusion amount is reduced down to $1 million per individual. Given inflation, the cost of living, and the dramatic increase in real property values, it is conceivable that in another five years, many families will exceed $2 million in total assets. In addition, the way the government is spending money so freely these days, the exclusion amount may stay at that lower level for some time.

The UMD allows you to pass all of your property, without limit, to your spouse free of any estate tax. That's the good news. The bad news is that your spouses' estate will now double in size. To the extent that doubling puts your spouse over the exclusion amounts discussed above, it could cost your heirs $100's of thousands in estate taxes.

There are several estate planning methods designed to address these issues and preserve both spouses' exclusion regardless of which spouse dies first, while also providing for the health and support of the surviving spouse. If you need further details, or any estate planning information, do not hesitate to contact us.