Federal Estate Tax Portability, made permanent by Congress in 2013 legislation, means that where a deceased spouse does not use his or her entire federal estate tax exemption – currently $5.25 million – the balance can be used by the surviving spouse. This is great news for tax efficiency, but without attention to the details of the law, certain people can lose out on the advantages of portability.
2013 Estate Tax Portability Rules Could Mean Potential Pitfalls for the Unwary
For example, suppose a husband dies and doesn’t use any of his $5.25 million amount (because he leaves everything to his wife, taking advantage of the unlimited marital deduction). When the wife dies, her exemption amount will be her own $5.25 million plus the $5.25 million that the husband didn’t use. The wife can therefore leave up to $10.5 million to whomever she wishes without paying any estate tax.
However, should the wife remarry, she can no longer take advantage of the inherited exemption amount if the new spouse dies first. Instead, she will inherit the exemption amount of the second spouse. As a result, if she marries someone with no exemption, for example, she’ll lose the $5.25 million she inherited from her former husband, and only be left with her own $5.25 million exemption.
Potential Planning Opportunities
There are opportunities to plan around such circumstances, however. If a widow who inherited a large exemption happened to marry someone with a much smaller exemption, there would be the opportunity to use up her large inherited exemption during her life by making substantial inter vivos gifts, thereby avoiding hefty estate taxes that may result if she waited until her new spouse’s death.
In Any Event, Filing an Estate Tax Return Is Crucial
Whether or not the spouse intends to remarry or not, filing a federal estate tax return is required to ensure that the surviving spouse inherits any unused exemption. Therefore, to achieve maximum tax efficiency, an estate tax return should always be filed, even if no tax is due. Who knows – you might win the lottery!