Understanding Estate Taxes
9. Problems with Leaving Everything to Your Spouse
Congress tried to fix this. If one spouse dies in 2011 or 2012, the executor of the estate may transfer any unused federal estate tax exemption to the surviving spouse. But there are still problems.
For example, let's say Sue remarries after Bob dies. If Sue outlives her new husband, she will lose all of Bob's unused exemption.
In addition, by leaving everything to Sue, Bob has no control over his share of their estate; Sue can do whatever she wants with the assets, including disinheriting any children Bob may have had from a previous marriage.
And when Sue dies, the entire estate, including any growth on the assets, will be taxed at rates in effect at that time. Remember, if Congress does not act again, in 2013 the estate tax exemption will be $1 million with a 55% top tax rate.
If they had planned ahead, they could have used both their exemptions, solved these problems, and saved $1,750,000 in federal estate taxes.