A Prenup Can Help with Your Estate Planning
California is a community property state, so all assets acquired during marriage, by either spouse, are community in nature. In the event of a spouse’s death, the couple’s community property must be divided equally. Neither spouse is permitted to dispose of more than one half of the couple’s community property through their will or trust.
A deceased spouse’s separate assets (property that can be traced to a pre-marriage source or that was acquired as a gift or inheritance) is not considered community property and can be passed on to individuals other than their spouse through a will or trust. Tracing an asset source whenever a spouse dies, however, is often difficult and expensive and can easily stray into legal gray area. Having a prenuptial agreement in place that expressly states what assets each individual owns when they enter into marriage can help with estate planning and avoid confusion as to how property should be divided upon each spouse’s death.
Marriage as an estate tax shelter
Marriage is the best estate tax shelter available today to individuals and couples. The Estate Tax is the tax that may be levied on a person’s property when that property is transferred at their death if the value of the estate is above a certain amount. The estate, for tax purposes, consists of everything they own or have certain interests in at the date of their death and may include: cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
As of 2022, the individual exemption for federal estate taxes is $12,060,000, meaning that a person who dies can pass assets up to that amount on to their heirs without their estate being taxed. Couples can pass on double that amount, or $24,120,000. The federal tax rate is 40% on the part of the estate that is over the exempted amount. Currently, California does not have its own estate tax, so estate taxes for those who live in California are only paid at the federal level.
Passing on assets tax-free – For an individual who owns assets valued above the $12,060,000 individual exemption, getting married to a less moneyed spouse increases the amount of the estate they can pass on tax-free to their heirs when they die. The American Taxpayer relief Act of 2012 enables a surviving spouse to use their deceased spouse’s unused federal estate tax exemption of $12,060,000, when the surviving spouse eventually dies. Called the DSUE (Deceased Spouse Unused Exclusion), the estate tax exclusion (or portability) amount can be claimed by filing a timely Form 706 Estate Tax return after their spouse dies.
Gifts given outright to a spouse upon death – The federal tax code allows an individual to give property tax-free to their surviving spouse upon their death. The value of the deceased spouse’s assets is reduced by the amount given to their surviving spouse, possibly enabling them to avoid estate taxes. The estate tax on the property given to the surviving spouse is deferred until the survivor’s death.
Tax-free gifts – For individuals who wish to provide tax-free gifts to their children or others, being married can double the amount they are able to give. In 2022, tax-free gifts could be as high as $16,000 per recipient, per member of a couple. So, an unmarried person would be able to give an annual tax-free gift of $16,000 to each of their children, while a married person would be able to gift $32,000 to each child, tax-free.
Whenever individuals enter into marriage with a great disparity in wealth between them and one spouse is able to provide an estate tax shelter for the other, it may be appropriate for the wealthier spouse to agree to compensate their less-moneyed spouse for the value they bring to the marriage in their prenuptial agreement. That compensation might include giving pre-marriage property to their surviving spouse tax-free upon their death, making the less-moneyed spouse the beneficiary on a retirement account or life insurance policy, or other means.
Contact me for assistance
If you are considering a prenuptial agreement as part of your estate planning, please contact my office for a consultation. As a San Francisco Bay Area family law attorney who also holds a Master of Laws in Taxation, I have worked with many couples who wish to protect their pre-marriage assets, as well as leave a fair inheritance for their prior-marriage children, grandchildren and surviving spouse, upon their death.
Attorney Christina Sherman is a Marin County CA family law attorney and Certified Family Law Specialist, specializing in divorce, child custody and support, marital contracts and other family law issues.
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