Thursday, December 17, 2015

Premarital Tax Planning

By Henry Grix

Prenuptial agreements not only govern spousal rights in the event of divorce or death but they also may address income, gift and estate tax issues that arise during a marriage or after the death of a spouse. By a prenuptial agreement, the parties may confirm an intention to minimize income taxes, and, if they file jointly, agree on how to share the joint liability.

For example, the parties may agree to pay that portion of the joint liability that represents a party’s share of the combined liabilities, determined as if each party had filed separately as an unmarried taxpayer. (Rule of thumb: if there is a meaningful disparity in the incomes of the two spouses, filing jointly generally will reduce taxes.) The affianced parties also may agree, after marriage, to take advantage of “gift splitting,” that is, the opportunity to treat one-half of the gifts made entirely by one (more affluent) spouse as if made by the spouses together, thus effectively doubling the amount that can be given away, possibly without adverse gift or estate tax consequences to either party. Finally, the parties may agree that, after the death of one party, that party’s successors will take steps so that the surviving spouse may use the deceased spouse’s unused estate tax exclusion, currently $5.43 million (and adjusted annually). It is useful to have a premarital agreement about portability because securing portability requires cooperation of a deceased spouse’s fiduciary (possibly children from a prior marriage) with the surviving (possibly a second or third) spouse.

For more information, please contact Henry Grix in our Troy, Mich. office at 248-433-7548.