9117 / What gift and estate tax issues typically arise in the case of couples who have divorced and remarried?

It is common for couples who have been divorced and remarried to have children from prior marriages, complicating the transfer of wealth both during life and upon death. In some cases, an individual may have some idea of the specific assets he or she wishes to transfer to a particular child, or may wish to provide more generous gifts to heirs who are less able to provide for themselves. In other cases, the goal of the individual is to create some level of equality in each heir’s inheritance and minimize conflict in general. In any event, federal transfer taxes (estate, gift and generation skipping transfer taxes) must be taken into account in order to minimize tax liability.

If the individual plans to begin making gifts during life (perhaps in order to minimize the necessity for complicated estate planning or to ensure that specific tangible assets pass to a certain beneficiary), he or she should attempt to take advantage of the $19,000 in 2025 per donor/donee annual gift tax exclusion amount (if the spouse consents, up to $38,000 per donee can be sheltered each year).¹ The exclusion amount applies only to present interest gifts (i.e., it does not apply to gifts where the donee only has the right to enjoy the property in the future (see Q 905)). Generally, if the gifts exceed the annual exclusion amount, the donor is responsible for paying gift tax on the fair market value of the property transferred and must file a gift tax return (Form 709) by April 15 in the year following the year in which the gift is made.²

Individuals who choose not to transfer wealth gradually during life should plan for the estate tax and the generation skipping transfer tax (GSTT; applicable if the individual wishes to “skip” a generation in making his or her bequests).

With respect to the estate tax, individuals should note that most transfers between spouses fall within the unlimited marital deduction, so will not be subject to estate tax.³ Transfers to certain types of trusts (QTIP trusts, see Q 9123 and Q 9124) also qualify for the marital deduction.⁴ Estates that are valued at below the transfer tax exemption amount are also exempt from the estate tax. In the blended family context (where age and wealth disparity are often factors), it can be important to plan to make use of both spouses’ exemption amounts (either through portability or trust planning (see Q to Q 9122).