SS4 R16 P243 Spousal Exemptions

[hs_1811]

How is spousal exeption related to estate transfer to children? Example on page 243 says transferring wealth to children on the death of 1st spouse will not trigger additional inheritance tax…cant understand the link. Help… thnx

[Sponge_Bob_CFA]

Each spouse has an exclusion/exemption, so if the first spouse dies and all money transfers to the surviving spouse (with money pooled) they lost the opportunity to use the first spouse exemption. Usually the money gets transferred to an irrevocable trust (thus it is out of the estate and utililizes the exemption) with the surviving spouse income beneficiary and children the remaindermen.

[FICC_Chk]

The example you are referring to talks about a spousal exemption AND an exclusion. A spousal exemption allows for the transfer of the deceased’s estate to the surviving spouse at ACB instead of FMV, so taxable liabilities (for CGs, income) are triggered. An exclusion is when the tax legislation allows for the transfer of a minimum amount of assets at ACB (conferring the same tax benefits as a spousal transfer) to ANYONE (could be spouse, children, grandchildren) without triggering a tax liability. So the example states that if an exclusion is available, it makes sense to first transfer that minimum amount to the children (or other beneficiaries to whom transfers would otherwise trigger taxable liabilities) so that the assets pass to the next generation tax free and there will be no inheritance taxes. If the exclusion in not utilized, and the assets are transferred to the surviving spouse (who benefits from the spousal exemption in most countries and doesn’t trigger a tax liability anyway), the estate would have “forfeited” an opportunity to pass a portion of the estate to the next generation tax-free. When the surviving spouse dies and transfers the estate to the next generation, the children would have to pay inheritance tax on the entire estate (if the exclusion will not be available at the time), instead of receiving a portion of the estate tax-free upon the death of the first spouse.

[hs_1811]

thanks guys. Really helps…

[palmbeach69100]

@FICC\_Chk

The example you are referring to talks about a spousal exemption AND an exclusion. A spousal exemption allows for the transfer of the deceased’s estate to the surviving spouse at ACB instead of FMV, so taxable liabilities (for CGs, income) are triggered. An exclusion is when the tax legislation allows for the transfer of a minimum amount of assets at ACB (conferring the same tax benefits as a spousal transfer) to ANYONE (could be spouse, children, grandchildren) without triggering a tax liability. So the example states that if an exclusion is available, it makes sense to first transfer that minimum amount to the children (or other beneficiaries to whom transfers would otherwise trigger taxable liabilities) so that the assets pass to the next generation tax free and there will be no inheritance taxes. If the exclusion in not utilized, and the assets are transferred to the surviving spouse (who benefits from the spousal exemption in most countries and doesn’t trigger a tax liability anyway), the estate would have “forfeited” an opportunity to pass a portion of the estate to the next generation tax-free. When the surviving spouse dies and transfers the estate to the next generation, the children would have to pay inheritance tax on the entire estate (if the exclusion will not be available at the time), instead of receiving a portion of the estate tax-free upon the death of the first spouse.

Nine years after, this is still very useful, thank you very much.