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A New Estate Tax Break for Married Individuals

July 10, 2015 by admin in Articles

The IRS issues rules detailing generous estate-tax break for millions of Married Individuals

Portability, what is it and is it worth it?

The estate tax exemption is the amount of assets you can leave to individuals other than your spouse without having to incur any federal estate tax liability.   The current 2015 federal estate tax exemption is $5.43 million per individual.  Both Maryland and the federal governments allow one to leave an unlimited amount of funds to their surviving spouse without incurring any estate tax liability.  However, if one leaves their entire estate to their surviving spouse, they essential “waste” their entire federal exemption.

As an example, assume that an individual dies with an estate valued at $10 million.  They leave their entire estate to their surviving spouse.  There will be no estate tax due at the death of the first spouse.  However, the surviving spouse now has a new net worth well above the federal estate tax exemption level of $5.43 million.  Moreover, by leaving their entire estate to their surviving spouse, the decedent did not use any of their federal estate tax exemption.

Portability changes this outcome.  In the deceased individual’s estate, the personal representative can file an estate tax return electing to have their entire unused estate tax exemption of $5.43 million pass to their surviving spouse.  It effectively is yet another tax free bequest that the decedent can leave to their surviving spouse.  The surviving spouse now has a total federal estate tax exemption of $10.86 million (the decedent’s unused $5.43 million plus the surviving spouse’s existing $5.43 million).

What if my estate is well below the $5.43 million threshold?

Opting for portability may still be a good idea for estates that seem unlikely to trigger any federal estate tax liability.  This is especially true if the assets left to the surviving spouse appreciate over time.  For example, assume an individual dies with an estate valued at $2 million.  They leave the entire amount to their surviving spouse.  There is no estate tax due and the decedent did not use any of their federal estate tax exemption.

However, what if the majority of the decedent’s bequest to their surviving spouse was real estate and/or other investments?  What if those assets greatly appreciated during the surviving spouse’s lifetime?  What originally appeared to be an estate valued at $2 million could balloon in size to $6 million.  If the personal representative failed to elect for portability in the decedent’s estate, the surviving spouse would end up needlessly incurring estate tax liability upon her death as her estate was now over the $5.43 million threshold.  

While it appears unlikely that the current estate tax exemption will be changed by Congress in the near future, things can always still change.  Therefore, opting for portability can provide the surviving spouse greater peace of mind that they too can minimize their estate tax liability upon their passing.  It can be an added layer of protection and flexibility to your estate plan.    

A Word of Caution

Special care needs to be taken in order to ensure that one can elect for portability.  An estate tax return typically needs to be filed within nine months of the decedent’s death.  This means that a decision needs to be made soon after one’s spouse dies in order to be able to file an estate tax return on time.  Moreover, depending on the nature of the assets in one’s estate, special appraisals may need to be done.  Therefore, it is important that one contact their tax preparation expert or their estate attorney soon after the death of their loved one to ensure that they can take advantage of this generous tax break.  If an estate tax return is not filed, you lose out on your ability to leave your surviving spouse $5.43 million in additional estate tax savings.  

To learn more about Estate Administration or drafting your own Estate Plan, please contact me to schedule an appointment.  I serve residents of Baltimore City as well as Timonium, Towson, Catonsville, Columbia, Hunt Valley, Jacksonville and throughout Maryland.