In 2009, the federal estate tax exemption will rise from $2 million to $3.5 million. This might create a dilemma: should you leave assets to your surviving spouse, delaying the estate tax until the survivor’s death, or should you move assets out of estate tax territory with a bequest to your children?
One tactic is for each spouse to leave their entire estate to a trust for the surviving spouse. Then the executor of the first spouse to die can look at the value of the decedent’s estate and the tax law in effect for that year. The executor can elect to treat some or all of that estate as marital property, so that it avoids estate tax.
If the executor elects marital property treatment for $1.2 million of a $2 million estate, for example, the other $800,000 will be considered to be a bequest that does not qualify as the spouse’s property. It will be subject to estate tax but sheltered by the $2 million estate tax exemption ($3.5 million in 2009). That $800,000 will be out of the surviving spouse’s estate so it will not be taxed at the survivor’s death, either.
