It is important to note that joint tenancy or survivorship assets are generally not available to fund a family trust as they automatically pass directly to the surviving spouse, by operation of state law.

Alternatively, the first spouse could leave all of his or her property directly to the surviving spouse, and an election can be made, under certain circumstances, that will permit the surviving spouse to utilize the deceased spouse’s exemption in addition to his or her own exemption at death. This “portability” feature helps preserve the deceased spouse’s exemption.

Determining which strategy works best for a married couple requires careful consideration of a number of factors, including the spouses’ relative ages, the size and composition of their estates and their desire to provide for grandchildren or more distant generations.

Unlimited Marital Deduction

Individuals may leave all of their property to their spouse without incurring any federal estate tax. This is commonly referred to as the “unlimited marital deduction,” although there are certain pitfalls to avoid.

Leaving all property to a spouse effectively defers the estate tax until the surviving spouse’s death. In the event the surviving spouse’s taxable estate then exceeds the surviving spouse’s estate-tax exemption, including any of the prior deceased spouse’s exemption if portability was elected, an estate tax will be due at the surviving spouse’s death.

However, it is a good idea to avoid any unnecessary buildup of asset value in a surviving spouse’s taxable estate by an overuse of the marital deduction upon the first spouse’s death. If potential estate taxation is an issue because of the size of the respective estates of each spouse, planning should emphasize the full utilization of each spouse’s estate-tax exemption as well as other strategies to reduce the taxable estates of both spouses.

In general, bequests qualifying for the marital deduction include outright bequests as well as bequests to a marital qualified terminable interest property (QTIP) trust for the exclusive lifetime benefit of the surviving spouse. A marital QTIP trust has the added benefit of ensuring that the assets will pass to the intended beneficiaries after the death of the surviving spouse and protecting the trust assets from the surviving spouse’s creditors or a second spouse in the event of remarriage.

Further, if the surviving spouse is not a citizen of the United States, a special marital trust, a qualified domestic trust (QDOT) for the exclusive benefit of the surviving spouse must be used to defer the taxation of the marital trust. The QDOT must comply with specific rules and regulations and be carefully drafted in order to meet these requirements for tax deferral until the death of the surviving spouse.

Annual Tax-Free Gifts

For 2016, the annual gift-tax exclusion is $14,000 and is annually adjusted for inflation. This exclusion enables clients to give up to $14,000 to anyone they choose, and as many people as they choose, each year, free of any gift tax or estate tax. In addition, if they are married, this exemption amount will be doubled to $28,000. So, for example, if the clients are married and make joint gifts to their four children of $28,000 each for a period of 10 years, the couple will effectively reduce their estates by a combined $1,120,000 and no gift or estate taxes will be paid on such sum.