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Understanding the marital deduction

Many in Miami may never have to worry about the issues of estate taxes. That is because the law allows an individual an estate tax exemption equivalent. Often referred to as the estate tax threshold, this figure represents the amount that one may leave to the beneficiaries without being subject to the federal estate tax. According to Forbes Magazine, that number is $5.45 million for 2016. Spouses may also combine the values of their estates to protect as much as $10.9 million from tax.

Federal law also allows one to avoid his or her estate from being taxed through a marital deduction. The Legal Information Institute of Cornell University Law School states that the marital deduction allows the value of assets left to a surviving spouse to be deducted from the total value of an estate. The taxable value of the estate is then determined after that deduction is applied. If after the deduction, the taxable value is below the threshold, then the estate may avoid being taxed.

Some may read this and assume that the best way to avoid estate taxes altogether is to leave their entire estates to their spouses. Indeed, information shared by the Internal Revenue Service shows that as recently as 2010, 48 percent of estates reported claimed the marital deduction. However, the late spouse’s estate tax exemption equivalent does not automatically carry over, meaning that even after inheriting his or her estate, his or her spouse’s exemption amount is still only $5.45 million, not the perceived $10.9 million. To carry over a late spouse’s exemption, the surviving spouse must elect portability on an estate tax return filed the year the deceased spouse dies (even if no taxes are owed). Only then will he or she enjoy protection for the combined values of their estates. 

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