- Does the Use of the Unlimited Marital Deduction Help to Reduce Estate Tax?
- An Introduction to Wills
- Spousal Exemption of Estate Tax Upon Death of Decedent
- The Determination of Who Owns an Insurance Policy by the IRS
- How to Redeem a Roth IRA
- Do Death Benefits From an Annuity Become Part of the Estate Value?
When you die, anything your spouse inherits is tax-free. No matter how much you leave him, there's no federal estate tax on spousal inheritance. The exception is when you're married to someone who isn't an American citizen, in which case normal estate-tax rules apply. Despite the big tax break, it's not always a good idea to leave everything to your spouse.
If you're like 90 percent of Americans, estate tax isn't even an issue. In the 21st century, the minimum level for paying estate tax has ranged from $1 million to over $5 million, so if you have a half million to pass on, there's no tax to worry about. That leaves you free to divide up your estate among your spouse, children, friends or charity without worrying the IRS will demand a cut.
Some states, including Delaware and Rhode Island, have their own estate taxes, separate from the federal tax. Other states have inheritance tax, which your heirs pay based on the value of the inheritance you leave them. The good news: None of the states that impose these taxes collect them on what you leave to your spouse. As with the federal tax, you can give your spouse everything you own without any tax coming due.
Your Spouse's Estate
If you leave a substantial estate -- $2 million, say -- to your spouse, this just kicks the tax challenge down the road. When she dies, there won't be a spouse to leave the money to unless she remarries, so her estate will be fair game for the tax man. If she has some accumulated wealth of her own, she could end up paying a higher rate than if you hadn't left her all the cash. One solution is leaving your estate to an A/B Trust: Your spouse gets to use the trust assets without actually inheriting them. When she dies, the assets pass from the trust to her heirs without ever becoming part of her estate.
While there's no upper limit on how much you can leave your spouse, most states limit how little you can leave him. In community-property states, you and your spouse are usually entitled to half of what the other earns or buys during the marriage: Even if the house you bought is in your name, half of it is automatically his and you can't give it to someone else. In most non-community property states, the law gives your spouse inheritance rights to one-third to one-half of your estate, even if your will leaves 100 percent to someone else.