Gifting Strategies

Estate Equalization

Estate equalization is the process by which a married couple transfers assets from one spouse to the other, allowing both spouses to fully use their estate tax applicable exclusions amounts ($2,000,000 in 2007) and to potentially take advantage of lower marginal estate tax brackets.  (Before assets are transferred to the less wealthy spouse, the couple should be aware of the consequences of such a transfer in case of divorce or creditor issues.)  Retitling of assets is one way to equalize a couple’s estate.  The unlimited marital deduction makes it possible to transfer assets between spouses at no tax cost.  In order to take full advantage of the $2,000,000 estate tax applicable exclusion amount available to both spouses, assets up to this amount should be owned individually and bequeathed in such a way that at least this amount will constitute the first-to-die spouse's taxable estate.  These assets can be left to your heirs directly or through the use of a trust, such as a bypass trust. 

Example

The following example illustrates how the combined estate taxes of a husband and wife can be reduced through estate equalization. 

Hypothetical Example

Taxable Estate

Estate Tax Due** 

Marginal Estate Tax Bracket

Husband

$5,000,000 

$1,350,000   

45% 

Wife

$300,000 

$0 

0% 

Totals

$5,300,000 

$1,350,000 

With estates equalized* 

Husband

$2,650,000 

$292,500

45%   

Wife 

$2,650,000 

$292,500

45%   

Totals 

$5,300,000 

$585,000 * 

*   Estate equalization saves $765,000 ($1,350,000 less $585,000).

** Assumes that assets pass to beneficiaries other than a spouse.