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Married couples: tips for avoiding estate tax

In 2011 and 2012, only individuals who die leaving an estate worth more than $5 million need concern themselves with federal estate taxes. Married person having an estate worth less than $10 do not have to pay estate tax. Those who have larger estates need to look into ways to reduce estate tax liability. The following are some tips for saving on estate tax.

Taxpayers can leave any amount to their spouse without federal estate tax consequences as long as their spouse is U.S. citizen. If you and your spouse have a large estate, though, you should look into other options, as leaving everything to your spouse could cause him or her to have an estate larger than the federal estate tax exemption at the time of their eventual death.

For 2011 and 2012, Congress has made the estate tax exemption "portable." This allows the executor of your estate to leave any unused federal estate tax exemption to your surviving spouse. A spouse who dies in 2011 and who doesn't need to use any of their estate tax exemption may direct their executor to apply it to their spouse. This option will expire, however, at the end of 2012 unless Congress extends it.

Many people choose to give away money to charities in order to reduce their taxable estate to the current estate-tax-free ceiling. A married person who dies in 2011 or 2012 and wishes to leave everything to their spouse would have an estate-tax-free ceiling of $10 million. A married person can direct their executor to make donations to IRS-approved charities in order to reduce their taxable estate to the current estate-tax-free-ceiling.

Another option to consider is making annual gifts to relatives and other loved ones. In 2011, the exemption amount is $13,000 per individual. It is likely to remain the same in 2012. The annual federal gift tax exclusion allows taxpayers to make annual gifts up to the exclusion amount. These gifts will reduce your taxable estate, and do not detract from your $5 million lifetime federal gift tax exemption or your $5 million federal estate tax exemption.

In our next post, we'll continue looking at options for estate tax savings.

Source: Marketwatch, "Estate Tax Tips for Married Couples," Bill Bischoff, 18 Mar 2011.

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