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San Antonio Express-News
January 18, 1996

Effect of Gifts to Spouse on Estate Tax

© 1989-2004, Paul Premack

Dear Mr. Premack: My husband passed away four months ago. When he knew he was getting ill, he signed a deed to our house putting it into my name only. Here’s the problem: his other assets have a total value of $572,000. This includes his half of our joint bank accounts and savings (which were in survivorship accounts). The house is worth $125,000. I’ve been getting conflicting advice on estate taxes. Do I need to include half the house’s value as being owned by him? It will make a big difference. Thank you. – A.M.

Estate taxes can take a really big bite out of your resources unless they are managed properly. In general, two tax rules apply. First, your husband’s estate could give anyone up to $600,000 tax free. Second, any amount your husband left to you is estate tax free.

You do not need to include half the value of the house as being owned by your husband. A recent court of appeals case helped define the law here. When a spouse gifts an asset to the other spouse, the entire asset becomes the separate property of the recipient. The deed signed by your husband turned 100% of the house into your separate property.

From a monetary perspective, his gift to you did not change things. If he had not made the gift (and had owned ½ the house when he died) his estate would have been $634,500 instead of $572,000. But he left the entire amount to you, his wife. There is no estate tax on any amount left to your spouse, so either way the tax would have been zero.

From the perspective of “unfinished business,” your husband’s gift did make a difference. Because you already owned the house before his death, you avoided the expense of probate for transfer of this asset. Also, because his assets were below $600,000 at the time of his death there was no need to file an estate tax return. You saved time and effort.

Unfortunately, all of those benefits are short term. When your husband left everything to you, you ended up with an estate of nearly $1,300,000. Someday when you pass on, only the first $600,000 will go to your heirs tax free. The remaining $700,000 will be exposed to federal estate taxes, and could cost up to $277,000 when you die.

This tax could have been reduced with proper planning before your husband died. You should have left the house alone and eliminated the right of survivorship arrangements on your investments. His Will would have then controlled his estate – and should have been written to leave a portion to a trust for your benefit. With this method, up to $240,000 could have been cut from the taxes and saved for your heirs.

Since that opportunity was missed, you need to get personal guidance on the next legal steps you should take. You can anticipate high estate taxes when you die unless you begin planning now to reduce the taxes. Visit an estate planning attorney right away.

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