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!

For questions about estate tax portability, or any other estate planning matter, contact our Andover, Massachusetts Estate Planning Attorneys at the Law Office of Debra Rahmin Silberstein on (978) 474-4700. 

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