Are there limits upon estate transfers to a surviving spouse?

How can spouses maximize their tax savings? In terms of federal estate taxes, spouses can combine their individual exemptions thanks to a 2011 change in estate law, called portability. As a result, many assets can be transferred to heirs without incurring federal estate tax.

Yet spouses who are leaving everything to their surviving spouse should consider the impact of a potential remarriage. Although a surviving spouse can use the decedent's unused exemption, that option might be lost when he or she remarries.

Thus, one solution would be to split the marital estate into two trusts. When the first spouse dies, his or her trust is funded with assets up to the $5.43 million exemption. When the surviving spouse passes away, the second trust will then use the other exemption. This approach also avoids the surviving spouse having to pay taxes on income from the entire taxable estate; instead, taxes will be calculated based only on his or her share of trust assets.

Another strategy for avoiding probate and estate taxes might be to restructure one's estate. Probate assets could be used to purchase life insurance. Keep in mind that there are options for designating owners and beneficiaries of life insurance polices. Perhaps it makes sense to designate an irrevocable life insurance trust as both the owner and beneficiary of a life insurance policy. At the decedent's death, the proceeds will be paid into the trust.

As this discussion illustrates, estate planning may involve tax-saving strategies regarding estate, income and capital gains taxes. Our firm can suggest the latest options and help you make informed choices.

Source: Consumer Reports, "6 costly estate-planning minefields, and how to avoid them," April 14, 2015