Every taxpayer has an estate tax exemption, which allows you to “shield” assets from the federal estate taxation. This federal estate tax exemption can be used to transfer assets to your beneficiaries, whether outright or in trust. Bequests to your spouse however are generally not subject to estate tax.
The federal estate tax exemption amount (before taxation commences at the 45% estate tax rate) is $3,500,000 in 2009; therefore, together you and your spouse can shield up to $7,000,000 from federal estate taxation with the proper estate planning and accompanying documentation. To take full advantage of this exemption, you need both (1) proper estate planning documentation and (2) proper asset ownership.
Proper documentation means estate planning documentation that takes full advantage of your estate tax exemption. This is best illustrated by an example of improper documentation: a “Sweetheart Will” under which you leave everything to your Spouse. In this example you and your spouse each own $3,500,000. Assume further that under your “Sweetheart Will”, your Spouse receives all your assets at your death. Therefore, at your death your spouse would own the entire $7,000,000 but could shield only $3,500,000 at his/her death (assuming the exemption amount does not change). This exposes $3,500,000 to an unnecessary Federal Estate tax of approximately $1,500,000 at the survivor’s death. With proper estate planning, as well as proper asset ownership, you can shield the entire $7,000,000 from estate tax.
An alternative would be to place $3,500,000 in a Trust shielding it with your exemption and keeping it out of your Spouse’s estate. If your spouse also implements the same strategy, no Federal Estate tax would be due, saving approximately $1,500,000 of Federal Estate Taxation.
Now assume further that you do have proper documentation; however you and your spouse still own all assets jointly. At your death, all of your assets pass to your spouse as the surviving joint tenant; therefore nothing will pass pursuant to your estate plan. The result is the same as the Sweetheart Will, even though you no longer have a Sweetheart Will. That is because you lack the second key component .i.e. proper asset ownership. Therefore, you must also own (title) your assets in a way that will allow your estate planning documentation to “work”.
A gift to your spouse is not subject to gift tax and can be accomplished with an outright transfer of assets or a transfer into a marital trust.
Conclusion: when doing your estate planning, always remember to also review how to best “TITLE” your assets—-some types of “togheterness” is not necessarily a good thing!