Spousal Planning: Take Care of Excess Proceeds to Enjoy Tax Deduction

The marital deduction is a great way to save taxes. It is two deductions that have a common purpose. The marital deduction has the power to shelter asset and property transfer between spouses from any federal estate tax and gift tax. Regardless of the circumstances, the exemption holds when the transfer occurs before the death of the owner as well as after.

Marital deduction of gift tax

When a person gives away property above the federal tax exemption limit to an unrelated individual, the federal government can claim tax on the gift value. However, when the transfer is from one spouse to another, the government cannot consider the transfer taxable. IT is as per the unlimited gift tax marital deduction that allows tax-free gift exchange of property between the spouses. There is a similar marital deduction on estate tax as well. One spouse can leave unlimited assets and property to the other. This transfer shall remain non-taxable as per the estate tax marital deduction law. Estate planning for physicians helps them find smart, legal and IRS approved ways to save tax.

How is it beneficial for physicians?

Doctors can make upwards of $6 million in their lifetime. While most doctors stay well within the federal tax exemption limits, there are those who are looking towards years’ worth of investment in business and stock. Their net worth will be well over the federal tax exemption limit of $5.49 million.

Doctors work all their lives, mostly more than 9 to 5 office goers to establish their credibility, gain experience and claim fees for their services. Along with several challenges in their professional lives, there are looming threats of patient lawsuits, malpractice lawsuits, and tax lawsuits. An analysis shows that doctors are expected to pay 33% tax on their income each year. Well, even if a doctor earns 1 million each year, he has to pay 330,000 as taxes from his rightful share. That does not sound right!

Spousal planning and marital deduction are great for doctors. The doctor can transfer the excess above the exemption limit to his or her spouse. Since this is non-taxable, the spouse does not have to pay the whopping 33% tax. The other can use the asset immediately or put it in an irrevocable trust. As per the Qualified Domestic Trust or QDOT, this will hold true even when the receiver is not of American decent or is not a resident of the USA.

What is QDOT?

QDOT is a trust that allows married couples, where the surviving individual is not a citizen or resident of USA, to take complete advantage of the marital deduction laws. You can say that QDOT is a statutory trust that has the power to defer the estate tax until the subsequent taxable event.

You should note that the estate tax rate remains the same upon the execution of QDOT and the federal government will evaluate the assets at the fair value market rate on the death of the spouse’s demise.

If you have $2 million or more worth assets in QDOT, then only 35% of the total property can be in real estate outside the USA. In case the asset value outside the United States is more than 35% one of your QDOT trustees needs to be a US Bank. The bank needs to post a bond that holds the same value as 65% of the assets in QDOT.

How can property pass between spouses?

Doctors put in much effort to build their home and strengthen their asset value. Therefore, it is only fair that they get a chance to defend their property and assets during their lifetime, so their surviving family members can have a secure financial life in the future. Uncle Sam allows property transfer between spouses to be tax-free. While the property can pass in a variety of ways, there are only a few ways of proving a couple’s marital status.

The state law usually determines if a couple is married. “Common law” marriages, where cohabitation has been prolonged, may or may not hold up in probate depending on the state and its law.

Here are a few ways in which your property can go to your husband/wife:

  • As per the deceased spouse’s will.
  • As a part of life insurance death proceeds.
  • As per state intestacy laws.
  • Under curtsey interest.
  • Under estate trust.
  • As a part of a lifetime gift.
  • Under a QTIP election by an executor.
  • By the right of survivorship.

The property that passes onto the spouse must not be a terminable interest to become tax-free. It means, the husband or wife’s interest in the property must be strong and cannot expire with time. The spouse can disqualify terminable interest if their interest is subject to influence by a future event or the failure of a future event to occur.

Things might not pan out as smoothly as you wish

There is always an exception to the terminable interest look. If the benefactor dies prematurely and before the testator or the estate owner, the exemption applies. The spouse should outlive the decedent to inherit the property/estate tax-free.

In the event of an unfortunate accident, the spouses can die simultaneously. One of them can survive a few hours longer, but their death is a cause of the same accident. In these events, the simultaneous death clause and common disaster clause kicks in. An experienced attorney often recommends a six-month survival clause since it can deal with a situation where the deaths are unrelated but occur within six months of one another.

Conclusion

While it may seem morbid and grim in the beginning, doctors are quick to realize that estate planning and tax planning help them save more for their surviving families. Firms like Beam a Life help the physicians to set up marital deduction trusts, written trust agreements, estate trust and QDOTs. Visit https://beamalife.com/ to start your estate planning and tax planning today to ensure a secure future for everyone you love.

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Mr. Merchant
Software Company Owner

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